Thursday, May 28, 2009

A month or two ago you mentioned the significance and simplicity of monitoring the crossing of the 50 and 200-day SPY moving averages as a market strength/direction indicator. Have you ever considered monitoring the 50/200 MA status of many of the ETFs and trading those based on its status? Tim C.

FRED REPLIES Hi Tim, Between 1979 and 1983 I was involved in a commodities trading system that was based on the intersection of three moving averages. I determined the best averages to use for each of over 20 commodities using a computer that took a week to study each one. We found the system worked for a week or so, but would then have to be rebalanced by selecting different moving averages. We concluded that it was not a viable method for trading commodities.

I see little difference between that study and the application to ETFs, even though the optimization can now be done in minutes rather than days. I have found that the 50 and 200 day moving averages have significance when applied to the major stock indexes, probably because so many people believe in them. However, note that I combine them with other indicators, because no single indicator that I have discovered, works every time.

Posted at 11:30 AM

Wednesday, January 7, 2009

I just want to comment on your choice of bond funds. I suppose in choosing your ETFs you're concerned with easy trading, but they're selling for more than their NAV. TLT and LQD are about 4% over NAV and HYG about 10% over. There are closed end funds with higher yields and selling at less than their NAV. With corporate yields where they are at present I myself feel comfortable holding open end bond mutual funds for an extended period. What do you think? Tom M.

FRED REPLIES Hi Tom, I prefer ETFs primarily for their liquidity, especially at a time of financial crisis, otherwise I might consider a well run conventional mutual fund like those available through PIMCO. However, I have not considered closed end funds because their discounts change frequently, they trade on very low volume, their fees can be very high and one must investigate their holdings carefully to determine suitability, while ETFs follow wide, transparent indexes.

Posted at 12:30 PM

Mr. Goodman, First of all, thank you for all the great work toward helping the rest of us achieve better returns. Taking a little more risk than usual, I got bit by the most recent downturn and while thinking about what I should have and not have done, I thought about comparing the Short Term Indicator to the Average Signature Indicator by overlaying them on a single chart. I would be interested to see how each behaves in light of the other. It's somewhat difficult to this on my end since the charts you provide are scaled differently (the date ranges are different). Would it be possible for you to overlay the two so we can see how the two compare? Best regards, Adrian Nicolici

FRED REPLIES Hi Adrian, Thanks for the suggestion. I have attached a chart showing both the Short Trend Indicator and the Average Signatures on the same scale for comparison. I will probably post it in the next report as well. Let me know what you think.

Posted at 11:10 AM

Wednesday, October 11, 2006

I would like to thank you for the work you have done in developing and explaining your market indicators. With limited knowledge of the market I have been working since April 2001 on developing and interpreting market indicators for myself with very limited success. With the incorporation of your indicators along with mine I have been able to dramatically improve my profit margins while increasing my market risk minimally.

It wasn't until I began following your daily newsletter that I became able to weed through the information and glean the important tidbits that are vital to making profits. As of Oct. 1'06 my total portfolio return for the past 12 months is 21.7%. All the while keeping my Beta at or near 1.10. I find that absolutely outstanding. Thanks, Jim Ramoin

FRED REPLIES Hi Jim, I couldn't be happier to hear of your success, and while I am delighted to learn that I have helped you, the credit belongs entirely to you for your excellent return.

Posted at 8:25 AM

Tuesday, December 20, 2005

What is the support on the S&P 500 that you are talking about? We broke 1168 yesterday. Is 1245 the next level that you are talking about? Where do you think we will drop to before a bounce? ROGER DAVIS

FRED REPLIES I expect a bounce this week, but I don't know what the low will be. 1245 is a significant stopping place. If it is penetrated then I expect that the 50-day moving average will also get significant testing. I will make decisions about trading in the Discretionary Technical Portfolio based on how well or poorly the S&P 500 does over the next several days.

I have no means of guessing where the market will stop. I simply use the support areas to decide how to handle the overall investment in the DTP and other discretionary portfolios. I also pay attention to the position of the 29 indicators to try to determine when a reversal will occur.

Posted at 11:11 AM

Monday, December 19, 2005

Two quick questions for you. First, how much do you rely on the price/volume charts? Are they more ancillary, or do they occupy a cornerstone of your investment strategy? And second, you mentioned in today’s commentary that the Summary Index is an intermediate-term indicator, and that one should look at short-term indicators for more precise entry/exit points once the Summary Index flashes a buy or sell. Do you have any favorite short-term indicators that you find reliable (enough)? EMANUEL SCHROETER

FRED REPLIES My primary short term trading tools are straight chart-reading. The Price/Volume Charts are useful to show high volume penetrations of previous support and resistance levels, but those levels are important by themselves. I often specify a price below which I will reduce or exit positions. For example, the 50-day and 200-day moving averages. If violated I will expect further weakness and will reduce my long positions if they are.

I also use chart patterns such as pennants and previous lows. For example I mentioned 1176.84 in today's report as a critical support level. I wish I could provide a simple formula for either exiting or entering the market, but it is more a continuum than finite change in state.

Posted at 11:53 AM

Saturday, December 10, 2005

As you know, Don Hays has been one of the most fervent bulls since the end of the bear market in March 2003. If anything he has always tended to be early with his market forecasts (e.g. most recently he reduced his own cash positions two weeks before your last buy signal of Oct. 26). Now he is strongly forecasting the following:

1) The "last great buying opportunity" of this bull market will begin to materialize over the next few days and weeks - only due to short-term negative investor psychology - then it is lift-off for this market.

2) He sees a surging market over the next 6-12 months (at least) and portoflios doubling within 2 years. In short he forecasts a great bull market for 2006-2008.

3) The next and final leg-up for this bull market will be lead by the technology sector - he is heavily weighted in technology. He sees the energy sector (the darling of Wall Street for the last 15 months) succumbing to lower energy prices.

Do you have any opinions on the above views -- especially on the general direction of the market for 2006 and beyond which clearly seems to be at odds with what your own indicators seem to be telling you. ROBERTO MARZOLINI

FRED REPLIES I have very few long term indicators. As a matter of fact, the Smart Money Indicator is probably the only one that I have followed that has done well (in the past) in picking the direction accurately over a long period -- and Don Hays is the person who popularized the SMI. However, I noticed the public/total short sales ratio has reached an all time high this week, and I studied it in detail back to 1971. The results of that study will be included in Monday's report. And the conclusion that must be drawn is that the market is about to break out to the upside once the ratio completes peaking and turns down. I cannot pinpoint the date, but it could happen any week, now that it has reached a high.

Posted at 1:33 PM

Wednesday, December 07, 2005

I am up overall about 15% this year. Not too shabby in a certainly shaky-bakey year! Your most recent daily columns have me concerned however, and I cannot quite get a “read” past a few weeks. I subscribe to two other “fundamentals”–based services as well as yours. Both are saying be 100% invested right now...one saying domestic equities and the other calling for 75% in foreign-market ETFs and 25% in XLE. This seems somewhat conflicting to me. I am invested, but somewhat cautiously, having kept almost 50% cash on the sidelines during most of this rally. What's your take on the “likelihoods” of the next 8 to 10 weeks? MICHAEL

FRED REPLIES The best thing to do is to keep an eye on the Discretionary Technical Portfolio, which is invested to the extent of 91.8% at the present time. Even though the position is very bullish, fully 50% can be converted to cash in an instant because it is invested in ETF's, which are very liquid. The indicators are still bullish, and will continue until the Summary Index gives a sell signal. However, with the Trend Indicator in an Uptrend, I probably will not reduce the DTP to much less than 75% at first, and will act according to the indicators thereafter.

With a 15% gain thus far this year, you have earned the right to be cautious so close to an SI sell signal. If you do decide to get closer to the DTP, doing so with high volume ETF's is a good idea to preserve your liquidity.

Posted at 1:23 PM

Friday, October 28, 2005

I am curious about your latest GPS readings about Dell. Would it still be considered a buy today? MICHAEL STOOTS

FRED REPLIES A stock is a GPS buy only when its price/volume line is above the trigger, so by definition Dell would not be a buy today. However, it is not a sell from the GPS portfolios, either -- it is a hold. That's because the p/v line is above the sell trigger, so the stock does not yet qualify to be sold under the 30-day rule.

Posted at 11:14 AM

Wednesday, October 26, 2005

Do you think this upcoming Summary Index buy signal is the uptrend prelude to the sell (downtrend) you were discussing before, mainly due to the Smart Money Indicator? In other words, are you still as worried about a longer downtrend as you previously commented on, based on the Smart Money Indicator? ARDEN BRION

FRED REPLIES Excellent question. It has certainly crossed my mind too and yes, I am still concerned. I think we will have to wait for our answer to see if we get a new high from the S&P 500 or not.

Posted at 1:27 PM

Tuesday, October 25, 2005

Are you considering rotating out of energy (XLE, and the energy-heavy WWNPX) in the Discretionary Technical Portfolio? ALAN HELDMAN

FRED REPLIES I sold half of XLE a week or so ago but have no plan to sell WWNPX at this time. They are a "thinking man's energy play" -- coal sands, etc. -- which is more long-term oriented. However, I monitor funds weekly and will react if it starts performing poorly with respect other funds.

Posted at 10:16 AM

Saturday, October 22, 2005

As an observation, in the past when momentum indicators made new lows not seen in years , after the usual rally to relieve the oversold, disaster usually follows. I am only an amateur technician so I would like to ask you if my observation has any merit in your experiance. -- HAROLD HELLMAN

FRED REPLIES There have been just three Summary Index declines that equalled or exceeded the current one. Two were in late 1999 and early 2000, just near the market high reached before the slide. The third occurred in late 2000 after it got started. So, based on this extremely narrow and specialized sample, one might reach the conclusion that there is another disaster ahead.

However, I am not comfortable coming to a conclusion based on so few observations and must defer until more information is accumulated. A big confirmation of the theory would be if a major decline is ahead of us in early 2006, which the Smart Money Indicator supports.

Posted at 10:45 AM

Wednesday, October 12, 2005

It has been a long time since the Summary Index was below two. My casual glance suggests that would bode poorly. Your more studied assessment would be most welcome. RALPH HISE

FRED REPLIES I looked back and you are right. The last time was in 2000 and before that in October 1999. We're still at 4.65, but will get to 0.7 in a week without a rally. The good news is that in both cases a big rally followed the next buy signals.

More important to me, though, is the Smart Money Indicator, which continues to drop like a stone. I think it is telling us to expect a big drop, but unfortunately it does not tell us if there will be a big bounce first. Personally, for the Discretionary Technical Portfolio, at this time I do not expect to go much above 75% in the market in the forseeable future.

Posted at 4:31 PM

Friday, August 19, 2005

You've talked a lot about how you are worried about a big decline this fall. Will all the negative macro news finally be observed then? What do you see that makes you feel this way? My worry is any big decline doesn't occur until fall 2006. TOM O'GRADY

FRED REPLIES I certainly would not worry if a big decline is delayed -- that would be good news. However, I am primarily concerned by the Smart Money Indicator, which has been declining for two years, and the fact that the current bull market is almost three years old.

Right now the Summary Index is moving quickly towards an extreme from which a buy signal will occur. When that signal runs its course we'll be in a position to evaluate the fall. In the meantime, I am still 75% invested in the Discretionary Technical Portfolio and will profit from the next upleg. If the recent high at 1245 cannot be exceeded, it is likely that we'll come back down to test the low we are making now.

Posted at 9:19 AM

Wednesday, August 03, 2005

You have often talked about expecting a significant decline in the fall due to the readings from the Smart Money Indicator. I know this is early to make a call on any upcoming decline, but is it possible to hint approximately when and how deep the decline will be? I know you'll get your clue the various systems and indicators you use, but can one be prepare for this upcoming event? -- ALBERT QUAN

FRED REPLIES I wish that were possible, but it is not. The SMI is a long term indicator, and it is completely non-specific for timing. The reason I expect trouble in the fall is because the SMI has been dropping for almost two year, which is longer than the last cycle. However, I have only tracked the indicator for 7 years and that is not enough time to be able to determine a probable time.

My expectation of trouble in the fall is based on many factors not the least of which is simply the traditional decline in Sept-Oct. As we get closer, you can be certain that I will give as much information as possible.

Posted at 9:21 AM

Wednesday, July 27, 2005

Dear Mr. Goodman, You stated today that "we can anticipate a sudden increase in the distance between the Bollinger Bands will occur at the first sign of a market decline".

Could we therefore infer that with the VIX near a 10 year low, that this would be a good opportunity to buy? Further, what is your interpretation of the VIX being so low? One would presume that with increased program trading and increased terrorist threats, the VIX should be much higher. -- FRANK SCUCCIMARRI

FRED REPLIESThere is a big difference between the CBOE ratio of puts and calls and the VIX, which is "a weighted measure of the volatility for eight OEX put and call options."

While they may move occasionally in concert, one has little to do with the other technically. I use indicators based on the VIX primarily to show me when a decline is likely to end, since the VIX is often very elevated at that time and suddenly drops sharply. Unfortunately it is not as clear the other way around. The VIX has been declining for three years without reversing for more than a few weeks. Each low has been followed by a decline in the market which pushed it back up for a while, but it quickly turned and fell to another low.

The VIX makes up one of my 29 indicators and I simply rate it positive when it is low and falling and negative when it is rising.

Posted at 1:19 PM

Wednesday, May 25, 2005

Just an observation, but I feel we are still in a bull market! Do you agree? We have many stocks breaking out to new highs on above average volume, and good earnings reports. A good example is HURC which announced earnings. They were great! Many companies like FRGO are heading up on twice normal volume! I not saying we aren't going to have a small pullback here, but I think that would be a buying opportunity! What do you think? PETER WAGNER

FRED REPLIES One does get a "feeling" about the market, and mine suggests that things will be okay during the summer, but we must have a period during which the indicators become less overextended. So I expect a near time rocky period during which the most recent low is tested, followed by a rally in which the 1225 high is tested or exceeded. Then, in the fall, I am looking for a more severe pullback.

To trade it I may add to my equity at risk in the DTP when the overextension appears over, and then I will most certainly reduce it as the 1225 high is approached, or at least when the indicators are overextended again after a return to normal. I realize of course that the above must be tempered by the realities that we encounter as we go along.

Posted at 2:01 PM

Tuesday, May 24, 2005

I note in the report for May 24 that the Smart Money Indicator delined 67 points as stated in the text. The accompanying chart does not appear to reflect this (blue line). Can you help me with this apparent discrepancy? -- TOM CRAIG

FRED REPLIES Even with an elarged version of the chart it is difficult to see, and at normal size it is impossible. Today the SMI added 44 points, yesterday it lost 67 and on Friday it gained 27. Because it is so difficult to read and still provide the history that I consider to be most important, I usually list the daily point change. However, it is easy to calculate it yourself if you want precise numbers. Simply subtract the number of points changed in the first 30 minutes from the point change in the final hour and add the result to the total from the day before.

Posted at 6:20 PM

Thursday, May 05, 2005

The Option Volume Oscillator seems to be better at signalling a "buy" for the S&P 500 than the Summary Index. Do you have any statistics that show successes versus failures for both? HENRY BURGESS

FRED REPLIES The OEX indicator does have a better record for buy signals, but it is a short term indicator and the Summary Index is for the intermediate term, and as a matter of fact, includes the OEX indicator as one of the 29 components.

The longer the term under study, the worse is the batting average -- it's just like forecasting the weather.

Posted at 4:53 PM

Thursday, April 14, 2005

Weird that the Summary Index actually advanced Wednesday with such a decline. Will it turn down Thursday and go below 4.5? -- MARCO GEROMLIMETTO

FRED REPLIES That is the way the SI work. Once it starts to move in one direction it takes a lot of negative activity to turn it around. It may turn down again, but it will take a lot of indicators moving to negative, or it will take a number of days with a few more negative indicators. Keep in mind that it is not a short term indicator, it is for the intermediate term, on average around 6 weeks.

Posted at 3:15 PM

Tuesday, April 12, 2005

Please explain why you would keep the 3 most recently added mutual funds in the Discretionary Technical Portfolio when you do not expect the S&P 500 to rally any more than 3-4% from present levels? These funds are down around 3% since inception. Does it not make sense to sell all three positions in the upcoming rally as we have recently seen that they too can take a beating in a down market - which you are fully expecting to return once the next rally fizzles out? ROBERTO MARZOLINI

FRED REPLIES Every week I evaluate the funds held in the DTP with respect to their performance in comparison with the S&P 500 in both up and down markets. It is my goal to outperform the index and I will hold any funds that continue to outperform it. In the event that the market goes down as a whole, I expect that my funds will lose ground too, but if they are losing less than the S&P, I can short SPY and protect them during down periods, and make a small profit at the same time.

If the funds are not outperforming the S&P, or at least holding their own against the index, I will sell them.

While I do expect some rough periods ahead, I will rely on my indicators to help me determine when they will occur. At this point I do not have reliable information to determine when, how far or even if the market will turn down.

Posted at 7:07 AM

Friday, April 08, 2005

I have been following your report and my own studies of the market and agree that 1225 will be a challenge for the SP500 to overcome. With the pending SI buy signal upon us, BUT with only 8 negative indicators, is it possible that we could see a short spike up and then a QSI sell signal with the negative indicators dropping below 3 and then rising back above 7? And if 1225 is not breached a sell signal is generated, given the smart money indicators severe negative bias as well as the head and shoulders top - could it not usher in lower lows and negative markets through the spring/summer months? NANDAN SHAH

FRED REPLIES You are right about the QSI. A sell signal will occur if the number of negative indicators drops to three and then turns around and rises to 7 or more -- that is not only a possible, but a plausible set of circumstances.

While I am now trading for a rally, I am holding 10% out of the market in the Discretionary Portfolio, and 19% is in ETFs which will permit me to raise the cash to 29% very quickly. If we do get a sell signal soon, I am likely to use some of that 30% to short SPY and/or QQQQ to protect my fund positions.

In that short spike to which you refer, I am planning to reduce the mutual fund commitments as described -- I'll sell half of BPTRX and RSVAX, and will close out ICENX and ICBMX.

Posted at 10:14 PM

Friday, April 01, 2005

Why does your track record of Summary Index signals show that the QSI signaled going long on 3/4/05, and at the same time on the same day, your Technical Condition of the Market shows the QSI giving a Sell signal on 3/4/05.

Did the QSI give a buy signal or a sell signal on 3/4/05? PETER TIMMONS

FRED REPLIESI think the confusion has occurred as follows: I wrote the report posted on March 4, 2005 on Thursday evening March 3rd -- there was no buy signal then. However, at the close on the 4th there was a Quick Summary Index buy signal because there were 8 positive indicators. The track record, by convention, dates the buy signal March 4 because it happed at the close that day and we take the closing price as of that day.

Posted at 3:45 PM

Thursday, March 24, 2005

I'm an "old-time charter" and appreciate all of your various charts and interpretations. I have an observation with a question.

I'm looking at the S&P 500 and darned if it doesn't seem to be forming a classic head and shoulders pattern. First low leg about November 2004, followed by a "top" in late December, then a decline, then the low leg beginning about early February to the second slightly higher "top" just recently in early March, and now a decline down to present levels. Pattern suggests the third low leg beginning right in here real soon (about 10 more negative points on the S&P, or just about down to longer-term support) and then up to a "top" with a time frame of 30 or so trading days.

Am I all wet here? Does no one look at head and shoulders patterns any more? MICHAEL SCOTT SCUDDER

FRED REPLIES Head and shoulders patterns are subject to many different interpretations that depend on volume at the various turning points. For that reason, advocates are never wrong, they just change the parameters. Nevertheless, if we break the January lows one of the primary price factors will be in place -- a lower right neckline. If that happens it will clearly be a negative event and unless the subsequent high exceeds 1225, the complexion of the market will be changed for the worse. I suspect that if there is a lower right neckline followed by a failure to make a new high, the Trend Indicator will also change to Downtrend and then head and shoulders or not, the market will be likely to drop seriously.

I have been writing about the failure of the Smart Money Indicator and its implications for a serious decline starting in the late summer or fall. The possibility the scenario described above will certainly make a collapse in the fall more likely.

Posted at 5:27 AM

Wednesday, March 23, 2005

Since I'm short the market right now based on your sell signal, my question is: how far can it go down if the 200 day moving average is penetrated decisively? Could your SI signal stay below 4.5 for an extended length of time? Say, 2 months? I'm following another indicator that suggests a continuing weak market until mid-May. What's your thought on this? ALBERT LOUIE

FRED REPLIES If the 200-day moving average fails, the next logical support will be found at last summer's lows, around 1060. As far as the SI remaining below 4.5, the longest period it stayed below 4.5 without poking above was a month in September of 1999 and again in September of 2000.

Posted at 3:03 AM

Monday, March 21, 2005

I am holding my breath waiting for the next buy signal. Love it when your SI signal drops below 4.5. I have been watching your sell signals for awhile and have noticed after the initial sell signal the market always seems to have one more bounce, almost like a 2 week delay before the sell signal sets in, where as your solid 4.5 buy signal has most of its gains in the first few weeks.

I have been watching your individual stock buys and have participated in ones that have great looking charts and are in outperforming sectors such as BNI, EXC and XOM (thanks for these picks), and have avoided the ones that look like they need CPR. I was wondering if you have tried to concentrate buys on individual stocks in sectors that are outperforming such as in the mutal funds you pick, and then pull back to oversold conditions? I was looking for a few more oil stocks, HMOs, or metals.

You the man, and you have a great service BRAD HOLLAND

FRED REPLIES Thanks for your nice words. You mention two areas that will benefit from additional study: timing the Summary Index signals and refining the selection of the most promising stocks from the list of GPS buys.

One thing I am doing for my own account and for clients who have chosen to participate in the GPS trading system, is to time my purchases. So, for example, during the past week I have made all of the sells, but I have not yet made the purchases. The idea of using other techniques to screen the GPS buys is certainly a good one.

Posted at 4:36 PM

Monday, February 28, 2005

In keeping with your cautious tone, one issue you have not addressed recently is your previously stated expectation (on the basis of certain indicators) of the formation of a major market top around the April time frame. Do your indicators still point to stormy weather on the horizon? And if so, why open mutual fund positions with the upcoming QSI buy signal and not tradable ETFs instead? ROBERTO MARZOLINI

FRED REPLIES One cannot study the markets daily without forming a general opinion based on all the inputs -- fundamental as well as technical, with cycles thrown in. My overall "feeling" about the market tells me that this summer is going to be dangerous.

The reason for funds -- specifically the three recently discussed -- is that they hold stocks that generally do best towards the end of an advancing market. As long as they can be held for 3 months they can be sold without paying fees for early redemption that some brokers charge. In the meantime, we have 15% in cash and another 11% in DVY that can be quickly converted to cash, so there is 26% available to hedge the remaining mutual funds down to the 50% invested level.

That is my reasoning, but of course one could look for ETF's similar to the funds in the DTP and invest in them instead. However, we must be aware that some ETF's are thinly traded and a big price may have to be paid to exit under stress. SPY and QQQQ are exceptions to that.

Posted at 9:43 AM

Sunday, February 27, 2005

With a probable QSI buy signal looming (and the market remaining in a Trend Indicator Uptrend state) please explain why you intend to only add the 3 new mutual funds to the DTP, as referred to in the February 25 report: ARTKX, ICSLX, CAMOX? Why will you not also open positions in SPY and QQQQ as you did with the last SI buy signal? Does the QSI (and not a regular SI) buy signal negate opening positions in SPY and QQQQ irrespective of the Trend Indicator Uptrend state? ROBERTO MARZOLINI

FRED REPLIES The addition of the three mutual funds will bring the total equity at risk to 85%, which I consider to be enough at this point, until I see how things progress. Admitedly I may be too cautious, but I prefer to add ETF's after I see how things work out. Keep in mind that we have closed up 9 out of 11 sessions so if the buy signal comes tomorrow we can still expect to see some backing and filling before a major upmove. Also, 1220 was the high back in 2001 that we must climb over. At that time I will consider adding to the total invested.

Posted at 3:07 PM

Friday, February 25, 2005

You mention a higher volume rally and a summary buy signal. well we didn't make it yet and the volume was flat BUT one thing you mentioned was we should have extended to 1208 and then roll over to 1148? Can it be that precise? Although, cycle theory i am aware of has us making an important top soon next week or if anything a trend reversal. Comments? O'GRADY

FRED REPLIES What I said was:

"There is no scientific reason to expect the market to keep following the sequence of events that started last March, but if it does continue, yesterday's advance would be extended to 1208. The market would then turn and make a low at 1148; and it will stage another rally in an attempt to breakout above 1213.55"

Please take it literally. There is no reason to expect that it will do the same thing, but a rally that does not make a new high may re-visit the low before it tries again.

On the other hand, there are many reasons, based on the strength the last three days, for the market to just keep right on going. If it does, there will be a new buy signal and a new high and I will be back to 95% invested from the 65% level I am now at. To me, getting out was worth it for the protection it gave me, even if it goes straight up from here. I will make less than I would have had I remained fully invested, but I will still make plenty and had the decline been more severe, I would have saved a lot of losses.

Posted at 8:52 PM

As you know, the market closed around 1211. My problem is that I only have index funds available for my 401k and had it all in the S&P 500. Closed out the position and have kicked myself ever since. Since it didn't close above 1213, do you still feel good about the call? Thanks for your advice. STEPHEN WOODALL

FRED REPLIES One very important point first. You did notice that I sold only 30% in the Discretionary Technical Portfolio, from 95% invested to 65%. As a result, very good money was made even though I, too, am kicking myself because I didn't make more. This was a sell signal during a Trend Indicator Uptrend state, so I use sell signals to reduce, but not eliminate my long positions.

Now to your question. Since I have 65% at risk already I am in no hurry to increase the position unless there is a new high made and a reversal of the sell signal to buy. That will happen in another day or two if the market rises. At that time, I will increase back to 95% invested.

Posted at 8:50 PM

Have been following your advice for some time and got out since your last sell signal. What happened these last three days? Left alot of money on the table. With the commodities going thru the roof I don't understand why the market is going nuts. What is your take? STEPHEN WOODALL

FRED REPLIES The power does surprise me, but until we close above 1213 I'll stay where I am at 65% invested. I don't like the fact that I sold 30% any more than you do, but it can still prove to have been the right thing to have done and it certainly was the most prudent, win or lose.

We'll have a new buy signal if just 3 indicators turn up, and they are bound to do so if the market gets over 1213, if they haven't done so already. We'll know before the opening Monday.

Posted at 1:48 PM

Do you ever comment on foreign ETF possibilities that tend to be independent of the US indices and stock activity and look like promising investments for the near future? GARY KASTEL

FRED REPLIES I look at the group, on a relative strength basis, every night -- but I just have not had the time yet to extend my coverage to include them. It is certainly in the thinking stage. One priority that is ahead of it is the expansion of sector coverage to include the Semiconductors and Energy stocks as I do with the XAU.

Posted at 9:51 AM

Sunday, December 26, 2004

Just wondering what you think of the Dow Theory as an indicator. The Dow Industrials' December 21 41-month high close above its previous February 11 high close reconfirmed the bullish primary trend (though it did not signal a new bullish trend, according to the theory). Prior to that, there had been a divergence between the Industrials and Transportations, which had closed at an all-time high. Therefore, followers of the Dow Theory -- already no doubt committed to equities -- would be deploying more cash on pull-backs. Despite the venerability of Dow Theory, after reading your report for awhile now, I'm skeptical of the weight of any single indicator. Does the Dow Theory carry any weight for you in terms of market timing? ROB LOVE

FRED REPLIES It's not a timing indicator -- it can be months or even a year ahead of itself. Or, it can be way behind as it is now, since the market has been rallying for months leading up to the Dow Theory buy signal.

For example, let's say the market trades in a tight range of 200 Dow points up and down from today on. You would have to say that Dow Theory was right about the market, but there would be no profits.

That said, it is useful when used as a contribution to one's general hypothesis about the market over the next several months based on both fundamentals and other technical indicators.

Posted at 9:50 PM

Thursday, October 07, 2004

Tom Mcmanus from BancAmerica does great work, but he is usually one month early when he gets incrementally bullish/bearish. He got bearish right around the time of your sell signal, and it has backfired. My fundamental thoughts are hedgies have been trying to make up for lost performance and are whistling by the graveyard. I think when this rolls over it will be hard and fast! Thought? C O'GRADY

FRED REPLIES I have called attention to the fact that the first five sessions of the month are frequently the strongest. Today is the last of the five for October. We'll just have to wait to see, but the market was acting toppy yesterday and closed just below the last high. I am bullish on the balance of the year, so after a pullback, I am expecting a rally that takes out all of the highs of the year and maybe even the 1170 high made a in 2002.

Posted at 1:34 PM

Wednesday, October 06, 2004

I have a suggestion for you. Under a Summary Index sell signal, you have added a provision to declare a Quick Summary Index buy signal when the negative indicators go above 19 and then drop below 16. This happened last November.

Similarly, you should also be able to generate a QSI buy signal when, under a sell signal, the positive indicators drop to 3 or less, and then go back up to 6 or more. This is exactly what has happened in the past two weeks. Perhaps such a condition would at least suggest that you should go long by 50% rather than being 100% short. MANUEL COSTA

FRED REPLIES Thank you very much for taking the time to write with your suggestion. As you know I am planning to undertake some studies now that I have 6 years of data about the Summary Index. It is my intention to try to improve the returns it generates. Your suggestion definitely has merit and I will study it along with some others.

Posted at 8:48 PM

Wednesday, September 29, 2004

I have been using your service for over a year now, and so far your buy signals have produced a 100% success rate for me. The last sell signal was great, but the previous ones were so-so. Looking back, the only difference i can see is the performance of the world markets during a sell signal. During a couple of sell signals there were as many as 3 to 5 foreign markets making new highs such as China, Japan, Taiwan, India, Russia, Canada, Africa, Mexico and a few others. With several foreign markets now on the verge of breaking out, such as Brittain, Austrailia, Canada, Mexico, France, Germany and a few others, It would seem that the success of this sell signal will depend on their performance during this signal. BRAD HOLLAND

FRED REPLIES Thans for your observation and kind words. I will look further into the relationship between some of the international ETF's and the Summary Index's signals.

Posted at 4:14 PM

Do you feel it is too late to invest into the metals sector at this time? JOHN

FRED REPLIES The only way I can answer this is in general terms with respect to how I handle the Discretionary Technical Portfolio. I have no intention of selling the position in the Icon Basic Materials Fund, which includes a large metals component. Therefore, anyone who is trying to emulate that portfolio can buy it. However, this can change at any time. I will from time to time warn about a holding without taking action, like I did with the Icon Industrials Fund just this week. I have issued no warning about basic materials up to now. In fact, the gold/silver Index (XAU) has been particularly strong and just broke out to the upside. This is one of the things I look at in considering my position in the materials sector.

Posted at 4:11 PM

Thursday, September 09, 2004

Do you use point and figure charts? They seem to make sense to me! PETER WAGNER

FRED REPLIES For more years than you would believe, back in the 60's, I hand drew P&F charts on indices and around 200 individual stocks. I still find them interesting, and have written a program to generate them on the Fidelity Select Funds and some stocks, but rarely look at them anymore. They are just as useful at bar charts, but I never found the projections to be of any value to me. Any tool is no better than the operator using them, so for some they may work beautifully, but for me there are other tools that work better.

Posted at 8:56 AM

Thursday, September 02, 2004

I trade individual stocks. Does the Summary Index sell trigger apply to the semiconductor sector, which has been decimated? -- PETER WAGNER

FRED REPLIES The Summary Index is based on the S&P 500 primarily, but there are inputs from the NASDAQ. Since individual stocks and sectors do not necessarily follow the market -- some even move contrary to the market -- there is no single indicator system that can work for all of them.

The good news is that I already have up and running a daily stock-by-stock analysis program for the NASDAQ 100 and the S&P 100 and will soon make that available, after I have written up the results of the study that led to its development.

Posted at 8:29 AM

Wednesday, August 25, 2004

You probably have been asked this a thousand times, but what is your take on covered calls? If the stock goes down, doesn't that offset any premium that you received when you wrote the call? If it works so well, why don't the brokerage houses use it for their clients' retirement funds? Why do all these web sites push this? What do they get out of it? They just trying to generate interrest? -- PETER WAGNER

FRED REPLIES Interestingly, from 1973 through 1983 I wrote a newsletter called EVM MarketWeek in which I focused entirely on stock options. As a matter of fact, when I started, the CBOE was just opened and mine was the only option letter in existance. For a full year, until everyone caught up, I was in demand as an instructor of brokers in the art of options.

That aside, I believe that writing options against a portfolio of stocks has a definite place for those who hold stocks and plan to keep them for at least as long as they have options against them -- it does offer an enhancement to their income. However, it is a lot of work. One has to keep track of expiration dates and be ready to give up their stock or buy back the options when the stock goes up. The advantage is that if stocks go down the money received from the sale offsets the loss -- partially.

As far as brokers doing it for clients -- no way, unless the commission income is high enough to cover their time. This means that it will only be done for large accounts.

There are a few mutual funds that write options against their holdings. Gateway is one, and I did hold it for awhile during the rotten market in 2002. I found that they did not go down as much as most mutual funds, but they did go down.

The reason most fringe websites push them is not for option writing, but for option buying, which attracts people who hope to get rich quick. In the long run, options buyers generally quit because their income is either too little or their money is eaten away by high commissions and frequent losses due to the volatility of the market. It is not unlike the typical fate of commodities speculators.

Posted at 8:52 AM

1. You mention that a decline on increasing volume will complete counterclockwise sell loops for the Price/Volume charts. Is it equally true that increases on higher volume will confirm the nearly completed clockwise buy loops of a few days ago, or does the backing and filling of the last few days render that signal moot and you start all over?

2. do you ever look at prior period volumes (say, August 2003) for comparison to see if today's volumes are meaningfully higher or lower or seasonally adjust the volumes? -- MICHAEL TCHEYAN

FRED REPLIES I often make the distinction between a "classic" or textbook buy or sell loop and one that is merely a bullish or bearish pattern. If the volume increases and the market rises, it will certainly be a bullish pattern even though it would not qualify as "classic."

For the purpose of the Price/Volume Charts, the volume is just relative to that which is occurring at the present. However, I do often post a chart that compares the 5-day average to the 12-month average to give an idea of how the present compares with past volume. I just posted that chart in the last few days.

Posted at 8:50 AM

Monday, August 23, 2004

I have been afraid to re-enter the market. Can you offer any general advice in terms of a percentage or method I might use to re-enter the market gradually? Since I'm currently at 100% cash, I am fearful to lump-sum 85% of my funds into the market. I am thinking of buying only the SPY. Since I have no paper-gain profit cushion, any loss would be from principal. While I understand that you cannot give individual advice, could you offer any very general guidance for entering the market from a 100% cash position? ROB LOVE

FRED REPLIES I think your instinct to start with a highly liquid vehicle is a good one. Using a large, heavily traded ETF like SPY, DIA and/or QQQ permits one to get in inexpensively and out very quickly if necessary.

One method for entering the market from a pure cash position is to divide your anticipated investment into smaller amounts and buy a constant amount each month or each quarter until you are in as far as you plan. In that way you will buy more shares if the market turns against you since the price will have declined.

Once you have some capital in the market, and if things are going in your favor, you will have an opportunity to choose a specific and hopefully longer-term investment while keeping some money in an ETF to permit you to adjust the total amount of the portfolio that is invested, if it appears that the market is going to be weak.

You are correct that I cannot give you specific advice without knowing a great deal about your financial situation, but I hope these general comments will be of some value.

Posted at 7:04 AM

Friday, August 20, 2004

It seems to me that Zwieg's 4% model should be adjusted to current levels of volatility. Is 4% advance/decline really enough to establish a pattern in today's market? To me, the figure should definitely be higher than 4%. Do you think trying to adjust this 4% figure to be a worthwhile exercise? -- DAVID HAROONI

FRED REPLIESIf one were to alter the Valueline indicator according to the present volatility, one would have to extend the study back to the beginning and see what buy and sell signals were added or eliminated by changing the parameters.

Perhaps one could apply a modification to the percent needed for a signal based on a current assessment of volatility maybe improve the returns from this indicator, but another method is to modify one's response to the indicator by the position of other indicators. That is the method I employ in my Summary Index.

I prefer to look at a lot of indicators with decent past performance records and go with the majority. I think it accomplishes the same thing without fine tuning all of the individuals. One runs a definite risk in fine tuning -- it is possible to tune past the usefulness of the indicator. The process is called "over fitting" and it is often done when trying to optimize a stock selection system.

I am presently involved with optimization of a system for buying NASDAQ 100 stocks and am dealing with this problem. I'll soon be writing a lot more about it.

Posted at 9:50 AM

Since you have formulated the Summary Index, have there ever been any "triple dips," and if so, what have been the historical results? -- JIM MCGOWAN

FRED REPLIES Not yet, and I hope it doesn't start now!

Posted at 9:49 AM

Thursday, August 19, 2004

As you know, Sept-Oct period, historically, have been very weak, with major lows occurring during the late Oct time period. Given that fact, does that infor mean anything to your system generated buy signal or are you a bit cautious going into the buy signal. ALBERT QUAN

FRED REPLIES I am always cautious :>) -- Very good question, which I will answer in detail in tomorrow's report. Thank you for the idea.

Posted at 8:30 AM

Monday, August 16, 2004

Have you looked at or evaluated Elliot Wave analysis? Maybe you use some or all of the same principles. -- PETER WAGNER

FRED REPLIES I have not been able to make effective use of Elliot Wave analysis. Like Fibonocci numbers, which also remain ellusive for me, they permit change of the parameters as the "signals" are reached, when the market does not react to them. I know that others swear by the technique, but I have not been able to profit from it.

Posted at 7:34 AM

Monday, August 09, 2004

At the Dow's and S&P 500's current juncture, it seems almost impossible to identify a technical support level upon which most (or even many) market technicians are willing to agree. Some of the possible support levels I've recently heard or read seem completely arbitrary.

I understand the basis for your recent prediction of possible near-term support - previous market bottoms on 10/24/03 and 12/10/04. However, I'm wondering whether, during your many years of experience, you have identified any long-term moving averages that tend to provide support after the market has broken down through the more commonly watched levels (20-day, 50-day, and 200-day).

Over the past few days, I've heard a number of technicians paying homage to the 80-month moving average but, when I look back at charts from the past 75 years, I fail to see the significance of this "line in the sand". -- CLARK DUELLMAN

FRED REPLIESExperience tells me that technicians rarely agree on anything, but traders often do. We are all programmed the same way and all respond to the inputs from a falling market with fear tempered with a desire to take advantage of the low prices.

There are a few things that have happened repeatedly as the bottom is approached, and one of the most frequently seen is that more and more shares are dumped at any price as it gets closer to the end of the slide.

This results in volume increasing, which has not really happened as yet. It also results in a great increase in new lows and declining volume, which has started to occur. The best I can do is to note the number of indicators that have fallen and wait for them to start to reverse to the upside. That takes the form of my Summary Index.

For the short term, various moving averages and "lines in the sand" make themselves felt, and while far from certain, previous magic numbers come into play near the bottom. That is not to say that minor violations will not occur. One can only come up with a range and then note how the market is acting as that range is entered.

That is what I am trying to do now. The 200-day moving average is about the longest period in which I have any confidence at all. The reason is that I don't believe traders have memories longer than that. It is truely mysterious how the 9-month cycle and the 200-day moving average are tuned so well to each other. Even though they are roughly the same number of days, there is nothing to prevent them from being out of phase by 100 days, and yet they are not.

Both will meet at a potential bottom right after Labor Day, a point in the calendar that often sees spectacular increases in volume and in the market. It is known as a turning point month, not strictly up or down, but in this case since we have been weak for months it is a likely point for an upside reversal.

So in short, technicians are affected by many observations about the market -- numerical, historical and instinctual. Let's hope this time is one when all three converge and the market responds with an upside reversal. That is my best educated guess, and I underline that it is still a guess.

Posted at 4:46 PM

Thursday, August 05, 2004

Fred, the Baron Partners Fund has been underperforming vs. the S&P 500 for several months now. I realize you chose the fund for its hot track record but sometimes you have to reevaluate your decision. The fund is heavily weighted in just 4 stocks. It is way too risky in this enviorment. -- ARTHUR YOLLIN

FRED REPLIES I get out of funds when the reasons for entering are reversed. My reasons were not that it was "hot," but that it was doing very well in both up and down markets relative to other funds and had a superb track record going back for many years.

It has been underperforming the S&P for just under one month, since July 8, when it got hit by one of its education holdings and by Krispy Kreme. Hopefully the damage has been mostly done. Keep in mind that the fund does engage in short selling on a limited basis which may help it should the market continue to fall.

If I were worried about the market here, I would be more likely to hedge it with an outside short position than to exit it at this time. When I have a reason to sell it from my personal account I will certainly say so in the reports.

Posted at 5:59 PM

Monday, August 02, 2004

Is it possible to have a rally with the VIX and VXO so low? I am interested in what you have to say. ANDREI RACEANU

FRED REPLIES I have to say that I am concerned that the upcoming buy signal will usher in a lukewarm rally. However, it is not just a single indicator that gives me concern -- many of the indicators are giving half-hearted positive signals.

Posted at 9:42 PM

Sunday, August 01, 2004

Is there any empirical evidence on buy and sell signals based on the various loops from the Price/Volume charts? I.e. what is the average gain on trading a price/volume loop buy signal? Sell signal? What about the long term Price/Volume charts? I know they are just one indicator, but other indicators can be judged on results of their signals. Finally, could you point me to an explanation of the Goodman version of the Price/Volume charts? I thought you had explained once how you translated the loops into the more linear charts but I can't seem to find it. DAVID ZORN

FRED REPLIES The original Benjamin Crocker Price/Volume Charts do not lend themselves to careful monitoring of results over years because they are transitory and subjective by nature. One would have to attempt to go back and interpret them and measure their efficacy to answer you question. I have always (over close to 40 years) used them as aids in trading -- not as the be-all and end-all indicator -- and have the overall impression that they are of help to me.

However, the Goodman Price/Volume indicator does permit computer analysis of the results, the charts are easily reproduced over the past years and I have been heavily involved in doing just that for individual NASDAQ 100 and S&P 100 stocks starting with data from 1998.

The results of that research have been implemented in the design of a trading system for individual stocks that I am about to introduce to readers starting in about six weeks. The testing system involves the optimization of parameters that permit the analysis of my Price/Volume indicator to provide buy and sell signals based on reading of charts that do not have to be drawn. The optimized parameters are then used in a test of trading the next six months of out-of-sample data -- price data that followed the optimization window.

The preliminary results are excellent and I started paper trading the system on the first of July. All of the above will become clear to readers over the rest of the year, after that I expect to start real-time trading in January. The actual system will remain proprietary for the immediate future. However, it is based on the Crocker method of Price/Volume Charting.

Posted at 10:39 AM

Thursday, July 29, 2004

Thank you for posting the MinMax Indicator. I have studied this indicator for a while now, and I think this it is very usefull. The way it's calculated, it sometimes give a false buy signal. MinMax is a way to show the stress the market is living with. Usually, high Minmax values are when markets have been declining. But like early 2000 and march 2003, the high MinMax was due to volatility because of a strong snap back by the market, not because of a decline.

I would compute MinMax only if the past 10 or 20 days was a market decline. For buy signals, I would start considering only when indicator is at 1 standard deviation and higher followed by a 10% drop as you do. The indicator is more usefull for buys than sells. Your indicator is very usefull at finding the timing of major bottom with only a few days early or later. I think it has a lot of potential if you continue to fine tune it. how about trying 20 days? For sells, maybe a different rule than buys would be more useful. It's much more difficult to find something that might work. If i find something for MinMax for sells, I will let you know. -- JEAN-MARC MILETTE

FRED REPLIES Thank you, Jean-Marc, for your analysis. I certainly will spend some time taking another look at the MinMax Indicator with your comments in mind and will post the results in the future.

Posted at 3:18 PM

Sunday, July 11, 2004

I would to know where your 45-week Diffusion Index, based on Fidelity Select Mutual funds, is for the last week. I remember you mentioned that if it is below about 60%, the market would tumble. Also, may I ask for your opinion about the possibility of the market to re-visit the May low next week. -- JIN ZENG

FRED REPLIES The Diffusion Index generally moves slowly. It stands at 86.8% and a sell signal will not occur unless it drops below 65%. I will certainly announce it in the report when/if it occurs. I have no specific indicator that can tell me if the May lows will be revisited or not. My expectation is probably not yet, but I would not count it out over the next couple of months.

Posted at 12:48 PM

Wednesday, June 23, 2004

In today's report you say, "we are always ready to reverse engines and reduce the equity at risk at a moment's notice. To do so simply requires the sale of the positions in SPY and QQQ and even, if conditions warrant, the opening of a short position in one or both. We can take equity at risk down from 75% to 15% in 5 minutes, if we have to"

Does that mean that I have to keep a vigil all the time the market is open to do the same thing, or there may be some kind of earlw warning from one or more of the indicators? -- SWAMI

FRED REPLIES I cannot think of a time when I traded in the Discretionary Technical Portfolio without first reporting that I was considering a trade in that morning's report. Nor do I intend to do so in the future -- so there is no need for an early warning.

If I am looking for something to happen during the day I will mention it in the report so there is time for all to act if they choose to.

Posted at 6:07 PM

With so many indicators currently neutral and the S&P500 within 3% of it 200dma; why would you not reduce your holdings by more than 25%? At 14.50 (and without any changes a turn back up next week at 12.70) we are very far from a SI Buy Signal. Is it your belief that we will drop below 4.5 and be in position to generate a buy signal without the market breaking out to the downside? -- NANDAN

FRED REPLIES I have answered it in detail in today's report. If you have further questions after reading it please let me know.

Posted at 4:15 AM

Some time back you published the historical macro movement of the market, and opined that the state of the market at that point fit the pattern as part of a "hesitation" phase. You pointed out how, in the past, these hesitation states invariably preceded a resumption of upward market movement.

I would be interested if the current market continues to behave according to the "hesitation" pattern, or if it is now behaving contrarily to the historical model. Needless to say, there are no guarantees, but your assessment of the historical trends seemed like it pointed to probable repeatability.-- DINO VALLONE

FRED REPLIES Thanks Dino, for reminding me of that chart from the March 1 report. After reviewing it I think we are still in the "hesitation" phase, since I don't remember a "manic" stage. Although there are some writers who would maintain that we are in it now.

It would certainly fit in my overall view if there were a major rally in the course of the next six months followed with a sizeable decline. We'll just have to wait and watch.

Posted at 4:13 AM

Wednesday, June 16, 2004

I have been somewhat reluctant to act on the last few sell signals. Especially in light of your recent analysis on Marty Zweig's 10-day average advance/decline ratio and the average returns after 3 and 6 months. I wonder if you have done any research on the success of sell signals when the 200 DMA is going up versus the success of sell signals when the 200 DMA is going down. -- GERALD GITCHELL

FRED REPLIES I haven't separately studied signals based on the condition of the 200DMA, but in general, my reaction to the current drop in indicators, while we are well entrenched in a trading range, is to use it as a signal to decrease portfolio volatility rather than to attempt to make profits on a decline in the market. There is no reason now to expect a penetration of the lower border of the range, but there is even less to expect an upside penetration. For me, I will stick with 75% in equity until there is a reason to expect a breakout.

Posted at 6:05 AM

Friday, May 07, 2004

There is a SI buy and now the negative indicators are very close to a QSI buy signal yet, in the Volume -Enhanced which is very bearish you say we must be ready to exit. This is confusing as the indicators will need to go more negative to give a QSI buy yet, the Enhanced is telling me to exit? Which to I go with? -- GUS BANDEMER

FRED REPLIES I am not surprised that there is confusion, with the market in a trading range there is little to rely upon until there is a breakout up or down. However, the Smart Money Indicator and its Volume-enhanced version serve as just one indicator out of the total of 29. Always pay attention to the SI and QSI for direction the details are of interest, but the main indicators for the intermediate term are SI and QSI. Short term are the Price/Volume Charts.

There will be a QSI buy signal if the number of negative indicators decrease from 19 (where they were earlier in the week) to 16 or fewer. Since there is already an SI buy signal, this will merely confirm the buy we already have

Posted at 6:16 AM

Thursday, March 18, 2004

Strange comment on insurance in your Thursday report. One normally buys enough insurance (house, car) to protect the total amount invested or the replacement cost. Protecting 14% of the investment does not really represent insurance, but is rather a kind of fence straddling. -- DAVE

FRED REPLIES In my opinion, there is not enough life insurance that I could buy on my life that I would consider to be enough, and in investing, there is the argument that you can't keep your long positions and then go short enough to protect them from losses, and in addition insure yourself against the lost income that would have accrued if the market were not falling.

The question is, how much insurance are you going to buy? Each must answer that question personally. The answer will depend upon your position in life in terms of both years and the size of your portfolio relative to your net worth and income requirements.

In the Discretionary Technical Portfolio my answer is just enough to protect from severe losses in a downturn unless I anticipate an extended and extreme decline. However, our indicators are overextended to the downside in number, and many are in the process of reversing, so I do not see a sustained decline without a positive reaction first.

Those who wish to take on more risk for the possibility of higher gains should the sell signals be extended in time and degree, can invest in part or entirely in the two "always invested" portfolios that are either 100% long or short the QQQ's or SPY.

Posted at 9:49 AM

Monday, March 15, 2004

I have been following your always-on summary index for the past few months and it's been giving rather bad signals. Can you please explain why this is happening after years of good record? -- JONAS LING

FRED REPLIES That is the million dollar question. Not only has this been a difficult period for the Summary Index, but it has been difficult for almost all of the components and for the many new indicators that I continue to study and monitor. It has also been difficult for other technicians that I read about as well.

That said, I have every confidence that we will be back on track very soon, perhaps as we speak, for that matter. All technical systems rely on the transition from uptrend through trading range to downtrend and back. Unfortunately for technical analysis, the last year has had only updtrend punctuated by a couple of trading ranges -- the worst environment for a technical system.

Thank you for your tenacity in sticking with the program, I believe it will pay off in the long term. I have no intention of changing my methods.

Posted at 5:42 PM

I do not understand the basis for this statement from your most recent report: "The Commitments of Traders for the NASDAQ 100 appear to be calling for further weakness."

It looks to me like the commercial hedgers ("smart money") have accumulated a very large net long position on the NASDAQ 100, rivalling that found at market bottoms in the past --- e.g., March 2003 (roughly 9,000 contracts!) as this chart at http://www.vtoreport.com/sentiment/cot.htm shows.

Now, you could make the case for the NASDAQ going down based on other things (trend, etc.), and typically the commercial hedgers take their positions before a market bottoms and sell/short while it's still going up. But I simply do not understand the basis for your statement from the COT data. In fact, the COT data is saying precisely the OPPOSITE. Is there something I'm not seeing here?? -- AARON COHN

FRED REPLIES   The line you quoted is from the "At a Glance" section of yesterday's report. There is a lengthy explanation at the very bottom of the report in which I have made some comparisons with the past.

There is a distinction to be made between the small speculators, the large traders and the commercial traders. The small speculators are the ones considered to be almost always wrong, and they are playing a very small role in the procedings at the present. The commercial traders are assumed to be just "fading the bets" of the other two classes, which makes the large traders the prime movers at this time.

That said, the large traders are doing exactly the opposite from what they were doing at the beginning of the rally in March. then they were buying with both fists, now they are selling in even larger quantities. Also, the commercial traders have been long three times in the last two years. Now, and twice during the slide in 2001-2002. In both instances the market was sliding, or about to. As a result, I am very skeptical of the significance attached to the commercial long positions. There is more to be read by visiting the section on COT in Key Indicators for Investment Success.

Posted at 12:18 AM

Tuesday, March 09, 2004

Could the strength for the first five days of the month be from 401K administrators putting the cash to work into mutual funds from the payroll deductions taken on the 15th and last day of the month? Is there also strength from the 16th to the 20th? Or maybe the funds from the 15th are held in escrow and released to the portfolio managers at the end of the month. And as far as seasonality goes with 401K funds being put to work, the highest amounts would probaby be in the first 3 to 4 months of the year until many employees hit the maximum allowed by law. -- JIM STOECKER

FRED REPLIES    If you look at the chart in the December 4th report you will see that there are two double peaks -- a big one on the 30th and 1st, and a smaller one on the 11th and 14th of the month. Each point represents the average for the day and the next four days following, so rising prices are seen in a range from the 30th throuth the 5th and from the 11th through the 19th.

It is certainly possible that you are correct in thinking that these peaks are related to the 401k deposits, but whatever the cause, the phenomenon appears to be real.

Posted at 6:53 PM

Tuesday, February 24, 2004

Please explain how to handle the present situation with the QSI and the 4% stop loss. The QSI buy signal was given on 2/11/04 when the QQQ's closed at 37.58. My understanding is that if the Q's fall 4% below the highest subsequent close (which in this case is 37.58 less 4% = 36.08) then I am to close out my long position and sell short QQQ at that time. Since the Nasdaq and the S&P have bifurcated of late is it possible the signals for the S&P and the Nasdaq may also be different? If QQQ were to be stopped out but not the S&P we theoretically will have QQQ short and the SPY long. Please let me know if I am correct in this assumption. -- RICK

FRED REPLIES   The QSI stop-loss is based on the S&P, not on the QQQ. So, the stop loss for the QSI buy signal is still at 1111.45, and we are still far from there. I will use QQQ for any short activity in the Discretionary Technical Portfolio because the NASDAQ has been weaker than the other indices for some weeks.

It is more likely that the QSI buy signal will end when the SI drops below 4.5, than because of a violation of the stop-loss, but either is possible. When (if) that happens we will reverse the two automatic portfolios, but in the DTP it will depend on the technical conditions that present themselves at the time.

So, in answer to your specific question, there can be no different treatment of SPY and QQQ in the two automatic portfolios, but there can be in the DTP which is based solely on my discretion.

Posted at 9:41 PM

Wednesday, February 18, 2004

You mentioned in today's report the importance of the 1170 area on the S&P 500. I just wanted to share with you some potential heavy resistance areas. You may already be aware of this.

SPX 50% retracement from the 2000 top: 1160.75
Double top March 2002: 1174
Right shoulder SPX weekly: 1174-1177

It appears momentum has topped while prices are still inching higher. We are entering a favorable seasonal period from Feb 25 to March 7. We'll see what happens. Keep up the good work. Thanks. -- ALBERT QUAN

FRED REPLIES   I totally agree that the 1170 area is key to whether we are going to make further gains or retrench for a while first. I think this will be resolved to the upside, but it could take weeks or months jockeying around before we get through.

Posted at 10:49 AM

Monday, December 22, 2003

I'd like to hear your ideas on concerning the decline of the dollar with it's relationship to the stock market's advances. Has the real advance of the market has been diminshed by this weaker dollar? If so, over all, how much do you think? -- DAVE WILKINS

FRED REPLIES   For those of us living in the US there is no reduction of the gains made here from the market in terms of our lifestyle. However, the decline of the dollar certainly affects our ability to travel and import things since the cost in dollars has risen. The low interest rates have played a big role in the decline of the dollar and the result of the process is likely to be inflation here at home.

A possible advantage has accrued from our investments in foreign stock markets because their stocks have appreciated more in terms of dollars than they would have otherwise.

Posted at 10:09 AM

Wednesday, December 03, 2003

As you have pointed out, you got a sell signal in August, and the S&P 500 has been fairly lackluster over these past few months since then. However, it seems to me that the S&P 500 has been lagging quite a bit the smaller cap indicies. I know you've pointed this out, especially when you purchased the RSPFX fund. One of the indicies that has done particularly well has been the MidCap 600, which has ishares with symbol of IJT. Since August, depending on what date you choose, it's up at least 20%. I've also seen a number of articles where folks have pointed out that the S%P 500 has underperformed the market quite a lot over the past few years because of some of the choices that the index managers have made. For instance many of the smaller cap indicies are at all time highs, while the Dow and S&P 500 are nowhere near all time highs.

Does it make sense to start looking more at some of these smaller to midcap indicies, and are you considering that going forward? These actually seem more representative of the overall market performance. What do you think about the divergence between the Dow, S&P 500 and the smaller cap indicies? -- BILL KAMPS

FRED REPLIES   I have indicators based on the Russell 2000, Mid-Cap 400 and the ValueLine Indices in addition to the NASDAQ, Dow and S&P 500. I use the S&P as my primary benchmark, but the others play a role in calculating the Summary Index.

While it is certainly true that the small cap and NASDAQ have been leading the show of late, they will respond along with the S&P to the SI. Since there is no free lunch, investors will pay a price for the opportunity to make bigger gains trading small cap stocks. That price is an increase in the volatility of their portfolios. It is for that reason that most investment managers recommend a mixture of sectors and investment classes in designing a portfolio.

For that reason I have chosen to mix Asia, Gold, small cap, bonds and cash in designing the Technical Portfolio.

Posted at 6:33 AM

Wednesday, November 05, 2003

I wrote before about means to use the Summary Index as a timing signal other than the simple crosses above or below the 4.5 and 17 level. I still haven't found any method that gets a greater profit for the S&P since the beginning of 1999 than the one you're using. But I cant trade that method, since it's not my style and I dont have the patience or trust for longer term methods. I've been successfully short term market timing mutual funds since 86 and dont like standing long when the market is really dropping. But with the recent mutual fund mess, I only see Rydex, ProFunds and Potomac as alternatives for short term trading until the ETFs get sufficient liquidity. While I can still profitably trade utilities and real estate, I've often looked and never found a statistically sound means of trading the S&P on a short term basis.

With the Summary Index, I now have the means to short term trade the S&P. Specifically, the short term method that works since 1999 is only going the direction of the Summary Index signal that you use, and using a simple 7-day moving average for entry and exits. Thus buy the S&P when the Summary Index says to buy and the 7-day MA is rising. Exit long when the 7-day MA is falling. Short when the SI signal is a sell and the 7-day MA is falling, and so on.

Here are the pros and cons of the MA trading system:

Cons: Your method makes 2/3 more money overall since 1999 and is simpler. (The MA method makes 60% of your method.)

Pros: The MA method maximum drawdown is 15% of your method. The MA method is in the market about 65% of the time. There are 120 trades for the MA method since 1999 versus 20 for yours so I consider the MA method to be more statistically reliable. I can sleep better not fighting the market. Your method lost 9% in 1999 while the S&P went up 15%. (The MA method lost 2% in 1999 which is not the type of thing that impresses your neighbors either.)

This short term signal in conjunction with the SI is sort of what you are doing with the price volume method and other connsiderations, where today with an SI sell signal, you're net long based on other factors. The most important indicator in the market is price, which is what is used here. -- TOM MEREE

FRED REPLIES   Hi Tom, I very much appreciate the time and trouble you have gone through and especially thank you for sharing your findings. I too have been wrestling with the problem since I am not comfortable with just taking a stand and waiting for the SI to give a new signal, and the frequent long and short trades are expensive at best, due to the slippage and direct costs. You have given me lots to think about.

One question, is the 7-day MA calculated on the S&P 500 close each day?

Posted at 8:21 PM

Monday, November 03, 2003

Normalizing volume for the Price/Volume Charts has very attractive logic. However, trading decisions by BIG MONEY may be made on the traditional price volume charts. BIG MONEY seeing buy or sell signals may be what makes them work. Then again, maybe the patterns may somehow actually reflect the initial stages of major market decisions being made by collectively those big enough to move the market. If the latter is true, then normalizing would seem to make sense. A retrospective study might be of value. -- RALPH HISE

FRED REPLIES   Thanks for your comments. I do plan to look at some critical past periods using the normalized technique. I will report on the project in the reports.

Posted at 9:36 AM

Monday, October 20, 2003

In the 70’s I subscribed to a newsletter I think you published call EVM Market Week. I thought it was probably the most honest and outstanding investment newsletter ever in print. As far as I am concerned you are the DEAN of option trading. You taught me things that have kept me in the market over the years by utilizing options to minimize risk and maximize profit’s. You have helped me put 2 kids through college and keep ahead of a lot of medical bills due to my wife’s long term illness. I guess my real question is: Why don’t you put the newsletter out again? There’s so much any investor experienced or beginner can learn from you that it’s trully ashame that it’s not available to everyone. I realize the investment community has flooded the market with investment newsletters but eventually the cream rises to the top! I do subscibe to your market analysis through Trend Macrolytics but I sure do miss your newsletter. -- DENNIS ARCISZEWSKI

FRED REPLIES   Thanks Dennis, your words made my day. I'm happy to have you as a subscriber to "Technical Excellence." Let's not tell anyone how old we are. With the daily effort in writing the report, I really couldn't think of adding another whole publication. But tell me, what is missing from the web report that you would like to see? Perhaps I can oblige.

Posted at 10:25 PM

Thursday, October 16, 2003

I am wondering why you closed out the short position in QQQ if you think there is going to be a downturn soon even though you explained it was because of a breakout to a new high by the S&P 500. -- DOROTHY CHRISTENSEN

FRED REPLIES   It's a good question and I may soon reinstate the trade. I believe that an investor must have preplanned trades for contingencies that must be consistently applied if the conditions warrant. In this case, I have said for weeks that if short term indicators turned up, I would close out the 10% hedge. So, when the S&P 500 closed at a new high I executed the trade and covered the short. It is too easy to put off a trade in the heat of battle and find that it continues to go against you until losses are severe.

Now, if the Summary Index turns down and/or we get a Price/Volume Chart sell signal, I will reinstate a hedge on at least half of the Technical Portfolio. I will short either or both SPY and QQQ.

Posted at 10:13 AM

Tuesday, October 07, 2003

It is not clear to me what the Commitment of Traders charts indicate in the way of timing signals. Eyballing the charts they dont seem to consistently lead or lag the market. How about putting buy and sell signals on them. -- RICHARD McCLOW

FRED REPLIES   In my opinion, based on studying the COT material for just a month or two, they are intermediate to long term indicators. In the Monday report I included a combined weighted S&P chart with arrows pointing to the peak levels, which of course cannot be determined until they start to turn down again, and it looks like when the commercial traders start getting more short after a period of reducing their short positions, the market has started to rally.

Each of those arrows can tentatively be considered to be a buy signal and the troughs to be sell signals. However I am quite cautious when there is so little real time history. And, especially cautious since this was not seen as clearly with the Dow or NASDAQ charts.

Posted at 12:02 PM

Friday, September 26, 2003

I'm a new subscriber. Since, I don't short stocks, what would the historical results be if I followed the Always-on Summary Index Portfolio, but instead of shorting, just went to cash? Is this a viable strategy? -- GARY PEARL

FRED REPLIES   If one had invested in SPY, as we did in the Always-On Summary Index Portfolio, but only went long when there was a buy signal and put the money in a money market fund paying 2% annually when there was a sell signal, the return would have been 11.1% annually over the period from December of 1998 through August 15th of this year. By going both long and short, the return was 22.6% over the same period.

If instead, one had purchased SPY in December 1998 and held it until August 15th, 2003, a loss of 4.5% annually would have been the result.

Posted at 12:14 PM

Tuesday, September 16, 2003

Seems is a rally going today. Is it possible this rally today can reverse the sell signal? How many points a rally needed to do this? Also your Technical Portfolio will hold 20-30% long position. Is it your thinking this sell signal would not result in down market? -- MEHDI

FRED REPLIES   It would take a shift of 21 indicators from negative to neutral or from neutral to positive to drive the SI back to 17.00 today. This is not possible. But even that would not "reverse" the sell signal. The only thing that can "reverse" a sell signal is a buy signal -- and that requires the SI to fall below 4.5 and then re-emerge above that level.

My reason for remaining net long in the Technical Portfolio is primarily because I expect to see a better performance in those few positions I am keeping than in the major indices. I will reduce the net long position as I see how the sell signal plays out. I am trying to keep the volatility of the TP low and will use short positions to accomplish it.

The market responses to SI buy and sell signals have varied in their intensity since the beginning, and there is every reason to expect variability to continue in the future. The great strength of the market this year makes me consider caution necessary when opposing it in following a sell signal.

Posted at 9:29 PM

There's still a possibility for the SI to go back above 17 before it starts to go back down again, Right? In that case, the SI is still at a sell signal? Right?

If Yes (to #1), why would you not consider to wait a couple of MORE days to flip the positions to SHORT (near the TOP rather than getting in a lil early)? Or, in your experience, you are confident that the short-term TOP is in (based on the SI sell signal) so you are very comfortable changing to short positions TODAY (in the appropriate portfolios)?

The last time the August Buy signal was generated, you talked about some concerns about the volume which showed up later making things work out pretty nicely. What concerns do you have (IF ANY) regarding the new SI sell signal this timee around? Anything you are a little uncomfortable with and would like to see MORE OF (to feel a lil bit better)? -- DINESH

FRED REPLIES   For the SI to climb above 17.00 today it would take the movement from negative to neutral or from neutral to positive of 21 indicators! That is not possible. So we have a sell signal to contend with. To me it means that the probability of a decline or stagnation is far greater than for continued forward progress.

How one plays the sell signal will vary with each and every individual. In the Technical Portfolio, it is my desire to minimize the volatility while producing as much profit as is consistent with doing so. That is why I am selling the most volatile domestic holdings and holding the international equities with a small percentage hedge to balance them. Chasing after the highest price is another way of playing a buy or sell signal, but I do not feel that it is consistent with my aims for the TP.

The SI is an intermediate term indicator, not a short term indicator. Some traders will use their short term indicators to modulate their intermediate term trades -- I have done so in the TP to the extent of waiting for the 3-day VIX buy signal to end today, and by taking the Price/Volume Charts into consideration.

As far as concerns about the market following the SI signal -- there are always concerns. However, it has had an excellent showing in the last few years.

Posted at 9:22 PM

Monday, September 01, 2003

I am a subscriber, but unfortuently, due to my excutions of trades and being busy, I did not cover my short sales and still have a short position. I need your help to figure out if I should still hold it being this late, or should cover and go long. Also, reading Mr. Luskin's report on your site, he expects the S&P 500 at 1100 by the end of September. But reading your comentary, it seems you believe there's maybe a week more of rally. Thanks for your help -- MEHDI

FRED REPLIES   I have nothing short in the Technical Portfolio or other portfolios and will not institute short positions until there is a change in the Summary Index from buy to sell. I remember the last time there was a buy signal back in February, and in June the SI got over 17.00 and remained there for 3 weeks before producing a sell signal. I have learned not to predict the Summary Index but to wait for it to turn.

Posted at 2:06 PM

I am not clear about the new Portfolio "Q". The portfolio is supposed to start tomorrow on Tuesday (is that correct?) and yet there is an entry from August 18. So -- I am confused. What are the instructions? Are we to go 100% long at the open on Tuesday? At the close? Or not at all? Thanks so much for all your help!-- JAN

FRED REPLIES   The new portfolio is exactly like the original Always-On Summary Index Portfolio except it uses the QQQ's instead of SPY. Nothing new is indicated until there is a new Summary Index sell signal at which time both portfolios will close their long trades and go 100% short SPY or QQQ. The purpose of the new portfolio is to demonstrate what would happen if one were to follow the SI buy signals using the QQQ's. The reason we started back in time at February 24 is to keep it comparable the old portfolio -- we just copied the trades using the the QQQ's. If you have any further questions please let me know.

Posted at 8:20 AM

Tuesday, August 19, 2003

I'm probably going to wait on this buy signal until a drop below 4: I'm uneasy with a buy in August headed into September. I would expect a brief rise, pullback with a below-4 buy signal, and will get in then. If not, not. There will surely be other buy and sell signals. I, who was amazed at how the market worked off the last sell signal with such a minor drop, have to wonder if there isn't still a lot of tinder there to ignite a conflagration... -- THOMAS SCHMIDT

FRED REPLIES   I certainly do not question your judgement about waiting to see how things play out. I am not rushing to a 100% long position in the Technical Portfolio either. But there is no rationale for interpreting the buy signal at a different level, 4.0, 3.6 or whatever. The triggers were picked based upon 4-1/2 years of data and unless there are several signals in the future that make it necessary, it will not change in the forseeable future. The change in February was made during the development of the method.

Posted at 2:36 PM

Do I recall incorrctly, or did you used to require a drop below 4 and rise out of that range for a buy signal? I recall that you recalibrated a while ago. As I recall, the buy signal in February was early, but also a 4-level buy, while this most recent one seems less "solid." Am I off? -- THOMAS SCHMIDT

FRED REPLIES   Tom you have a great memory -- I had forgotten all about it. I did start with 4.0, but in the February 18th report, which you can see by clicking here, I gave the reasons for resetting it to 4.5. This was before the first realtime buy signal on February 24. No changes have been made since then, or are contemplated.

Posted at 12:00 PM

Sunday, August 17, 2003

The bond market is beginning to look attractive. Please advise us on when it would look good technically to buy bonds. -- RALPH HISE

FRED REPLIES The first thing I have to know is to what bonds you are referring. If you mean Treasuries, other than the TIPS, I am not thinking of adding them to the Technical Portfolio. I do have an interest in high yield bonds and own the Neuberger Berman fund in the portfolio, but if the recent weakness continues I will probably close out the trade. I am currently investigating a convertible fund, RPFCX for the Technical Portfolio as a possible substitute for part or all of Neuberger Berman. In general, I use bonds in the Technical Portfolio to produce income -- if there is appreciation, that is lucky, but it is not my motive in buying them.

Posted at 11:53 PM

Tuesday, August 12, 2003

I was just wondering what, if any, relation there might be between Summary Index buy signals and the relative position of the VIX. It appears that we are going to get a SI buy signal sometime soone, yet the VIX is obviously at a very low level. Do you think there will be any correlation between the possible strength of the next rally after the SI buy signal and the level of the VIX? -- JAKE AND SUE JACOBSON

FRED REPLIES The VIX is one of my 29 indicators and it is still neutral, in my book. It is possible for the market to rally with a low VIX -- after all it rallied all through March and April. However, it would be much nicer if the market had done what I told it to do and fallen more sharply since the SI sell signal in June. Then the VIX would be higher now and we would have more confidence in the upcoming rally. The important point to take from this is than no one indicator works all the time. That is why I use so many. 

Posted at 12:40 PM

Tuesday, July 29, 2003

If I remember correctly, in earlier versions of the summary index a "higher low" was the qualification for a buy-signal. Such a pattern seems to be forming, and if it were, how important would it be? -- MIKAEL NASLUND

FRED REPLIES   You have a good memory. That was in the days before I had sufficient data collected to complete my study. The data do support the current buy and sell levels of 4.5 and 17 respectively. The calculation of the index has not changed, only the interpretation of the data, and that study was completed around a year ago. Certainly, if there is a rising tops, rising bottoms pattern, it will have short term significance, but for the intermediate term, we need to penetrate the extremes. Finally, don't count on the rising bottoms pattern being completed, today doesn't look too promising.

Posted at 8:05 AM

Sunday, July 06, 2003

I want to make sure I understand Price/Volume charting. Would you look at CAKE and tell me if the drop to 34 on high volume 7/1/03 completed an 11 day counter-clockwise loop to the downside? -- JOHN SCHMITZ

FRED REPLIES I almost never look at individual stocks using Price/Volume Charts. However, I have friends who swear by them. The one you selected, (I have attached the chart), is certainly interesting. While it has not completed a new clockwise loop, if it follows the green line it will produce a beauty. There also was a tiny buy loop at the very beginning of the sequence, in early June, and an up spring as I have indicated. The up spring takes a bit of imagination since it is somewhat distorted from the stylized one in the instructions. However, if this week brings an increase in volume with higher prices, a clear buy loop will result.
You are on your own if you trades based on this, as I mentioned, I do not follow individual stocks using this technique.

Posted at 7:34 PM

Sunday, June 08, 2003

Fred, have you heard of the relative VIX (June 6, 2003 = 0.71) ? Interesting concept! Here are a couple of links (here, and here). -- PHILIP TORTORELLA

FRED REPLIES   Thanks, Phil, for sending the article from Zeal. After examining the VIX divided by the 200-day moving averages, and plotting it along side the 20-day moving average that I have been using, I see a parallelism between the two techniques in which one method is within a few days in either direction of the other.

At the present time, the "relative VIX" method has already given a sell signal on April 29th when it turned up from .64. It then turned down again and gave a second sell signal when it turned up from .62 on May 13th. It then turned down and has now reached .70 following another low at .63. So, it has had a few whipsaws. I use an upturn by the 20-day moving average with the daily VIX at a higher level. To date I have not gotten a sell signal, but, believe it or not, it will turn up Monday even if the daily VIX drops to zero!!! So, consider that we will have a sell signal by the VIX tomorrow, for sure.

Thank you very much for focusing my attention on the VIX because I wouldn't have found the sell signal until tomorrow night if you had not written.

Posted at 1:32 PM

Saturday, June 07, 2003

More and more people are declaring the market a bull market. What is your opinion about this market? If you still think this is a bear market rally, how do you define a bull market (the market definition and your defintion if possible). -- DUNG NGUYEN

FRED REPLIES   I consider this market to be a cyclical bull market in a secular bear market. In other words, I am expecting gains for the next year or year and a half, at least until after the election, but then I expect to see sharp declines return. I base this not on any statistical definition of a bull market, but on the fundamental economic problems that I see -- high unused capacity, low orders, high consumer debt and so on.

Posted at 8:30 AM

Wednesday, June 04, 2003

I was wondering if you look at each of the Price/Volume Charts as separate indicators (S&P, long term S&P, Nasdaq, long term Nasdaq, Dow, Russel). Or do you sum them up as one indicator for the Summary Index? How many indicators do you derive from the P/V charts? -- CHRISTOPHER GURKOVIC

FRED REPLIES   The Price/Volume Charts are not a part of the Summary Index at all. I use them for short term trading confirmation of the intermediate term, which is based on the Summary Index.

Posted at 9:53 AM

Tuesday, June 03, 2003

Actually, there was no new 10 day low on the VIX Monday, and therefore no VIX 3-day trading sell signal. The low of 21 that appears on the daily charts for the VIX is an incorrect tick that occurred about 10:10 am. The lowest value on the VIX yesterday was 21.52. This can be seen on an intraday 5 minute chart. I went and confirmed this data with 2 different vendors(Qcharts and my Bloomberg Station). I hope no one got short short yesterday because this market just doesn't want to go down. -- ERIK FRIDMAN

FRED REPLIES   You are right, Erik. Fortunately, our rules kept us from trading the signal anyway because we are under a Summary Index buy signal. But this is a valuable lesson -- technical analysis is data-dependent, and sometimes the data can be wrong! Buyer beware (and seller, too)!

Posted at 10:00 PM

I am a brand new subscriber and very much enjoyed today's report. Do you recommend any specific investment to buy long and short with your signals? We are still in a buy signal at the moment? -- JOHN

FRED REPLIES   We have two portfolios, the "Always-On Summary Index" portfolio is always either long or short the S&P 500 ETF, (SPY). It is currently long 100% as it has since 2/25/03 when we got a buy signal. When the sell signal finally arrives, we will go 100% short. I would expect that readers who follow this portfolio with do so with just a part of their investment capital. I certainly hope so, since it is a very volatile trading method.

The "Technical Portfolio" is more judgement driven. I make specific trades in this portfolio based on my interpretation of the indicators and analysis of specific markets. The links to the current holdings in both portfolios are placed just to the right of the first paragraph of the report.

Since we have had our buy signal for over 3 months, we are fully invested and do not contemplate changes until the sell signal occurs. It is always difficult to hop in in the middle of a signal because the reversal can come at any minute. However, if I had a burning need to get in, I would do so with a small commitment in either SPY or QQQ, and would be quick to get out at a moment's notice. On a personal note, I would not have the burning need -- I would wait for the next signal.

Posted at 8:12 PM

I just have a question on how the averaging on the Summary Index is done. This morning you mentioned that there are 1 negative, 9 neutral and 19 positive indicators. If I am correct, you are using a 10 day average, so the indicators were dropped from 5/19, which had 1 negative, 6 neutral and 22 positive indicators. If this is correct, how can the Summary Index stays at 17.0, same as yesterday, and not decline? -- RICHARD CHAN

FRED REPLIES   That's a fair question, Richard. The reality is that the formula I use for determining the Summary Index is based on a 10 day period, but it employs a constant, a divisor and a smoothing factor applied to the index. That said, there will still be a strong relationship to the previous 10-day period. For example, you will note a sharp tendency for it to increase over the next 4 or 5 days because some low values will drop out over the period. However, the Summary Index is based on my personal evaluation of 29 indicators, and with this inherent subjectivity it seems appropriate to employ an adaptive, rather than a rigid summarization formula.

Posted at 8:08 PM

Saturday, May 31, 2003

Russell 2000 and small cap-growth still seem to be bullish. Hold them after sell signal until we see decline trend there? -- SWAMI NATHAN

FRED REPLIES   The small caps are certainly doing very well in this rally. How one plays the coming pullback is dependent on a great many personal strengths and weaknesses. In our Always-On portfolio, of course we will sell and go short because it is a tracking mechnanism for the Summary Index. However, in the Technical Portfolio, I will hold on to some things and even buy others. If I had a small cap component in it, I might make it the last thing to sell, and would be guided by how the sector's relative strength held up.

In my personal account I own two micro cap funds and have no intention of selling them at all. However, if they were a bigger part of my equity, I would be likely to reduce the positions now, before the market turns down, and hold the balance through the pullback even adding more when I thought the decline was ending.

Posted at 10:04 AM

Just finished an article where Paul Desmond of Lowry's discusses the growing risk for distortion of NYSE breadth data. For example:

Desmond, releasing a report to CBS MarketWatch, says: "New distortions to the accuracy of New York Stock Exchange trading data may be coming. Recent news articles make it clear that the New York Stock Exchange is working aggressively to add ETFs to the issues listed on the Big Board. If this comes about, the trading of ETFs, which essentially will double-count issues already listed on the exchange, will play havoc with not only the advance-decline statistics, but more importantly with the upside and downside volume statistics that investors have come to rely on over the years."

Also, Desmond says the difference between his company's advance-decline gauge and the one you see in financial newspapers via NYSE data "could become very important if interest rates were to begin to rise, weakening bonds and preferreds. At that point, bonds would have a heavy negative influence on the conventional advance-decline line, perhaps causing investors to turn cautious and sell prematurely. If investors continue to use the conventional advance-decline line, they must always consider the effect that bonds are having on that indicator."

Just curious whether you have been making -or plan on making -any adjustments to meet this kind of development. -- STEPEHN HAUGHEY

FRED REPLIES    I have found that indicators come in and go out of fashion with great regularity. Generally what happens is they go to neutral and stay there, so they can do no harm and no good. For this reason, I have 29 active indicators making up the Summary Index, and I have at least 15 others that I check daily, but do not include in the SI. They will be used to replace the quiescent ones as necessary.

Posted at 10:03 AM

Saturday, May 17, 2003

I know you're a pretty thorough guy. When you picked EEM as your emerging markets exposure, what was it about EMF that you didn't like? -- CLARKE

FRED REPLIES   It's more what I like about EEM. I like the .75% expense ratio as opposed to 1.63% and the fact that the daily volume is equal to EMF in just a month of trading. In general, I am not a fan of closed end funds because one never knows where the discount will be at the moment one chooses to sell it. For long term committments it might be fine, but I will be using it as a trading vehicle in the model portfolio.

Posted at 1:18 PM

Thursday, April 24, 2003

On the Dow's price volume loop, wouldn't the "remove one day rule" cancel the buy loop if you removed April 21, the low volume day of 1.1 billion? -- C. GURKOVIC

FRED REPLIES   No, the loop would hold up, but it would cross a different line. It is okay for there to be a three-day loop after you remove one day. However, I don't like the loop anyway, because it is not related to the "classic" form as shown in the Key Indicators article.

Posted at 10:21 AM

Wednesday, April 23, 2003

Can you tell me more about the VIX index? I heard the VIX is at the lowest point for the NASDAQ 100 since they started tracking it 3 years ago. The VIX is also pretty low for S&P around (24). Is there really complacency in the market right now? Normally you want the percent change in the VIX and the percent change in the S&P to have a one to one relationship, but the percent in VIX is a lot higher than the increase in this recent rally in the S&P. Doesn't that mean trouble ahead? -- ROEL VILLANUEVA

FRED REPLIES   The implied volatility for the NASDAQ 100 is called the VXN or "Vixen." I do not follow it. The VIX is fairly low, but not so low that I am concerned. I look at the 21 day moving average and it is not as low as it was just a few months ago. It is the direction that I look at more than the absolute level. When it starts to rise, I consider it to be a sell signal. As long as it is falling, I am not concerned.

Posted at 1:04 PM

Tuesday, April 15, 2003

I like your latest trend charts for individual stocks. I suggest you have a premium service, charging subscribers using this service separately, whereby a person can go to your data base and type in any stock and see a chart of the various moving averages noting buy and sell signals. I am in favor of such a service. I've already made money, so far, the last two weeks using this service. Thanks. -- ALBERT QUAN

FRED REPLIES   Thanks for the suggestion, Albert. Perhaps in the future. For now, I'll have to keep it less formal since it would require a great deal of work and I havn't yet developed the system sufficiently to expand it.

Posted at 9:21 AM

Saturday, April 12, 2003

I am afraid that I am not interested in the trend charts for individual stocks. I have enjoyed your analysis on the general market tremendously and have found it very valuable for my investment decision making. I have applied your analysis to my 401k account management and have had good results so far. However, I would rather see more charts and analyses of the 29 indicators of the summation index everyday than some individual stocks that I am not following and that I have no interests in trading. Actually I am a bit concerned now. Almost half of your daily charts and analyses are devoted to individual stocks. Perhaps you should start another daily analysis forum focused on individual stocks specifically for those who are interested in day trading. -- JINLING XIE

FRED REPLIES   Your concern is shared by around 10% of those who responded to my request for opinions about the coverage of individual stocks. I do want you to know that if I eliminated all talk about individual stocks last week, I would have added nothing in its place. A trading range market offers very little to talk about. The coverage of a few stocks, when they are of interest, will be in addition to, and not a replacement of my market work.

Posted at 8:34 PM

Thursday, April 10, 2003

Could the failure of the Summary Index to move above 17 mean more folks now know of your work and are acting on it....rendering it (I hope not!) less exact...? -- JOHN MACKAY

FRED REPLIES   It is certainly possible that we will want to modify the trigger levels in the future, as new experiences are added to old, but I assure you that there is no possibility of my work influencing enough people to eliminate its usefulness. We do not even know at this point, being mired in a trading range, if it would have been wise to sell on Monday, when the top was reached, since the Summary Index is an intermediate term indicator, and the buy signal came just 6 weeks ago. That having been said, it has always been the case that the market is dangerous when the index is falling, even during a buy signal.

Posted at 10:12 AM

Wednesday, March 26, 2003

It looks to me like the Price-Volume charts are making a "spring" formation. I havent read all the requirements for the spring, but to a layman/non-technician like me, it appears like one. -- DAVE PATHE

FRED REPLIES   The springs seem to have the wrong angle. A down spring should go from the upper left to the lower right and an up spring should go from the lower left to the upper right. I will elaborate in today's report.

Posted at 3:35 AM

Tuesday, March 25, 2003

"There's a war on, moron?" Don't think so -- it's the 200 day Moving Average! No technical indicator, I repeat no Technical Indicator, is more reliable in predicting the price movement of the S&P for the last 10 years better than the 200 day MA. Check it out! It was violated briefly in late 1998 and late 1999 during the bull market. The 200 day MA has not been violated since the bear market that started in late 2000. Last Friday the 200 day MA was resting at 89.67. SPY closed at 89.67 and it was soundly rejected yesterday. You don't fight an indicator that has worked very well for the past 10 years. Yes, I shorted the stock market last Friday. -- ROEL VILLANUEVA

FRED REPLIES   Great short, Roel! I checked the 200 day MA for the S&P 500 Index and you are certainly right in studying it. On Friday the index closed at 895.79, just 3 points above the 200 day average. There were only two other violations in the entire bear market. In December of 2001 and in March of 2002, and each marked the top of the rally going on at the time. It is also interesting to note that there has not been a single day in which the moving average closed higher than the previous day since the bear market started. I am certain that the indicator is of value, but as you know, my philosophy requires that I use a stable of indicators rather than just one or two. I definitely will add the 200-day S&P MA to that stable.

Posted at 12:25 PM

Monday, March 24, 2003

Fred, as I'm sure you have noticed the difference between moving money in and out of the Technical Portfolio since 8/31/2002 and just staying invested when you started has now shrunk to 1.33%. I think what this proves is how hard it is to beat the S&P 500. Just missing the two giant move days this past week has cost the portfolio dearly. I wonder how many money managers can beat the S&P over not a 10 or 15 year span but a 50 year span. I don't think 10-15 years is a large enough sample size.

I will watch with great interest to see if the Always-On Summary Index Portfolio can outperform the S&P over the next several months. I wish I had followed the Always-On the last the week or so. I would be ahead in my account instead of being -.20% since I signed up for your service. -- ARTHUR YOLLIN

FRED REPLIES   Arthur, first of all I want to thank you for writing. You have given me an opportunity to discuss some important points that I know are on the minds of many readers. The major difference between the Always-On Summary Index Portfolio (AOSIP) and the Technical Portfolio (TP) is that the AOSIP is fully invested, either long or short, in S&P 500 ETFs (SPY) all the time, and the TP is not always fully invested, and can hold equities other than SPY.

Of course, at this moment you wish you had followed the AOSIP -- it's up 8.5% in just under 4 weeks. But I want to remind you that there were some pretty uncomfortable moments for the first two weeks, until the market responded to the great technical underpinnings that produced the February 24 buy signal. It is that volatility that makes many investors uncomfortable, and that is why there is a TP.

Let's look at the volatility of the S&P versus the the TP and the AOSIP.

The first column compares the three since February 24. The S&P and AOSIP are virtually the same -- they will always be linked closely. At this writing, the AOSIP is up 8.5% while the S&P is up 7.6%.

The second column compares the TP to the S&P since the inception of the TP on August 30, 2002. As you see, the Technical Portfolio has had less than one-third of the volatility of the S&P because it has been substantially less than fully invested -- and, at this writing, is down only 0.75% while the S&P is down 2.20%.

Remember when looking at this table and considering this discussion that past performance is no guarantee of future returns -- or risk.

I previously reported that the backtested return of the AOSIP was 20.5% annually over the last 4 years, and I expect that the volatility will be at least as great as that of the S&P. The prospect of a 20.5% annual return may make that a worthwhile risk to undertake, but it is not for everyone. But with lower volatility comes lower risk, and often, lower reward as well. That's the game -- take it or leave it. You are responsible for the amount of risk you take -- I am responsible for the buy and sell signals that I generate with my indicators.

Finally, while I don't have any way to generate a 50-year backtest -- even though I started investing almost that long ago (43 years) -- I have kept very careful records of the last 5 years for all of my clients. Since March 31, 1998 my accounts have produced an average annualized return of 3.43% while the S&P 500 produced a loss of -2.73%, and I have done it with an average monthly volatility of 10.5 while the S&P has had an average monthly volatility of 19.2.

Posted at 4:33 AM

Friday, March 14, 2003

During the past boring market days I was cleaning my files and noticed a transcript I copied from a CNBC show in 1999. It's a discussion between Ron Insana and Jerry Favors. I used to subscribe to Jerry Favors' newsletter in the early 1990's. He's good, but not magic (who is?). He has uncovered a few gems in the past.

How does a 14 day RSI work in a bear market? It could be good at picking tops in a bear market as well as it picked bottoms in a bull market. -- TOM KRENT

FRED REPLIES   Thanks for the suggestion. It is clear to me that the RSI conveys much more information than does the A/D line itself. As a matter of fact, the RSI often opposes the conclusion one would normally come to regarding the advances and declines. The problem with the A/D line is that it rarely offers more than a very general, very long term signal -- one of either confirmation or rejection of a price trend.

The RSI offers more frequent and more useful signals and I will consider it as a replacement for the A/D line among the 29 indicators making up the Summary Index. I will include a discussion in Monday's report.

Posted at 10:39 AM

Thursday, March 13, 2003

Are the times at which you list sells in the Technical Portfolio actual times that you are selling out your client positions? I sold my S&P and QQQ at the open. You said in your report that you would sell into strength, but with the markets in the decline all day you had no way of knowing there would be an end of day rebound. The reason I make this statement is, because it is paper portfolio, you could just take the highest price of the day. This would increase your overall returns. I just want to clarify how yesterday's sell price was arrived at. -- ARTHUR YOLLIN

FRED REPLIES   A very fair question to ask, Arthur. As I’ve said many times in my reports, I use my trading judgment to select the exact moment of the day when I will trade. Yesterday my judgment happened to work out rather well. There are two ways that I keep myself honest about how I report my trades to my readers -- and keep myself from cheating by just reporting the highest prices of the day. First, on those occasions when my trading for the Technical Portfolio coincides with trades I am making for my managed accounts, I use the same pricing for both. Second, on those occasions when I am not trading for my managed accounts, I document the time and price of my Technical Portfolio trades in a contemporaneous e-mail to Don Luskin, who then posts the trades on the web site.

Posted at 8:40 AM

Tuesday, March 11, 2003

Lowry mentioned based on their 70 year history, there have been an average of six 90% Downside Days before major market bottoms. I hope this helps. -- ALBERT QUAN

FRED REPLIES   Thank you for the information. Is there a possibility that you can forward me a copy of the report you read? It is especially important to know the dispersion that resulted in an average of 6. Whether the events varied between 5 and 7 or between 2 and 10 to make up the average of 6 is very important to know in evaluating the current string. We also need to know from where to start counting. So far we have had 1 in 2000, 2 in 2001, 1 in 2002 and 1 yesterday. So, there have been a total of 5 since the market topped out. Thanks again, I look forward to the any other information you may have.

Posted at 9:30 AM

Monday, March 10, 2003

I take it that the direction of a "spring" pattern in a Price/Volume Chart is not as important as the occurrence of the pattern. Looking at the example in today's report, the pattern flows bottom left to top right (the bullish direction), whereas the current pattern is opposite in that it flows from bottom right to top left (the bearish direction). -- GLEN CARTY

FRED REPLIES   These are pretty much uncharted waters. I pointed out the springs because they are basically clockwise patterns, but clearly they do not move from the lower left to the upper right -- the "bullish" direction. Unfortunately, it appears, at this writing, that the question is moot.

Posted at 9:09 AM

Tuesday, March 04, 2003

Fred, isn't the market really being controlled now by Geo-politcal trends rather than the summary index. The index turning positive was actually caused by a delay in the Iraq situation rather than market fundamentals. At this point doesn't it appear more likely that the stop loss of of 817 S&P will be violated before a break to the upside. The paradox is by getting out you miss a huge move if something happens overnight or over a weekend with some kind of swift action in Iraq. -- ART YOLLIN

FRED REPLIES   Art, you have really put your finger on it. The bad news and uncertainty is simply overpowering the good economic news, although there is some bad econonomic news as well. However, the Summary Index does not consider fundamentals directly, only insofar as they affect the technical indicators. On Saturday, as I reviewed the technical indicators in preparation for Monday's report, I noticed that several indicators, on which I rely heavily, were not responding to the rally. In fact they were at their extremes, ready to turn down. That is what prompted my rather dour report on Monday. Yes, the 817 stoploss looks as if it will be violated, but we cannot be sure and I will wait for the violation and sell even at the risk of missing the beginning of an upturn. If there is a violation while the Summary Index is still rising, I will get back in when the market gets above it again, and certainly when 851 is violated to the upside.

Posted at 11:52 AM

Monday, March 03, 2003

I was quite encouraged to see the market go up this morning following two back to back days of gain. Now, it is giving it all back while the Summary Index continues to increase. Are you concerned that the rally has yet to arrive? -- LAURENCE HUGHES

FRED REPLIES   I tried to address the your question in today's report. I am encouraged that the technical strength in the market over the last week has managed to stem the tide of falling prices. However, I am not excited by the market's seeming inability to breakout of the narrow price range to the upside. I think we must adhere to our stoploss and recent highs and trade in the direction of the breakout.

Posted at 3:12 PM

I read the updates to volume enhanced SMI. One concern I always have is that the Pros may keep changing the trading games they play (like the 'swing trading' I keep hearing about) to mislead the technicians and amateurs about their intents. How likely is that scenario? -- SWAMI NATHAN

FRED REPLIES   Good point, it is always possible that a reliable indicator will suddenly stop working. I rather doubt that this one can be easily shaken because it requires extreme volume changes to make it effective. It is much easier to affect the closing prices of individual securities by manipulation than it is to manipulate volume. However, this is why I find comfort in using multiple indicators, to avoid reliance on just a few.

Posted at 3:11 PM

Tuesday, February 25, 2003

You have some very unique and outstanding indicators. Before I look at any indicator, I always look at price first and foremost. Price action rules. The indicators either warn me of impending reversals, topping or bottoming potentials, etc. I never, ever trade solely based on indicators. I look forward to going long soon but in the meantime, I am short and have been for awhile now. Since the market has broken the recent lows, 806 on the S&P 500 can't be ruled out soon. -- ALBERT QUAN

FRED REPLIES   I agree completely that all the indicators in the world are of little value if the markets do not respond to their buy signals with advances and to their sell signals with declines. That is why I am insisting that we climb above the recent highs before adding to our equity positions.

With respect to your other point, about selling short, I am not comfortable selling when the Summary Index has given a buy signal, so I will not consider selling short until a sell signal is produced. That said, I do not feel obliged to get 100% long if there is a buy signal, and I will even keep a small long position in the face of a Summary Index sell signal. However, my participation is geared to what is happening to price, as you suggested.

Posted at 6:52 PM

Monday, February 24, 2003

Doesn't the "remove one day" rule invalidate the buy loop you talked about in today's report? -- STEVE EDELSTEIN

FRED REPLIES   If the loops are not confirmed today then yes, they will be destroyed by the "remove one day rule." That is really why we wait for confirmation. The positive loops do, however, encourage me to buy a small amount early in the face of the almost inevitable Summary Index buy signal that will happen today. True, a major decline can delay the signal for a few days, but that will make the final rally all the more powerful.

Posted at 12:10 PM

Wednesday, February 19, 2003

Just a couple of thoughts. First is the timing of buy's and sell's on the summary index. In reviewing the data it seems to me that the entry points are OK but your exit points are bad. Keeping the same 4.5 buy and 17 sell positions I suggest that you close the buy when the index first gets to 17 and you close the sell when it first drops below 4.5. This means that you are out of the market for the short time frame when it is above or below the entry points.

The second thought is the summary index is shown plotted against the S&P. You are also trading the QQQ's as most people probably do. Can you show the summary index overlaid against the QQQ's? And as you know there are many indicators that track the S&P and have the equivalent for the NASDAQ. VIX & VXN for example. Is it possible to have a summary index for the NASDAQ? -- JOHN URBANIK

FRED REPLIES   Thank you, John, for your suggestions. In considering the first suggestion, concerning the positioning of the triggers for buying and selling, I have spent some time analyzing the data for the best placement. One consideration is whether one should use the drop below 4.5 as the trigger to close out the short signal and the reemergence from below 4.5 as the trigger for placing a long trade. While that might be a good strategy, I find that leaving some latitude for decisions "on the spot" is better for me. I am certain that improvements can be made by individuals considering their own strengths and weaknesses and will be made as we gain experience. With respect to your suggestion that I develop a Summary Index for the NASDAQ, I am already using specific NASDAQ indicators among the 29. I feel that while one index may outperform the other from time to time, they are pretty well coordinated with respect to timing. However, you are certainly correct that they present different opportunities from time to time. Perhaps the best way to take advantage of the differences is using a simple relative strength chart to determine where you want to place your investment, but use the combined timing indicator to determine when. Thank you for you suggestions.

Posted at 11:02 AM

Tuesday, February 18, 2003

I've reviewed your latest update to the Summary Index buy signal and I have a few comments.

1) I just want to say that I like your Summary Index a great deal as it is one of the few tools I've seen that does a great job of timing short term tops/bottoms in real time with minimal delay. I've looked at a lot of timing signals over the years and I think yours is the best I've seen.

2) I am not very impressed with your new trigger levels of 4.5 and 17. I see from the chart you have scaled the magnitude over time to account for the changing number of indicators in the index so the same trigger level can be applied throughout. This is OK but I see quite a few near misses on the low and high sides (about 10) such that different trigger levels would change the results quite a bit. I personally don't think a timing signal is very robust if it is highly sensitive to the trigger level. I think it would be worthwhile to take a look at how sensitive the performance, win/loss percentage, number of trades, etc is to the trigger levels. For example, if I change the trigger by 1.5 each way to 6 and 15.5, I get about 30 trades vs your 18. Knowing the performance of these 30 trades would be helpful to understanding the sensitivity to the trigger level chosen.

3) I am not very impressed with the performance during the first 2 years of testing for 1999 and 2000 during what is for the most part a bull market time period. I think your timing signal has proven it is very good for the last 2 years of the bear market, but I am skeptical of its ability during bull markets.

4) I noticed the first 2 years on the summation index chart has significantly more midpoint crossings than the last 2 years (about 50% more). I think this is an artifact of the fewer indicators used during this time period making it easier to switch from one extreme to another. So even though you have been able to account for the magnitude to set a consistent trigger level, the frequency or timing if the signal during the first 2 years is different than the last 2 years. So in some ways, I don't really think the first 2 years are comparable to the last 2 years when you are using more indicators resulting in slower oscillation. Thus, I think the last 2 years is a better indication of how your index is performing now and hopefully in the future. Given this is the period which the index excels is really good news. However, it just further confirms my suspicion that it has only been proven during a bear market, not a bull market.

5) I am a little concerned about the subjectivity and possible human bias for how you make the bullish/neutral/bearish call for each of the indicators. Of course having more indicators helps reduce this concern as it should average out. Still, it is something I am concerned about in that your indicator is dependent on your objectivity. Maybe understanding that process better would be of help -- LEE DORIUS

FRED REPLIES   I agree with your lengthy analysis. The early days were handicapped both by the fact that there were too few indicators and by the newness of the technique to me. The subjectivity is a definite factor, and a point I've made many times -- I do not believe there is a technical approach to the market that is not user-sensitive. Ultimately, even an entirely robotic indicator is user-sensitive because a user had to select it and parameterize it at some point. That's why I'll be running two versions of the Technical Portfolio -- a new one that follows the Summary Index literally, and the other (the existing Technical Portfolio) that will be run with liberal doses of my personal judgment. We will just have to wait until we see the results.

Posted at 9:29 PM

Wednesday, February 12, 2003

I went to the archives and read your articles around the time of the sub-4 buy signal that went bad (-8.1%). It was instructive to see how very leery of the signal you were at the time, given the large number of important indicators that were holding out. Sure enough the up move halted early on and then proceeded to whipsaw. Perhaps we can feel confident that such warning signs will often get/keep us out in future, similar situations. -- STEVE HAUGHEY

FRED REPLIES   Steve, thank you very much for the words of encouragement. I believe you have hit the nail on the head. Occasionally there will be a period when the best entry will be above or below the calculated bars so if we try to pinpoint our buys and sells using precise numbers we will sometimes miss major moves and we will sometimes get in too early. To think otherwise means you believe in the Holy Grail.

I do not. The extreme volatility, especially at moments of market inflection, means that if we use 4.10 instead of 4.00 we may buy 30 S&P points higher. To think otherwise is making an assumption that we are dealing with a science, when in fact it is an art.

I know I have to pick numbers for the 100% long, 100% short portfolio so we can evaluate the technique, but I believe that a trade based on everything one knows is going to be better than one based on a magic number.

I am going to select numbers based on the normalization of the data because we must include those days when there were fewer indicators, but I will still rely, for the Technical Portfolio and for my own investing, on my Price/Volume Charts and my instincts in addition to the Summary Index.

Thanks again for the e-mail, it really hit the spot.

Posted at 7:36 PM

Is it possible to get a 'sell' signal from the Price/Volume loops while the Summary Index gives a buy signal? In that case, should one wait until getting the Price/Volume buy or continuation buy loop after getting a buy signal from Summary Index?-- SWAMI NATHAN

FRED REPLIES   That is certainly possible since the Price/Volume loops are short term indicators and the Summary Index is intermediate term in nature. For the long/short portfolio I will ignore the Price/Volume signals, but for the other portfolio it will be fair game to modify trading in response to any inputs at all.

Posted at 10:40 AM

Tuesday, February 11, 2003

I'm very impressed with your latest work on the new buy/sell signal. I do have a few questions that maybe you can address sometime in the future.

Why are there sell signals on your chart when the Summary Index does not appear to go above 15 (about 3 times in the first half of the time period shown) or buy signals when it does not go below 4 (1 time in 1Q02)?

What is the performance of buy and sell to cash vs sell short?

What is the performance if you use the new buy/sell signal to buy another index like the Nasdaq 100? -- LEE DORIUS

FRED REPLIES   Thanks for writing Lee, the first question about the first few sell signals is an easy question. We started with only 13 indicators and added to them starting in 2000 so the first few sells were based on a retreat of 10% from the highest level reached. The 15 trigger is what has worked since we reached higher numbers of indicators.

The second question is also easy. I screwed up! Thanks for finding it. I will correct the data. It eliminates two trades but it won't present an interpretive difference.

Next, you asked about cash vs shorts. There would be substantial periods during which you would earn interest, but you would eliminate roughly 60% from the total return over 4 years. You could expect roughly 12% from longside alone. Of course this was a bear market for the last three years so it's not too bad even without the shorts.

Finally, I will be testing other trading vehicles as we go along, but for now I don't know the answer to that.

Posted at 2:45 PM

Congratulation on improving your Summary Index. Another way you can enhance your method is to use an index fund that is more volatile than the S&P. For example check the result of the buy and sell signal of SMH (semiconductors). The last buy signal was tremendous as well as the last sell signal. Since the beta for SMH is over 1, the result will be better than using the S&P.-- ROEL VILLANUEVA

FRED REPLIES   Thanks for the suggestion. I think it is appropriate for the Technical Portfolio as it is now defined, but I want to keep a new Technical Portfolio limited to the S&P alone for tracking the "pure play" results of the Summary Index.

Posted at 8:42 AM

Saturday, February 08, 2003

Can you say how you calculate the 9-day average of the percent of positive S&P 500 days. I'm curious how you treat the down days when taking a nine day average. -- DC

FRED REPLIES   The percent up is just the number of positive closes divided by 9 then you take a moving average of the daily percents.

Posted at 6:46 PM

Monday, February 03, 2003

Fred, something Cramer posted yesterday made me put the Smart Money Indicator in a new light, at least temporarily. He suggested that lately the morning selling has been as more the work of European professionals, unloading US equity due to dollar concerns, than any US actors (dumb or otherwise). While I am not privvy to the modus operandi of the European managers, it would seem to make some sense and, if true, would seem to suggest that we keep an extra close watch on the AM and PM components. For example, do my eyes deceive me or is the PM component more or less mainlining? European pros dumping in the morning while American pros play wait and see is one scenario that comes to mind.... and all the while the SMI rises... -- STEVE HAUGHEY

FRED REPLIES   I will post an enlarged view of the Smart Money Indicator this week to illustrate the components more clearly. It is true that the AM is falling and the PM is relatively quiet. Cramer's theory could be a factor. If true, it would positively affect the Smart Money Indicator. However, I am not willing to discount the indicator based on that possibility. On the other hand, I have discounted it on the basis of the failure of the volume to support it.

Posted at 8:50 PM

Wednesday, January 29, 2003

When observing the pink ovals in your Summary Index chart, it appears that based on the pattern of the 1st oval, the Summary Index will turn up one more time before making a low below 4. This would complete the pattern for the second oval.

The time compression of this pattern is also interesting, it almost appears as if the completion of the 2nd oval is being played out in synch with the issues surrounding the Iraq and economic debates.

If the index turns up before making a low below 4, and then turns down below the previous high, that may be a perfect time to lighten up and prepare for a drop below 4 and a subsequent rally. -- GLEN CARTY

FRED REPLIES   I agree with your analysis. While I have noticed the repetition for some time now, I also realize that it may be strictly random. It is useful to guide one into strategies such as you describe, but I think we must remain flexible and watch the PV charts, which are not included in the Summary Index.

Posted at 11:00 AM

Sunday, January 26, 2003

I receive your daily report about 15-20 minutes prior to market opening. It's just not enough time to read, understand, analyze, and include your information and comments into my daily trading plan. Is it possible to release the report much earlier? If you write the report the night before, could you release it nightly? Also, if you write the Monday's report on either Fridays or on weekends, could you release it on weekend?

I do a lot of preparation work nightly and especially on weekends. I just don't have enough time to incorporate your comments and charts into my plan. Your consideration is appreciated. Keep up the excellent work. Thanks. -- ALBERT QUAN

FRED REPLIES   The problem is the result of our production cycle. I study the day's data after the close and prepare the report starting around midnight EST. So, by the time I am finished it is well after 3 AM and Don Luskin, who edits and publishes the piece, is already asleep. He completes his work usually about thirty minutes before the market's opening. Similarly, the weekend is used for researching new topics for inclusion in Monday's report so it is rarely, though occasionally, ready late Sunday. I will discuss this with Don and see if we can come up with any ideas that might help.

Posted at 7:12 PM

Friday, January 24, 2003

Though there is a sell signal in effect from the Summary Index and the threat of war is looming, I could not resist the temptation to buy SPX at 87.63 this morning and put a tight stop! -- SWAMI NATHAN

FRED REPLIES   Well, you certainly have the support of the 3-day VIX trading buy signal. However, if I were to buy I would at least wait for the day to unfold and do it near the close as I did the last one. The market is already down 135 just before 11 AM, so I know what is going on, but I would still not be in a hurry to buy until near the end of the day.

Posted at 10:42 AM

Wednesday, January 22, 2003

Fred, Yesterday you listed the results of the 3 day VIX trades. I was wondering if you could cross reference them against the summation index by looking to see if the index was rising or falling at the time of the signal and also where the index was at. Maybe this refines the trade. A VIX signal when the summation index is rising or say down near 6 would be a much stronger buy signal then one where things are near the top. JOHN URBANIK

FRED REPLIES   An excellent suggestion, John, and one that was also made by Don Luskin. I expect to have information over the weekend for discussion on Monday.

Posted at 10:03 AM

Friday, January 03, 2003

Is January 2's counterclockwise continuation bullish loop weakened by the fact that the penetration of "the downtrend line immediately above it" is actually slightly up-trending (except for the Dow)? That is, if confirmed tomorrow? -- FRED GLASS

FRED REPLIES   Interesting thought, Fred, but I have never seen anything written by Crocker on the direction of the slope in a continuation loop. With respect to a classical buy loop, it is true, the intersection between the final leg of the loop and the initial one form an "X", with the first one descending and the final one rising.

Posted at 6:06 AM

Sunday, December 29, 2002

Thought that this quote may be useful for you:

"People sometimes under-appreciate the value of not losing money. Along those lines, I'd like to share a couple of recent statistics from Jim Stack, in his ever-insightful InvesTech monthly letter... It turns out that, measuring from 1928 to 2002, if you started with $10 and you followed the famous buy-and-hold strategy, that $10 would become $10,957. If you missed the 30 best months, your $10 would only be $154. However, if you missed the 30 worst months, your $10 would be $1,317,803. One can see from these numbers that missing the worst periods is very important to long-run compounding." -- SWAMI NATHAN

FRED REPLIES   Thank you for sending that quote along. The reason I am so conservative is that the pain of losing money is much greater than the pleasure of making it, especially if it is other people's money that you are dealing with. I do feel good about the outcome of the last three years, and I haven't lost a client during this difficult period.

Posted at 10:58 PM

Friday, December 27, 2002

I know its not part of your repetoire, but was yesterday an "outside reversal" day? As I understand it that's a trading range greater than the previous day's with a lower close. -- CLARKE

FRED REPLIES   An outside reversal day just has to have a higher high and a lower low than the day before. Yesterday qualified, but it's significance depends upon the range and volume, both of which were very low. Also, the fact that the previous day was a half day makes its significance questionable. Finally, the importance of such days depends upon it's position within the recent pattern of trading. If we were at resistance, which we are not, it would have more significance than being in the middle of a trading range.

Posted at 10:41 AM

Thursday, December 19, 2002

Love the star patterns -- charts that lose their "look" are information...but what information?...LOL What do you think about going long both puts and calls, out of the money? With the VIX low and the star pattern suggesting volatility a-comin' do you think this makes sense? -- CLARKE

FRED REPLIES   My concern with a straddle or strangle at this point is that the holiday is coming. It is notoriously volatile and frequently to the upside on low volume. I personally would lean in that direction in a speculative move around Xmas. However, I personally will not participate in anything but a flat out purchase if I do anything.

Posted at 8:50 AM

Friday, December 13, 2002

SMART DUMB? OR DUMB SMART?    Have you noticed that an anomaly has developed in the option markets since the summer of 2002? The normally negative correlation between 21-day moving averages for OEX and CBOE put/call-ratios has turned positive. The OEX and CBOE now move in lockstep, as opposed to the traditional pattern of CBOE p/c going up while OEX p/c moving down. Fred, try plotting the 21-day MAs and look at the chart. Not sure how to interpret this anomaly. Has the "smart money" (OEX traders) become dumber? Or has the "dumb money" (CBOE) become smarter? Would be interesting to hear what do you gentlemen think. -- CHRIS ST. JOHN

FRED REPLIES   The convergence between OEX and CBOE as a frequent occurrence before a bottom. Hopefully this is no exception. There's more on this in today's report.

Posted at 7:41 AM

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