Wall Street Craps – 2012 Global Ebook Finance Award-Winner

The stock market has been on a record upswing since April when I warned about a climatic bottom as indicated by a reading of “4” in the Fear/Greed Index. Now we are at the other end of the spectrum with the anticipation of a final top. But tops are more often trickier than bottoms to predict. The last confirmed high in the Dow Jones Industrial Average was on July 23rd about 3 1/2 weeks ago. I expect a closing high next week to be unconfirmed by many key indicators to signify an important top. The key other indicator that I’m especially looking at is a lack of strength in market leaders such as Nivida and Palantir.

Key underlying short-term timing indicators show the following:

• NYSE McClellan Oscillator – Ultimate Indicator – 53 (neutral)
• Nasdaq McClellan Oscillator – Ultimate Indicator – 56 (neutral)
• Volatility Indicator – Ultimate Indicator -59 (neutral)
• Risk On/Off Trend Indicator – Full STO Indicator – 57 (neutral)
• NYSE Advance/Decline Oscillator – Ultimate Indicator – 58 (neutral)

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NYSE McClellan Summation Index: This index’s oscillator has a current reading of 30. This indicates that a bottom is very near this area, but it is unclear how long it will stay in this area or how low it can go.

Fear/Greed Index: This popular indicator is in the “Greed” territory with a reading of 58. This does not indicator a buying area but could go in either direction.

The stock market is in full crash mode with back-to-back -5% moves on Thursday and Friday. This sets up a possible bottom for Tuesday, Wednesday or Thursday of this coming week with an intermediate top most likely coming in May. Walter Deemer, the esteemed stock market veteran, wrote, “When it’s time to buy, you won’t want to.” And that’s how it will feel next week when the market searches for a tradable bottom below the $SPX 5000. The real question is exactly how far below $SPX 5000 does it go? Maybe 4800?

Key underlying short-term timing indicators show the following:

• NYSE McClellan Oscillator – Ultimate Indicator – 34 (neutral)
• Nasdaq McClellan Oscillator – Ultimate Indicator – 32 (neutral)
• Volatility Indicator – Ultimate Indicator – 17 (oversold)
• Risk On/Off Trend Indicator – Full STO Indicator – 19 (oversold)
• NYSE Advance/Decline Oscillator – Ultimate Indicator – 27 (oversold)

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NYSE McClellan Summation Index: This index’s oscillator has a current reading of 26. This indicates that a bottom is in this area, but it is unclear how long it will stay in this area.

Fear/Greed Index: This popular indicator is in the “Fear” territory with a reading of 4. It rarely gets this low and when it does it only stays in this area for a day or two. Based on this indicator alone, a tradable bottom will be at hand next week.

The stock market has just had a sharp decline that broke through many moving averages and trend lines. But the oversold readings likely signaled a short-term bottom for a final move to All-Time Highs. If there is a new closing high in the DJIA that is not confirmed by the majority of other indicators, then we could have our final high and a classic “Dow Theory Sell Signal” or “Joe Granville Sell Everything Signal.” That final high must also coincide with an obvious “Cover Story” to bring in the “Bagholders” or final sucker buyers who will be left holding the proverbial bag.

Key underlying short-term timing indicators show the following:

• NYSE McClellan Oscillator – Ultimate Indicator – 55 (neutral)
• Nasdaq McClellan Oscillator – Ultimate Indicator – 55 (neutral)
• Volatility Indicator – Ultimate Indicator – 47 (neutral)
• Risk On/Off Trend Indicator – Full STO Indicator – 92 (overbought)
• NYSE Advance/Decline Oscillator – Ultimate Indicator – 33 (oversold)

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NYSE McClellan Summation Index: This index’s oscillator has a current reading of 10. This indicates that a bottom is in this area and the next move it up.

Fear/Greed Index: This popular indicator is in the “Fear” territory with a reading of 34. It did reach an oversold reading last week for one day and qualifies as a “buy signal” for this indicator.

The stock market had a rocky start to 2022. With several non-confirmations during the last week of December, it is not surprising that there would be problems this week. With that being said, the general market could stay in this range without a major move in either direction. But with the large percentage losses in many of last year’s dynamic growth stocks, the background is set for a final plunge for these shares. However, there aren’t any signs of capitulation that would mark that final bottom. So for now, I would recommend keeping your powder dry and resist the temptation of going long until we see more signs of extreme behavior/sentiment.

Key underlying short-term timing indicators show the following:

• NYSE McClellan Oscillator – Ultimate Indicator – 36 (neutral)
• Nasdaq McClellan Oscillator – Ultimate Indicator – 45 (neutral)
• Volatility Indicator – Ultimate Indicator – 41 (neutral)
• NYSE Advance/Decline Oscillator – Ultimate Indicator – 55 (neutral)

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NYSE McClellan Summation Index: This indicator has rallied from its December 20th low and is in the process of clustering at a peak before heading lower again. A tradable bottom usually isn’t signaled unless the clustering starts after a sustained move down. That point is still weeks away in time.

Fear/Greed Index: This popular indicator is in the “Neutral” territory with a reading of 52. At the December 2018 bottom, this indicator reached a reading of 3. So we are a long way away from a swing trade to the upside. A minimum reading of 25 is required to reach the “Extreme Fear” range.

MARKET OBSERVATIONS FOR MARCH 17, 2013: The stock market hit consecutive new highs for 10 trading sessions. That remarkable string was broken on Friday with the market’s modest decline. While the general market is certainly overbought by many measures, it is not as over-loved as you might expect. Since investor sentiment is still largely neutral, the market may correct in the short-term and then present investors with another chance to buy for the next leg up. That appears to be a less risky approach to making money than trying to short this relentlessly bullish market.

Key market indicators show the following:

• Investor Sentiment – short-term neutral & long-term moderately over-loved
• NYSE Breadth Oscillator – Ultimate Indicator reading of 51 – neutral
• Nasdaq Breadth Oscillator – Ultimate Indicator reading of 55 – neutral
• Risk On/Risk Off Indicator -Ultimate Indicator reading of 64 – near a sell signal

Many key breadth indicators  are showing neutral readings even after this persistent advance. If the market continues to march upwards in the coming week, it may present an opportunity to buy the Long-Term Treasury Bond ETF (TLT). This is one of the best ways to participate with less risk in a downward market as opposed to going short or buying inverse Exchange-Traded Funds.

If the market heads down next week, it may set up a short term buying opportunity for a continuation of this advancing market. So be ready to move in either direction as the market reveals its next opportunity for traders and investors.

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KNOW WHEN CASH IS KING: In a downward trending stock market, the buying power or relative value of your cash assets automatically goes up.

In other words, your money goes a lot further when the items in the store go “on sale.” That is exactly what’s going on when stocks drop in price. Always remember that being in a 100% cash position or out of any stock market positions allows you the emotional freedom to quickly enter into new trades when market extremes in prices and investor sentiment create timely buying opportunities. Realize that it’s a good thing for stock prices to plummet when you don’t own anything. Instead, declining prices offer cash-rich investors and traders an opportunity to buy stocks while they are “on sale.”

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Comment: Sitting safely in a 100% cash position allows you to enjoy a market that is in decline. Not only are you not losing money like everyone who has long positions, but you are also “keeping your powder dry” for the next buying opportunity — at lower prices! So don’t get caught up in simple asset allocation plans that only allow 5% to 10% in cash because there are plenty of times when your cash position approaches 100%.

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“Be comfortable holding cash. Nothing in nature is as powerful as a void and that’s why ‘cash’ is so difficult to hold.”

Bennett W. Goodspeed ~ Author of The Tao Jones Averages (1983)

RECOGNIZE THAT THE “DON’T PASS” BET SEEMS SMARTER: The bearish argument always sounds more intelligent than the bullish one. But for success in trading the stock market, always remember that there is a big difference between appearing smart and being right.

When you’re analyzing the stock market for trading purposes, it’s wise to remain mentally and emotionally neutral. Don’t fall prey for either the optimistic or the pessimistic point-of-view on the stock market. Choose instead to monitor the market in an unbiased way, so that your decisions are based on facts instead of opinions. That way, you won’t be seduced into unwarranted actions by the subtle unconscious influence of authoritative contrarian media figures in the investment world. (Note: The “Don’t Pass Bet” in the game of craps is the wager that is designed to pay off when the normal “Pass Line Bet” loses. In other words, betting on failure seems like an intelligent bet because it goes against the wishes of an unsophisticated, over-exuberant crowd.)

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Comment: In the 1980s, I found myself reading a lot of bearish material from the likes of economist Elliot Janeway, market technician Joseph Granville, Elliot Wave expert Robert Prechter, Dow Theory Letter’s Richard Russell, and gold expert James Dines. And while it made for interesting reading, I discovered that I had developed a bearish bias towards the stock market. And while these advisors made intelligent evaluations about the stock market, I found them to be largely wrong about the eventual outcome. In hindsight, I would have done a lot better by simply buying the recommendations of my full-service stockbroker at E.F. Hutton. The lesson was to avoid being persuaded to the negative just because it sounds more intelligent and less hyped.

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“As a very successful investor once said, ‘The bearish argument always sounds more intelligent.’”

Peter Lynch ~ Author of One Up On Wall Street

DON’T BET AGAINST A STREAK: Respect the power of a strong bearish or bullish trend in the stock market. Don’t bet against a market that moves relentlessly in one direction. Sometimes market moves will defy the odds for longer than your money or stomach can hold out.

It’s worth noting that a great deal of money has been lost by investors who don’t properly gauge the strength of a stock market move. It is far wiser to let the power of a stock trend wind itself down before trying to guess when a change in direction will occur.

If you do make such an untimely bet, be sure that you have the discipline and courage to cut your losses short in order to live to trade for another day. Losing lots of money in a short period of time does more than hurt your bank account —it also destroys the vital self-confidence to take action on your future opportunities. (Note: Many investors have misunderstood the popular advice of “buy when everyone else is selling.” If the selling is panicky in nature, buying is analogous to “trying to catch a falling knife.” What you really want to do is buy when everyone else is done selling. It’s when the selling has been exhausted that low risk opportunities become available. Otherwise, what you’re actually doing is trying to make fast money with more risk instead of with less. Buying during a market panic is just plain risky!)

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Comment: There is a natural tendency to bet against a trend that has persisted without you being onboard for the enjoyable ride up. But when market momentum is strong, it tends to go longer than anyone expects. The market also has an uncanny way of producing one last “overshoot rally” which causes the last doubters to finally throw in the towel. And that’s when the trend is about to change.

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“I believe that only short-term price swings can be predicted with any precision. The accuracy of a prediction drops off dramatically, the more distant the forecast time. I’m a strong believer in chaos theory.”

Linda Bradford Raschke ~ Professional trader

AVOID BEAR MARKET & BULL MARKET TALK: In the game of Las Vegas craps, the dice are often described as being either “hot,” “cold,” or “choppy.” In the stock market, expect any of these to appear, but think of them more as “streaks” and not “trends.” As savvy players will attest, most of the time the tables are in varying degrees of “choppiness.” (Note: The word “choppy” means short, irregular, or abruptly shifting runs of luck.)

Don’t make the common mistake of falling in love with long-term investment scenarios that prevent you from taking necessary actions in your short-term trading account. Save your long-term bull market and bear market discussions for when you’re sitting on the sidelines, out of the market, and have nothing to lose by taking a stand for the sake of intellectual entertainment.

Otherwise, your long-term investing views will naturally cause you to make critical errors in short-term trading decisions. On the other hand, the funds that you’ve portioned off as “security assets” are designed for long-term holding. It’s only in regards to your “security assets” that you should entertain any thoughts and discussions about bull and bear markets. (Note: Bull markets are long-term upward price movements in the general stock market. Conversely, bear markets are long-term downward movements in prices.)

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Comment: While the discussion of long-term stock trends makes for interesting conversation, it also has the unwanted side-effect of messing up your shorter-term decision-making. It is important to note that the stock market operates on three cycles at the same time –– short, intermediate, and long. So it’s often the case where the present stock market may be in a short-term rally within an intermediate and long-term downtrend. In my opinion, the best way to estimate the size of a rally is to determine the amount of time that was spent in the preceding downtrend. There seems to be symmetry in terms of time when it comes to rallies and declines.

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“Wall Street has a uniquely hysterical way of thinking the world will end tomorrow but be fully recovered in the long run, then a few years later believing the immediate future is rosy, but the long term stinks.”

Kenneth L. Fisher ~ Author of Wall Street Waltz

GET RICH IN THE DARK: Savvy players don’t share their opinions while playing the game. They quietly go about their business – playing correctly, making good money, and avoiding attention.

The temptation for amateur players is to share their opinions and early successes with almost anyone who will listen. But this type of naïve behavior has a way of locking an investor into their stated opinions. And as far as trading the stock market goes, a wise player must be able to turn on a dime and take decisive actions when underlying indicators point to a change in direction. In order to play the game correctly, investors must be willing to go against any previously stated positions without any regard for what other people may think about them.

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Comment: This advice comes from the gambling world. It is closely related to avoid the jinx. When things are going well for you, it’s the proper time to lie low and be humble. This is probably the exact opposite of what most amateurs are inclined to do….but precisely what the pros do. So when good fortunes come your way have the class and composure to handle it smoothly and quietly.

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“Men, it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, and one by one.”

Charles Mackay ~ Author of Extraordinary Popular Delusions and The Madness of Crowds (1852)