Market Insights™

Week Beginning 12/5

BullBear Stock Market Model: buy / oversold / neutral / OVERBOUGHT / sell

The BullBear Model moved from SELL to an OVERBOUGHT condition this week, which normally signals that a short-term top is in place. The fact that December 3 is a Bradley turn date increases the likelihood that this is the case.

From an intermediate-term perpsective, however, I am uninclined to believe that this will be anything other than a buying opportunity. Stock market tops rarely appear in the fall -- summer and winter seasons are normally reserved for those events. Additionally, back-testing shows that no significant intermediate top has appeared in the last 30 years without being preceded by a SELL signal from my intermediate-term stock market model. We haven't seen one of those since early 2002 (view chart). Either CPI inflation must exceed 3.60% or long-term interest rates must scale 5.50% for this model to turn negative.

Week Beginning 12/12

BullBear Stock Market Model: buy / oversold / NEUTRAL / overbought / sell

The December 3 Bradley turn date marked a temporary top in the stock market. The next turn date is due December 18 which is likely to coincide with a bottom within four trading days. From there I would anticipate a run at the recent highs. The final top in the cyclical bull market that began more than two years ago in October 2002 will not likely appear until either CPI inflation exceeds 3.60% or long-term interest rates scale 5.50%.

In recent weeks I have been tracking the ratio XAU/NDX, which is the Philadelphia Gold & Silver Index divided by the NASDAQ 100. It appears to be in wave 4 of a five wave advance. The fourth wave has been tracing out an easily identifiable descending horizontal triangle since the beginning of the cyclical stock bull market and is very near completion (view chart). The implication of this formation is that either gold is about to launch into a strong rally, stocks are ready to begin a major decline, or some combination of the two.

Week Beginning 12/26

BullBear Stock Market Model: buy / oversold / NEUTRAL / overbought / sell

Short and sweet for the holidays: little change from last week's newsletter other than to leave you with an Elliott Wave count of the S&P 500 index (view chart). A major top may be in store come January. We shall see...

Week Beginning 12/19

BullBear Stock Market Model: buy / oversold / NEUTRAL / overbought / sell

On Friday the consumer price index (CPI) for the month of November was released. Compared with the CPI a year earlier, the inflation rate now stands at 3.52%. In the past a CPI inflation rate in the 3.60% to 3.70% neighborhood during secular bear markets has been the catalyst for a cyclical bear decline. The last time we witnessed this was in March of 2000 after which the S&P 500 collapsed 50% over 2 1/2 years (about 80% for the NASDAQ). We will have to see if the recent inflation trend continues into December and January.

If it does, then CPI inflation could move high enough to trigger the end of the current 2+ years of cyclical bull market and the beginning of the next important leg down within the secular bear market that began back in 2000. A stock market top in late January would line up with the next major Bradley turn due on January 25-26, 2005 -- according to Manfred Zimmel of Amanita Market Forecasting (view chart). Between now and then I still anticipate a pullback and then another run to new cyclical highs. My ultimate target for the S&P 500 is 1250.

Week Beginning 11/7

BullBear Stock Market Model: buy / oversold / neutral / overbought / SELL

Stocks rallied hard this past week and it very well could be the beginning of something big. The S&P 500 closed at new highs for the year and the NASDAQ 100 scaled the 1500 resistance level I alluded to last week.

Looking at these markets from a longer term view, my opinion is that the bears are sitting at their final line of defense. The Russell 2000 is at major resistance at 605 -- which is where the bear market began back in 2000. If it turns down from here, a four year triple top will be in place. The S&P 500 is also at critical long term resistance at the upper border of a large resistance zone (view chart). The Dow Industrials and NASDAQ are in similar configurations.

With all the momentum behind this rally, it is difficult to imagine all these averages reversing right here right now, but anything is possible in the financial markets.

Week Beginning 11/14

BullBear Stock Market Model: buy / oversold / neutral / overbought / SELL

The Russell 2000 and the S&P 500 index broke out to new highs for the year this week. That means that technically speaking stocks are still in a cyclical bull market that began way back in October 2002. Looks like my intermediate-term model which moved to BUY in August 2002 has been spot on. The bad news for bears is that it is nowhere near giving a SELL signal yet. Looking at the BullBear Model on the year, it gave a SELL in February followed by two BUYS in March and May.

"Gee whiz, Norm, why didn't you believe your own models?" Because nothing is perfect in this business and those models sometimes miss signals and sometimes give false positive signals. They are just tools in a toolbox full of them. My mistake this past year has been to give too much weight to my liquidity indicator, RPCM2, which has been screaming at us to watch for the bottom to fall out. So far it hasn't happened but I suspect that once the trend reverses the sell-off will be quite violent. While my interest rate dominated intermediate-term model is not about to provide a trigger, CPI inflation just may. In the past, whenever inflation has broken above 3.50% stocks quickly formed an important top. Just a modest gain in CPI for November and December (from October's 189.9 to just under 191) will drive inflation above the critical 3.50% level.

In the immediate timeframe, the S&P 500 is very overbought, the NASDAQ 100 which normally leads is showing weakness and is currently testing its high for the year, the BullBear Model is in the SELL zone, and sentiment is extremely optimistic (which is bearish). So I am looking for a pullback here that will give us an opportunity to possibly take a long position.

I don't normally discuss the housing market in this column but the latest data on new home prices caught my eye this past week. If liquidity is drying up as the Fed reversal in policy and my RPCM2 indicator indicate, it should be reflected eventually in stock and housing prices. The data show a break in the recent three year long bullish trendline (view chart). What's worse, price and sales volume have been moving in opposite directions since February, indicating a distribution top.

Week Beginning 11/28

BullBear Stock Market Model: buy / oversold / neutral / overbought / SELL

It was a quiet week in the stock market as prices continued in a sideways correction. My comments and strategy in last week's newsletter are still germane this week.

Two weeks ago I posted a chart of housing prices that showed what I interpreted as a breakdown out of the recent bullish channel. Bad interpretation it seems. The latest price data for October (preliminary) shows average housing prices moving to a record high, which encouraged me to redefine the bull channel (view chart). With liquidity as measured by RPCM2 falling rather precipitously of late, it would seem reasonable to assume that stocks or houses or both would be tanking. Not yet.

Week Beginning 11/21

BullBear Stock Market Model: buy / oversold / neutral / overbought / SELL

All the major averages made reversals on the daily charts on Friday and it appears that the anticipated pullback has begun. At this point in time I believe that the sell-off will be relatively mild and a buying opportunity. I suspect the top of the cyclical bull market that began in October 2002 (within a secular bear market) will not arrive before the first quarter of next year.

If 1129 is breeched to the downside I would likely change my mind about this. If, on the other hand, there is breakout above 1187 I would set as the next target 1255 for the S&P and 1735 for the NASDAQ 100 (view chart).

Week Beginning 10/3

BullBear Stock Market Model: buy / oversold / NEUTRAL / overbought / sell

All those bearish outside reversals of two weeks ago were neutralized by even more impressive bullish outside reversals this past week. Most of my indicators are negative but momentum is on the bull's side right now. A break of trendline resistance by the Dow Industrials would be VERY bullish, in my opinion (view chart).

Gold is getting very overbought here.

Week Beginning 10/10

BullBear Stock Market Model: buy / oversold / NEUTRAL / overbought / sell

After making a closing high of 1042 on Wednesday, the S&P 500 sold off on Thursday and Friday in what should be the beginning of a decline to new lows for the year. The NASDAQ was even weaker and left a "dark cloud cover" bearish reversal on the weekly candlestick chart. Sentiment as measured by both the Investors Intelligence survey and the CBOE volatility index (VXO) has reached extremes that are normally associated with market tops.

The other sentiment indicator I follow, the CBOE put/call ratio, is not at extreme levels, however. I would feel more confident that a top is in place if the total put/call ratio for the coming week were to average under .77 (.87 last week). In order for that to occur, stocks would need to bounce higher beginning on Monday. That's very likely because there is strong support around 1113 for the S&P 500 which closed the week at 1122.

From a tactical standpoint, the Trendright system is calling for a move into stocks but once more I will trade more bearishly until upside resistance is penetrated. I plan to trade according to the guidelines shown in this chart of the Dow Industrials (view chart).

Week Beginning 10/24

BullBear Stock Market Model: buy / oversold / NEUTRAL / overbought / sell

The S&P 500 remained below 1127 this past week, confiming the sell signal I discussed in last week's newsletter. The index then closed down on the week and below September's low. It also appears to have broken down out of its three month long bullish channel (view chart). In support, the Trendright system has also turned negative as you can see in the chart above.

A Bradley turn is due in the first part of the week so I anticipate that share prices will make a low either Monday or Tuesday and then bounce higher for a week or so into a second Bradley turn. If that scenario develops, another leg down is due to commence right around election day.

Gold closed higher on the week, negating the two consecutive bearish hanging man patterns. The rally continues.

Week Beginning 10/17

BullBear Stock Market Model: buy / oversold / NEUTRAL / overbought / sell

The Investors Inteligence index of bullish minus bearish newsletter writers gave a sell signal this week by pushing up above 29% (view chart). This has been a pretty reliable indicator in the past and should be taken seriously as long as the S&P 500 remains below 1127 on a daily closing basis. During cyclical bear markets a sell signal like this one has been followed by a decline of 16% on average. A repeat of that would see the S&P 500 trading down around 960.

Gold on the weekly chart has formed two consecutive bearish hanging man patterns. That usually is followed by a decline.

Week Beginning 10/31

BullBear Stock Market Model: buy / oversold / neutral / overbought / SELL

The Trendright system has once again moved into stocks and once again I am ignoring it. The correct position to be in right now is cash. Over the past several weeks we have seen all the sentiment indicators move to extreme levels of optimism. Three weeks ago it was the CBOE Volatility Indicator (VXO), two weeks ago the Investors Intelligence survey of newsletter writers, and this week the CBOE put/call ratio.

In most cases, high levels of positive sentiment are met with important bearish reversals because sentiment indicators are contrary in nature. Occasionally, positive sentiment accompanies the early phase of a strong rally, as it did in 2003. Could we be on the verge of a bullish breakout of the yearlong trading ranges by the major stock market averages? Anything's possible but with my BullBear Model moving to sell this week and another Bradley turn due early this coming week, I think the bears are on the verge of finally taking stocks to new annual lows. I will be watching the 1500 level on the NASDAQ 100 index very closely (view chart).

Week Beginning 9/5

BullBear Stock Market Model: buy / oversold / neutral / OVERBOUGHT / sell

The bulls remain in control of this market and have now taken stocks up to a level where we need to start thinking about moving into long positions. I am currently 33% short right now but although the BullBear Model remains in bearish territory, the Trendright system has moved into cash which is neutral.

Looking at the charts, it appears to me that we are about to enter another distribution phase, not unlike what we witnessed in April and June. Those ground on for about three weeks before prices resumed their downward slide. For me the line in the sand for the coming week is 10370 for the Dow Jones Industrials based on what I see in the chart (view chart). I do not believe this level will be broken but rather that the head-and-shoulders formation I see in the NASDAQ chart will soon reassert itself. We shall see.

The XAU Gold & Silver Index closed the week at $93 -- down about a buck. Still looking for a pullback to the 50-day moving average around $89.

Week Beginning 9/12

BullBear Stock Market Model: buy / oversold / neutral / OVERBOUGHT / sell

The Dow Industrials remained below my line in the sand from last week of 10370. I expect stocks to make one final push higher early in the coming week and then reverse -- eventually heading for new lows on the year. That is due to the fact that a Bradley turn is due on September 13 at the same time that a confluence of Fibonacci turns arrive (55 days from the June 23 top, 34 days from the July 26 low, and 21 days from the August 12 low). I am adjusting my "line in the sand" slightly to 10400 based on the channel formed by the closing price chart ( view chart).

I have added more resolution to the BullBear Model signals. Rather than simply bullish or bearish there are now five categories. Both this week and last fall into the bearish category of OVERBOUGHT.

The XAU Gold & Silver Index reached a low of $91 this week -- on its way down to around $89, I believe.

Week Beginning 9/26

BullBear Stock Market Model: buy / oversold / NEUTRAL / overbought / sell

Ignoring the Trendright system's shift of assets from cash into stocks a week ago turned out to be a wise move. In the week just ended, six major averages formed bearish outside reversals on their weekly charts: S&P 500, Russell 2000, Dow Transportations, NASDAQ 100, NASDAQ Composite, and NYSE. The trend over the next few weeks should now be down and I expect to see new lows for the year set in October.

In the very near term stocks are a bit oversold and a short-term bounce is likely. That could be very bearish as another major Bradley turn is due on Tuesday September 28 (+/- one day). If stocks move higher over the next two or three days (1120-25 is my target for the S&P 500), then the Bradley turn would reperesent a double top of sorts and I would expect a serious sell-off to follow.

The XAU Gold & Silver Index closed the week at $96.30. While I remain long term bullish on the metals, I am still waiting for a decent pullback before committing long.

Week Beginning 9/19

BullBear Stock Market Model: buy / oversold / neutral / OVERBOUGHT / sell

The Trendright system has moved to stocks from cash but I will apply the same tactic now as I did in late June. Back then I remained in cash, ignoring the Trendright move into stocks, awaiting a predetermined price break before going long equities. This time around, the trigger prices are 10400 for the Dow Industrials and 1440 on the NASDAQ 100. I remain in cash until both price trigger levels are met.

As long as the NASDAQ remains below 1445, this Elliott Wave count is the preferred one ( view chart). A reversal down from these levels would mark the onset of a very bearish 3rd-of-a-3rd wave. A breakout higher than 1445 would suggest that a retest of the January highs will follow.

Week Beginning 8/1

BullBear Stock Market Model: BEARISH

Stocks put in a short-term bottom last week and the major averages are poised for a retest of their 50-day moving averages. I believe the S&P 500 index entered a cyclical bear market at the beginning of the year so I anticipate that it will be unable to make a significant close above this important average and then will move to new lows for the year.

My latest Elliott Wave count (view chart) calls for a decline to the 1088 area in the coming week followed by a move up to the 1113 neighborhood. This latter target should be achieved around August 11 when the next Bradley turn date is due. Then, if my analysis is correct, the S&P 500 should plummet to around 1000 in September. We shall see...

The XAU Gold & Silver Index gapped higher on Friday and managed to close slightly above its 50-day moving average. That left a five day island bottom on the chart which is bullish. I am a buyer of gold shares with any follow-through strength here.

Week Beginning 8/8

BullBear Stock Market Model: BEARISH

Stocks were unable to test the 50-day moving average as the bears finally took control this week. The S&P 500, Dow Industrials, and the NYSE averages all made it back to their 200-day MA but that was it. None of the other major indices even came close. The collapse in prices began on Monday right at the Bradley turn date and sent the S&P 500 below my 1088 target and all the way down to 1062. Monday should see this index bounce off the 1058 area and back up toward 1075. But then Wednesday or Thursday the next Bradley turn arrives and should slap stocks down once again.

My analysis based on Elliott Wave, Fibonacci numbers, and Bradley turn dates projects the S&P 500 down to around 1000 by September 13 when a major Bradley turn should put a temporary floor under prices (view chart). The blue arrows in that chart represent major Bradley turn dates while the orange arrows are minor ones. The Trendright system has kept us on the right side of this latest decline and continues to position short. My intermediate stock market model has yet to flash a SELL signal but interest rates are the centerpiece of that model and the bond market is the most managed financial market out there at this time. Were it not for heavy buying by the Asian central bankers, long-term rates would be considerably higher here and would have tripped my model long ago.

Gold made a solid move above the $400 mark on Friday, but the gold shares continue to languish below their 50-day MA. There was no follow through on last week's breakout by the XAU Gold & Silver Index so I continue to sit on the sidelines.

Week Beginning 8/22

BullBear Stock Market Model: BEARISH

The stock market blindsided me this week as prices did not fall into the August 20 Bradley turn date. Instead they rallied and the S&P 500 closed the week just shy of 1100. August 20, then, should be a top rather than a bottom (let's allow at least one day margin on that call). I am still looking for a dramatic sell-off into the September 13 Bradley turn and just for the sake of bullheadedness I will continue to hold out the 1000 level as my target. Both the Trendright system and the BullBear Model remain bearish.

The NASDAQ 100 index completed a head-and-shoulders pattern a couple of weeks ago and then retraced all the way back up to the neckline this past week (view chart). A retrace to the neckline following a breakdown out of the pattern is quite common and on rare occasions price will move back above the neckline for a short while before tumbling down through once again. If we see that with the NASDAQ, my next upside target is 1387. But more times than not prices collapse after testing the neckline and I suspect my downside target based on this formation of 1180 will be met before 1387 is seen again.

Gold stocks broke violently above their 50-day moving averages and the XAU Gold & Silver Index managed a close just slightly above its 200-day MA. I am expecting a pullback here and will consider going long gold shares if the XAU retraces down to the $91 level.

Week Beginning 8/15

BullBear Stock Market Model: BEARISH

The price targets I laid out in last week's letter still look valid to me. I expect the S&P 500 to continue down its recent channel until it reaches 1025 on Thursday or Friday of the coming week (view chart). Friday is a major Bradley turn date and I expect it to be a bottom that will last through the end of the month. The final leg down should begin in early September and continue to the September 13 turn date where the final target should be in the 1000 vicinity.

Gold stocks remain below their 50-day moving averages and do not appear to have begun the next leg up yet.

Week Beginning 8/29

BullBear Stock Market Model: BEARISH

Well, the August 20 Bradley turn never materialized. That is a very rare event -- so far this year they have been spot on. The chances of this occuring twice in a row are infinitesimally small so I would be prepared for the September 13 turn to be an important one. And at this point in time, it looks very much like it will be a low since both the Trendright system and the BullBear Model remain bearish.

The rally this past week came on increasingly lighter volume which is a sign of weakness. Also, diminishing intraday volatility as we saw at week's end points to a topping process. The NASDAQ 100 index broke above its head-and-shoulders neckline at 1370 and worked its way up to my initial target of 1387 plus a little. At most I would expect a 50% retrace of the recent decline which would take this average up to 1413 (view chart). However, I do not expect the NASDAQ to close above its 50-day moving average at 1405 and prices should collapse this week and begin the journey to the head-and-shoulders target of 1180 (equivalent to around 1000 for the S&P 500).

I'm still looking for the gold shares to pull back here. The XAU Gold & Silver Index closed the week at $94 and change. The 50-day moving average is just below $89 which would be as good a place as any to consider picking up some gold shares.

Week Beginning 7/4

BullBear Stock Market Model: BEARISH

The Trendright system continues to allocate to stocks but, as I stated last week, cash is the preferred position as long as the S&P 500 index remains between 1125 and 1151 (the close on Friday was 1125.4). This week saw the BullBear Model move from Bullish to Bearish so that confirms that I will begin shorting equities on any pullbacks once the 1125 level is taken out on a closing basis. The 50-day moving average currently sits at 1120 so to play it safe, I would like to see that taken out as well.

The Dow Jones Industrials completed a pivot point reversal this week on the weekly candlestick chart. More interesting to me is the development on the NASDAQ 100 (view chart). Looks like a high probability that a sharp 3rd wave sell-off begins next week.

The XAU Gold & Silver Index gapped below its 50-day MA last week and that chased me out of my gold shares at break-even. It then proceeded to close above its 50-day MA but I did not re-enter my position because it appears that the XAU is in a trading range. Therefore, I will wait for a close above the 90 dollar level before going long gold stocks.

Week Beginning 7/11

BullBear Stock Market Model: BEARISH

The Trendright system moved from a stock allocation to a short position this week. Personally, I began moving net short last week when the S&P 500 index closed below its 50-day moving average. I will add to those short positions on Monday morning, bringing my portfolio allocation to 25%. My expectation is that the S&P 500 index will test the 200-day moving average (around 1100) in the coming week followed by a test of the 50-day MA (around 1120) from below. Then I believe stocks will move to new lows for the year down to around the 1050 area.

The XAU Gold & Silver Index closed above the 90 dollar resistance level this week so I will move to the long side on gold shares once again in the coming week -- somewhere around 20% of my portfolio. My target for the XAU is 105.

Week Beginning 7/25

BullBear Stock Market Model: BEARISH

Stocks trended lower this past week, with the S&P 500 reaching a low of 1084 on Friday. That is shy of my 1065 target from last week and forced me to reevaluate my Elliott Wave count. It now appears to me that the 1084 low may represent the end of the first wave down from the June 23-24 top in which case I would expect to see a bounce back up to the 50-day moving average (1116ish) by Friday. If, instead, Friday turns out to be a lower low then it would probably turn out to be the end of Wave 1. Frankly, this decline from June 23 has been as difficult as any I've seen to pin a wave count on.

Friday, being day 21 since the June top, is a Fibonacci turn date. Turn dates are shown in the accompanying chart (view chart) and since the trend was down into day 21 we should be alert to some kind of rally here. That chart also provides technical analysis support for a bounce in the coming week.

The XAU Gold & Silver Index fell back this past week and I expect more of the same in the coming week. Watch the long-term bullish trendline support at around 80 dollars closely for a possible entry point on any bullish reversal.

Week Beginning 7/18

BullBear Stock Market Model: BEARISH

The Trendright system and the BullBear model have been aligned in the bearish camp for the past two weeks and now we know why. Nearly all the major stock market averages are trading below their 200-day moving averages and should soon fall to new lows for the year. My Elliott Wave and Fibonacci analysis of the S&P 500 (view chart) tells me this index will fall to 1065 by Friday. I am currently 50% short and look to add on any bounce Monday.

The XAU Gold & Silver Index is bouncing around the 90 dollar level and above its 50-day MA (86). I chose to not venture back into gold shares this past week because the chart simply does not look bullish to me at this point. So I will adopt a wait-and-see attitude.

Week Beginning 6/6

BullBear Stock Market Model: BULLISH

The stock market moved sideways this week and looks a little tired as the new week approaches. I look for a sell-off into mid week down to trendline support in the 1110 area (view chart) and then a final drive up to perhaps 1144. Regardless of where, I believe the final top will arrive between June 17 and 21 followed by the next important leg down (assuming my Elliott Wave count is correct).

Meanwhile, long-term yields appear to have bottomed and should now challenge the recent highs around 5.50% for the 30-year T-bond. My intermediate-term stock market model is very near a SELL signal and a break above 5.50% would most assuredly be the final trigger.

Gold ran into resistance at the $400 level where the 50-day moving average lies. It appears the pullback to $386 completed the necessary correction and I now expect to see a rapid run to the $410 area.

Week Beginning 6/13

BullBear Stock Market Model: BULLISH

The next eight trading days should be critical ones. My work points to a final top in that time frame and two important turn dates are just around the corner -- at least according to the Bradley Siderograph model. In the following chart are the Bradley turn dates for the year thus far and, as you can see for yourself, they have more times than not been critical points for the stock market (view chart). The Bradley model is a very complex one that is based on the position of the planets and whether or not that suits your taste, I would not ignore it. The next two turn dates are due on June 17 and June 22. I would be surprised if one of them didn't turn out to be the final high before the next serious decline in share prices. If stocks move lower into Thursday this week (my bias at the moment) then look for the 22nd to be the top. If we see a rally to new highs or even a retest of the recent high by Thursday, then that would likely be the top.

The CBOE Volatility Index is showing a great deal of complacency at the moment and that is bearish. Likewise the Investor Intelligence survey of newsletter writers. The other piece of the sentiment puzzle, however, is the CBOE put/call ratio which is still suggesting that stocks will move to new highs. I would not expect the next leg down in share prices to occur until the put/call ratio falls to around .70 (currently at 1.15).

Gold prices are falling back once again but I see this as an important buying opportunity.

Week Beginning 6/27

BullBear Stock Market Model: BULLISH

On Thursday the S&P 500 index climbed to a rally high of 1146 followed by a bearish reversal on Friday on very heavy volume. My price target has been the 1150 area and 1146 is certainly close enough to qualify. Whether or not 1146 turns out to be the top or not we probably won't know for several trading days at least. I should caution you that the NASDAQ, which always seems to lead the way, has seen no such reversal and its chart remains bullish.

Meanwhile, the Trendright system has just switched to bullish green in the above chart. I do not follow the Trendright system religiously but rather use it as one tool in my decision-making arsenal. I plan to remain in cash (yellow) until the S&P 500 either closes above 1151 (then switch to green) or closes below 1125 (move to red).

I am currently long gold stocks, now that the XAU Gold & Silver Index, the HUI Gold Bugs Index, and both metals (gold, silver) are all trading above their 50-day moving averages. The metals are above their 200-day MAs as well. I would expect to see a pullback test of the 50-day MA by the XAU and HUI in the coming week and then we should find out whether or not this rally is for real.

Week Beginning 6/20

BullBear Stock Market Model: BULLISH

The June 17 Bradley turn played out as a minor low. That increases the likelihood that the June 22 date will be a top. My short-term work suggests Thursday June 24 would be a more likely spot for a final high to the rally that began back on May 17. Let's just leave it at this: I suspect that the next leg down in the bear market will begin sometime this week.

Sentiment levels have become frothy once again and that supports my case. For example, Investors Intelligence survey shows bulls at 56% and bears at fewer than 18% -- those are pretty extreme numbers that often precede market sell-offs. Additionally, the NASDAQ has been underperforming the Dow Industrials in recent weeks, indicating that money is moving into quality and out of speculative issues. The CBOE put/call ratio is also telling us that a top is nigh (view chart). Liquidity as measured by my RPCM2 indicator continues to decline and interest rates are heading higher. Finally, CPI inflation for May moved above 3.00% and could quite possibly hurdle 3.50% in June or July. In the past, this has triggered ugliness in the stock market like the 1973-74 megabear, the 1987 bear market and crash, the 2000 secular bear market, and the May 2001 waterfall decline.

Gold popped above its 50-day MA on Friday and is bumping up against the 200-day. The XAU Gold & Silver Index has yet to hurdle its 50-day MA but when it does, I plan to buy gold shares.

Week Beginning 5/2

BullBear Index: NEUTRAL

The bears took back control of the stock market this week. Tuesday saw the S&P 500 pushing up to 1147 intraday and then collapsing from there, closing the week at 1107 and change. I look for a final test of the 50-day MA in the coming week. If my Elliott Wave count is close to being correct (view chart), that test will fail and stock prices will accelerate to the downside.

Gold closed the week at $387 per ounce. I misspoke last week when I said that gold must hold above $390 to remain in a bull market. I should have said "remain in an intermediate-term uptrend." As long as gold trades above $375 in the near-term, the long-term bull trend going back to November 2001 remains intact. For the record, I believe that negative real (inflation-adjusted) short-term interest rates will provide bullish support to gold.

Week Beginning 5/9

BullBear Index: NEUTRAL

There is something very peculiar going on in the stock market. Various market breadth indicators like the McClellan Oscillator, the NYSE new highs - new lows, and the NYSE advance - decline (view chart) are collapsing down to levels that are normally seen at major bottoms. Yet the S&P 500 is only about 5% off its yearly high. I'm not certain what it means but I have a hunch.

Because they are such rare events, I hate to bring up the word crash. But you need to be prepared for something very dramatic over the next week or so. The last big crash event was in October 1987. If you compare the BullBear Index then with now you will see nearly identical numbers over the last several weeks, lining the market up within six days of where the crash occured. In addition, the 30-year T-Bond yield has pushed up against 5.50% and now trades above its 150-week moving average. The last four times we saw that happen were September 2000, May 2001, March 2002, and August 2003. The first three occured during the cyclical bear market and led to very steep sell-offs. The last one appeared during the cyclical bull and triggered a 5% correction. And, oh yeah, yields were above their 150-week MA back in September and October of 1987.

If the 30-year T-Bond yield breaks out above 5.50%, that will trigger a SELL signal in my Intermediate-term stock market model. Normally these signals show up within six weeks of a major top but yields were heavily manipulated by the Bank of Japan until just recently which postponed the inevitable signal. By the way, during the 1987 crash virtually all stocks headed south, including the gold shares.

Week Beginning 5/23

BullBear Stock Market Model: BEARISH

I continue to hold out the 1025 target for the S&P 500, but I now see June 11 as the most likely date for a bottom. Monday 5/24 is the next Fibonacci turn date and I would expect to see the 1107 resistance level tested at that time. A failure would result in a top that should carry prices significantly lower into the following Fib turn date in June (view chart).

Gold appears to be putting in a significant intermediate-term bottom here.

Week Beginning 5/16

BullBear Stock Market Model: BEARISH

We are not likely to see an all-out market crash in the coming week, but I do have a target of 1025 for the S&P 500 within seven trading days. This projection is based primarily on Elliott Wave (view chart) and Fibonacci analyses. That wave count in the chart is wrong if the S&P is able to close above 1108.

This week I am introducing the BullBear Stock Market Model. It incorporates the old BullBear index and mixes in some other sentiment indicators like the CBOE put/call ratio and the CBOE volatility index (VXO). It has two modes -- BULLISH and BEARISH -- and is currently BEARISH. This new model should be more nimble than my stock market Intermediate-term Indicator and more pricise than the old BullBear Index. We'll just have to see how useful it is going forward.

Gold and gold stocks as measured by the XAU Gold & Silver Index are nearing their three year long bull market trendline support. I am still bullish on the metal as long as short-term interest rates are negative so I would anticipate that the trendline will hold support. In other words, those who are interested should be prepared to begin nibbling the gold shares over the next couple of weeks

Week Beginning 5/30

BullBear Stock Market Model: BULLISH

The BullBear model flipped to BULLISH this week, making it likely that the S&P 500 will make a run at the 52-week highs made in the February-March timeframe around the 1150 level. The change of heart by my model was confirmed by bullish divergences and breakouts in the technical oscillators (view chart) . The S&P 500 closed the week at the critical 1122 resistance line but I am convincecd that this wall will be unable to contain prices for long.

Gold is running into overhead resistance at the 50-day and 200-day moving averages so I would anticipate a pullback here. That should be treated as a buying opportunity for gold bulls.

Week Beginning 4/4

BullBear Index: NEUTRAL

The S&P 500 index crossed above its 50-day moving average while the NASDAQ hurdled its 80-day MA. Time to hedge or cover the short positions. I still believe this is a counter-trend Wave 2 rally that will be followed by a nasty Wave 3 decline, but I will short only when prices move back below those MA lines. Meanwhile, I wouldn't be at all surprised to see the S&P retest its recent high around 1160.

Today's jobs report knocked the socks off of the long bond. We'll have to watch and see if this is the beginning of the long awaited collapse of the bond and rise in long-term yields.

Still long the GOLDX fund with the XAU Index firmly above its 50-day MA.

Week Beginning 4/11

BullBear Index: NEUTRAL

My short-term indicators are telling me that the counter-trend rally has run its course with the S&P 500 reaching a high of 1151 and the Dow Industrials reversing at 10570. The Dow chart looks particularly bearish to me as it turned just as it was nearing overhead supply and managed to close just below its 50-day moving average line (view chart). It is not a clear violation of the 50-day MA yet, but the breakdown in March started off the same way.

The Dow also gives the clearest picture from an Elliott Wave standpoint and it is a bearish one. Beginning at the top on February 19, five waves are clearly apparent into the low of March 24. This series of down-up-down-up-down waves taken together represent a larger degree Wave 1 which was folllowed by a nine day rally that comprises the Wave 2 counter-trend rally. If my analysis is correct, the fiercely destructive Wave 3 has just begun. The way I am trading this is to be 37.5% short, 37.5% cash, and 25% in GOLDX fund as long as the Dow remains below 10570. I will commit to 75% short as soon as the NASDAQ 100 breaks below its 80-day MA line.

Week Beginning 4/25

BullBear Index: OVERBOUGHT

The bulls had a good week on Wall Street, but they are going to need another good day on Monday. That's because the NASDAQ 100, which managed to finish above major resistance at 1490, traced out a Hanging Man candle pattern on Friday (view chart). That indicates a high likelihood of a reversal here and any significant down move (required as confirmation to complete a Hanging Man reversal) could drive the NASDAQ back below support at 1482-1490. That would mean lights out for the bulls.

Working againt the bulls is the fact that the BullBear Index, after four weeks in NEUTRAL mode, is now once again signalling an OVERBOUGHT condition. That usually points to an important top in stocks within one week. Additionally, if the S&P 500 manages to close above 1147 on Monday or Tuesday, my short-term model could flash a SELL signal.

Gold is at a very critical juncture here. If it going to continue to be in a bull market, I believe that the $390 support level must hold (gold closed Friday at $396). Likewise, the XAU Gold & SIlver Index must hold support at 87 (closed Friday at 88.12). As long as short-term interest rates adjusted for inflation remain negative, I would expect the bull trend to remain intact.

Week Beginning 4/18

BullBear Index: NEUTRAL

Stocks bounced higher this week with the S&P 500 index closing at 1135 on Friday. I look for the market to top in the coming week with a high in the S&P forming below 1151. I would be surprised to see it move above 1140 for the reasons shown (view chart), but as always anything is possible. Notice in the hourly chart how trading volume has been moving opposite to price. This is a sign of distribution out of the hands of the smart money and into those of the small guy bagholders. If my Elliott Wave count is correct, the sell-off could be fierce over the next couple of weeks.

Adding to stock woes are signs of higher inflation and higher interest rates. The ISM prices paid index is above 80 for the first time in four years, a level that often portends a reversal in Fed interest rate policy. The long bond yield broke out of its eight-month consolidation and is headed higher. A 30-year T-bond Yield of around 6.00% would trigger a SELL signal in my intermediate-term stock model.

Meanwhile, gold and real estate investment trusts are sniffing out higher rates. Gold is down around $400 per ounce and looks like it is headed down to the $380s and a test of the 200-day MA. I expect that level to hold but I am out of my GOLDX fund for now. The Morgan Stanley REIT index (ticker symbol RMS) collapsed over 15 percent in less than two weeks, erasing about five months of gains -- not a good sign for real estate prices going forward.

Week Beginning 3/7

BullBear Index: EXTREMELY OVERBOUGHT

The S&P 500 index completed the fifth wave of a bearish rising wedge reversal pattern on Friday (view chart). We saw this same configuration back in November 2003 when after the S&P broke down below the lower resistance it simply turned right back around and headed north again. It's different this time, though. RPCM2 is now below its 7-year moving average line, indicating that liquidity is drying up. Oil, gold, and commodities in general are heating up. The BullBear Index is extremely overbought. The NASDAQ is in a divergent decline and the S&P, which is showing signs of distribution (see last week's letter), hasn't seen a significant correction in eight months.

I would be surprised if the S&P doesn't trade within its diagonal triangle for at least a week or two more. Then look for confirmation of a bearish reversal with a close below the triangle support line and a further close below the recent pivot low at 1134. More bearish confirmation would be for the NASDAQ indices to trade below their 80-day MA lines.

The XAU Gold & Silver Index closed just a hair above its 50-day MA. Any follow-through should be bought.

Week Beginning 3/14

BullBear Index: OVERBOUGHT

Quite a bit of technical damage was done this week. Both the Dow Industrials and the Nasdaq sliced through their 80-day moving averages for the first time in over a year. The S&P 500, after weeks of smart money distribution into the hands of bagholders, shattered the 50-day MA and made a run at the 80-day, but closed above it on Friday. As I look at the daily charts, it appears to me that the Thursday low will hold for a few days and allow the bears to push more equities at the buy-the-dips crowd.

While the NASDAQ 100 peaked on January 20, and the Dow on February 19, the johnny-come-lately S&P 500 didn't join the party until March 5, although the daily closing high was made way back on February 11. This week saw the S&P break down out of its bearish rising wedge and close well below its 50-day moving average ( view chart). Notice that the CCI oscillator at the bottom of the chart went below -300, levels we haven't seen since the mini-crash of April 2000. This suggests to me that Thursday marked at least a short-term bottom.

My Elliott Wave count shows that the Thursday low also marked the end of the first impulse wave down. Wave 2's usually retrace 62% so that would take price up to around 1140 and a test of the 50-day MA breakout. The downside target for the Wave 3 to follow is right around 1050.

Week Beginning 3/28

BullBear Index: NEUTRAL

The S&P 500 index made a new cycle low this week. That means the Elliott Wave count from last week was incorrect. I believe now that Wave 1 terminated on Wednesday and corrective Wave 2 is in force. I would anticipate a retrace up to the 1125 level at which time the massive number of bagholders shown in the volume-by-price chart will start unloading their losers in a big way, triggering a declining Wave 3 that should take prices down to the 1050 area (view chart).

By the way, for those who are unaware, the Bank of Japan has been a huge buyer of U.S. dollars over the past year. They have been vacuuming up Uncle Buck in order to maintain a favorable dollar-yen exchange rate. With the excess dollars they purchase U.S. Treasury bonds, which has been a major reason why long rates have been declining. This artificial intervention is likely responsible for my Intermediate-term stock market model remaining on a BUY signal. Ignore that model for now. At some point yields will reach and surpass their natural market level and ring the SELL signal in my model.

Still holding my GOLDX fund and still short equities.

Week Beginning 3/21

BullBear Index: OVERBOUGHT

Stocks made a slightly lower low on Tuesday, causing me to slightly alter my Elliott Wave count. It looks to me as though the S&P 500 is ready to begin wave c-of-2 (view chart) which should terminate between 1133 and 1140 in the coming week. After that, Wave 3 will follow which is normally the most destructive of the down waves in a bear market.

Gold and the XAU Gold & Silver Index closed above their respective 50-day moving averages and also broke out of the recent short-term downtrend. I am back in the GOLDX fund.

Week Beginning 2/1

BullBear Index: OVERBOUGHT

On Monday the S&P 500 made a daily closing high of 1155.4 and triggered a sell signal in my short-term model. It finished the week at 1131 and change. That created an outside reversal top on the weekly charts. An outside reversal top means that this week's high was higher than last week's high and the low was lower. I only take these seriously if the weekly close is also below the prior week's low. The reversal is even stronger if it is accompanied by an expansion in trading volume.

Not only can we put a check in all three boxes (outside, close below, rising volume) for the S&P, but also for the NASDAQ Composite, the NYSE, the Russell 2000, and the Dow Industrials! Furthermore, the Dow Transports wiped out 10 full weeks of gains this past week. Investors are fleeing speculative stocks relative to the "safer" Blue Chippers. A weekly close below the 25-week MA is a sell signal in the following chart (view chart). Still need to see some follow-through here but if we get it, I doubt there will be any safe places to hide...

From a trading perspective, a close above 1525 by the NASDAQ 100 would move me back long into stocks (currently in cash). A break below the 80-day MA would be very bearish.

Week Beginning 2/8

BullBear Index: OVERBOUGHT

The S&P 500 index eeked out still another nominal new rally high of 1142.9 based on weekly closing price. I still believe that a cycle top is in place as long as the S&P does not close above 1155.39 on a daily basis. A close by the NASDAQ 100 below its 80-day moving average is a trigger to sell short.

The XAU Gold & Silver Index gapped higher today with a large white candle on the day. This looks like the beginning of something big and I am moving 25% into the GOLDX fund on Monday with any positive follow through. More cautious types should wait for the XAU to close above its 50-day MA first.

Week Beginning 2/22

BullBear Index: EXTREMELY OVERBOUGHT

One more puzzle piece in the bearish picture fell into place this week. The BullBear Index at 41.9 moved into extremely overbought territory once again. The pattern in this index is very, very similar to what we saw back in 1987 when the cycle top in stocks coincided with a trip by the BullBear above 41 in August 1978, some eight months after its first incursion (view chart). If history repeats, the top in the S&P 500 is now in place. However, a four-day cycle low was made on Friday so I expect to see two days up (a retest of the highs is likely) followed by a smack-down.

The latest CPI and M2 money supply figures continue to show shrinking liquidity in the economy. RPCM2 for January has fallen $400 below its 7-year moving average. In 1973 and 1987, a similar drop in this index occured a mere week or two prior to the onset of the most severe part of each bear market decline. Get ready for some fireworks, especially if the final puzzle piece -- long-term interest rates above 5.15% -- falls into place!

The XAU Gold & Silver Index closed below its 50-day MA on Wednesday so I sold out of my position in the GOLDX mutual fund. A trip down to the 200-day MA appears to be on its way. I will be watching for a good entry point to get back in as I am still bullish on gold (and silver).

Week Beginning 2/15

BullBear Index: OVERBOUGHT

The Dow Industrials, S&P 500, and NYSE index all closed at new cycle highs on Wednesday, negating the weekly bearish outside reversals of two weeks ago. That's a victory for the bulls. However, negative divergences abound on the charts and my fear/greed indicator is getting more and more bearish. And the market leading NASDAQ is still in a downtrend.

I still believe stocks are in an important topping process. Here is how I intend to trade this market in the near-term (view chart). Above 1554 and I am very heavily into stocks. Below 1554 and above the 50-day MA I am neutral. Below the 50-day MA on a closing basis and I begin to nibble on the short side. Below the 80-day MA and I will be very short the market.

The XAU Gold & Silver Index is flirting with its 50-day MA but has not yet closed above it. I am 25% long gold stocks through the GOLDX fund.

Week Beginning 2/29

BullBear Index: EXTREMELY OVERBOUGHT

Six weeks ago I made a forecast that the cyclical bull market that began back in October 2002 was coming to an end and that the S&P 500 would likely not make a weekly close above 1140. As it turns out, 1150 would have been a better choice as we have seen weekly closes since then of 1142, 1131, 1143, 1146, 1144, and 1145. But so far a decent call. Meanwhile the NASDAQ 100 has dropped over 5 percent with closes of 1531, 1493, 1499, 1485, 1482, and 1470 setting up a classic divergence with the larger cap index.

So where is the market headed from here? The various liquidity and sentiment indicators I have been following tell me that this market is standing at the edge of the cliff, staring down into the abyss. Fibonacci analysis says right now is as good a time as any for a trend reversal. From the record high of 1553.11 set in March 2000 down to the October 2002 low of 768.58, the S&P fell 784.53 points. By February 18 last week, the S&P had clawed back a full 49.8% of that decline -- about as close as you can get to a perfect 50% retrace.

The price chart is telling us a very similar tale. These last five weeks trading volume has moved opposite to price -- a sure sign of distribution as the smart money unloads (view chart). Notice also that a tweezer top reversal pattern was completed last week and this week saw the formation of a double doji. Both of these require confirmation with a close below 1134. Should we get that, you would be advised to hang on tightly because a double doji portends a swift and severe change in price.

Week Beginning 1/4

BullBear Index: OVERBOUGHT

It is clear now that the S&P 500 index has broken out above its diagonal triangle topping pattern of the last several months. And why not? Just add this to the long list of technical analysis failures during the speculative fever that began last March. Because of this, I have moved the intermediate-term model back to BUY, something I should have done back in October when the normal window for a signal change (six weeks) closed. In other words, the August 22 SELL signal is now officially declared a false positive. To trigger another SELL, the long bond yield must move back up toward the 5.50% level (currently at 5.18%).

That said, I believe that a top is very likely sometime over the next two weeks. Along with RPCM2 crossing below its 7-year moving average, and the NASDAQ/Dow chart showing a shift toward investor fear (see the charts in the December 21 newsletter), I am seeing some ominous parallels betweeen 2003 and 1987. In both years the U.S. dollar was falling, commodities were rising, RPCM2 broke down, and long term interest rates were in an uptrend. In addition, the BullBear Index is behaving very much the same (view chart ). If the pattern continues, a blowoff top is just a week or so away.

Week Beginning 1/11

BullBear Index: OVERBOUGHT

Last week I presented a chart that illustrated how the BullBear Index behaved this past year in a way that is very similar to the 1986-7 period just before the stock market made an important top. Here is a chart comparing trading volume of the S&P 500 for the same two periods (view chart). It shows that volume peaked in June 2003 and January 1987, at the same time that the BullBear Index made its high for the year (see last week's chart). Then one week before the market made its final push to record highs in August 1987, volume surged to a new 52-week high in a buying climax.

If the pattern persists, the S&P 500 will make a weekly closing cycle high this coming Friday. Look to the 30-year T-Bond yield for confirmation. Before a top is securely in place, my research indicates that the long bond yield must close above 5.20% (closed Friday at 4.97%).

Week Beginning 1/25

BullBear Index: OVERBOUGHT

The S&P 500 made a nominal new weekly closing high, up 0.2% on the week. However, it formed a candlestick tweezer top on Wednesday-Thursday followed by a bearish pivot-point reversal on Friday. Meanwhile, market leader NASDAQ closed lower by -1.5% on the week after forming a candlestick hanging man top on Monday followed by a complex pivot-point reversal on Thursday. It is now in a short-term downtrend and also violated a 6-week uptrend line.

We'll just have to wait and see if this is the start of something big. Weekly volume on the S&P 500 index made a slightly new 52-week high, which extends the "buying climax" window another week, meaning that stocks could be within a week of a top. My own short-term model can't post a sell signal unless the S&P 500 closes in the 1150s this week. From a trading perspective, I remain invested in stocks unless the NASDAQ 100 closes beneath support at 1513. A break above 1554 would be very bullish.

Week Beginning 1/18

BullBear Index: OVERBOUGHT

The closing high on the S&P 500 last week was 1140. That, I believe, is the final advancing high on a weekly closing basis for the current counter-trend cyclical bull market. There could be more push up in the coming week, but I suspect that 1140 weekly will be all she wrote for a long time to come. Last week I said that if the long bond closed above 5.20%, that would confirm that an important top is in. It now looks as though yields are headed lower after breaking support this week. I don't know what this means, exactly, but I no longer believe that yields must head higher to trigger a sell-off in stocks.

Using inflation-adjusted monthly averaged data, there have been four market sell-offs in the S&P 500 over the past 35 years that exceeded 25 percent. These began in January 1973 (-53%), September 1976 (-39%), August 1987 (-26%), and August 2000 (-45%). What did all of these have in common? Was it rising inflation? Nope. Only in 1973 did inflation play a major role. Short-term interest rates? Uh-uh. Just in 1973 and 2000. Long-term interest rates? In 1987 alone. How about a falling dollar? 1987 again.

The one common thread to each of these cyclical bear markets was falling liquidity. In every case where my liquidity indicator RPCM2 was falling and either at or near its 7-year moving average, one of the above mentioned bear markets was in progress. As of December 2003, this indicator has fallen as far below its MA as it did by July 1987 -- just one month prior to the final top that year. That hints that we should be on the alert for a top in this month of January.

Speaking of 1987, one week before the S&P 500 peaked out on a weekly closing basis, trading volume reached a 52-week high signaling that a buying climax was in progress (see last week's chart). The same thing occured in the week ending January 9, suggesting that Friday's close is the end of the road.