Stock-Market-Observations

Now that summer is behind me I am turning my attention to a number of new long-range studies that may point the way for the outcome of future Short Range Ts and the key 39-week MA Adaptive channels.

My topic for this week is the 200-month moving average of the Dow Jones Industrials as plotted in the Mega-T chart below. Click on the image for a larger view.

As I have discussed in earlier updates, it has been suggested that a long term moving average of some 16 years or so (plotted as the green line in the upper part of the chart) was particularly useful because it could be generally concluded that important lows for this blue chip average might reasonably be expected near a 200 Month ( 16.5 year) MA now at 6557 and rising very slowly. This is an exponential MA and has a good record of anticipating important or critical events throughout this 200-year history as you can see from this long history.

I have not had a chance to optimize this potentially interesting indicator but the blue long term oscillator in the lower portion of the chart does use a 200 month MA of the monthly price change so there are historical reasons to pursue the indicator’s usefulness. As you may remember, the main use of the blue price change oscillator is to define the left side time duration of the numbered Ts. The 8 oscillator declines noted in the chart are interpreted as Cash Build Up periods much the same way we do for Short Range Ts. The secondary use of the oscillator is to locate long term oversold, overbought or neutral periods as the right scale suggests. However the 200-month MA maybe an equally important way to approach valuation issues from a very long-term perspective and I am interested in pursuing it further.

As matters now stand, I would interpret the historic 200-month MA in a similar light to the 39-week MA in the weekly Adaptive Channel plot, which is currently of near term interest. Near term, a bullish outcome to the current correction requires a holding around the 39-week MA (still S&P 1088). If this holds, as appears to be the case, then a new uptrend would be likely. In a like manner some of the nicest long term market lows have historically come as the Dow average simply bottomed on its 200-month MA. The Timing of any such bottom is best done by my Advance-Decline Ts and I have been very fortunate to obtain a fine database that goes back to 1926. Along with the breadth data I also have the daily Dow closing values so I can produce a very detailed version of this Mega-T chart from 1926 which include both the key A-D Ts that project 2 to 6 year types of trends while still maintaining the 200 month perspective for historical purposes.

Once the two databases are integrated I can then take the 200-month MA (or something similar if a better average can be found) and transfer my proprietary equations used to develop the high/low envelopes to this big Dow picture. I am constantly amazed to find out that regardless of the market intermediate trends the one sane and relatively constant outcome is that nice bottoms occur near the 39 week MA and extremes are pretty well defined by the mathematically defined upper and lower extremes. In a similar manner I would expect the nice bottoms for this bigger picture will be most likely around the 200 month MA and hopefully the extremes swings that go well above the MA or well below the MA will be adequately projected by my new adaptive envelop equations. If so, I will have a powerful management tool that can identify risk reward expectations based on a very long history and I can do it without recourse to Price to Earnings concepts, which are constantly being manipulated by their proponents for their own purposes.
The DJIA level relative to its 200-month MA is also an important consideration for the structure of the management concept introduced in my recent updates. Basically the 200-month MA (or thereabouts) is the historical “sweet spot” for initial stock ownership. Note the long history of the green line as plotted against the DJIA (or its very early equivalents) does suggest that if the index were to base at the 200-month MA then an ideal long term buying opportunity might be at hand. The 1974-1982 illustrates an almost ideal point in time to get interested in stocks.

Going back in time one sees that getting interested in stocks before they sell down to the 200 month MA is not likely to be a long term success unless the trend is within the right side of the time symmetrical Ts, that is, within a T’s projected right side uptrend.

The most dangerous conditions for investors are easily seen as the period following a T’s projected peak at its right end date. This post T peak period may last some 10 years plus, so it is significant. A second and even more dangerous condition occurs when the DJIA falls to the 200-month MA, then losses support at that level, plunging well below. This is only likely in the right side of a T that finds the financial system not capable of withstanding the contraction pressures as in 1932 for example. Failure for the Dow to hold at the 200-month MA implies defaults across the board including stocks, bonds and real estate. Gold would likely be the only defense under these circumstances.

Getting historically reliable answers to these sorts of outcomes and providing unbiased quantitative estimates derived from history is my key goal here. Hopefully adding the adaptive channels to this long term Dow picture could provide long term price objectives that might hold up for some 10 years. In any case the big Ts aren’t likely to fail after 200 years of getting the picture approximately correct and the A-D Ts should do the better job of refining the bigger picture so the long-term picture should become much clearer. With a clearer long-term picture, the near term decisions should become simpler to make since the probable outcomes have been greatly reduced by the dual constraints imposed by the Big Ts and the 200-month MA and channels as valuation measures.

The A-D Ts conclusion is known at this point and calls for an uptrend well into next year. The ever-present unknown is the magnitude of the price advances but this the normal consequence of any T Theory projection. Only the time duration of an advance is given in T Theory and the upside price target can not specified. Of course you can easily make a guess that that new highs relative to the highs of some 6 months ago ought to be achieved simply based on any history of Ts. You can even produce a target for a near term upside objective from the 39 week envelopes, but I don’t believe these sorts of near term statistical objectives to be very useful from an investment standpoint.

What I really want to develop is very much greater scope based on much greater envelope channels center around the 200 month MA. This more advanced concept might be able to statistically specify the next peak based on 200-year history, which I think, is the much more reasonable investment approach. I will be working on this addition to the Mega-T chart over the next month. Once the Mega-T envelope channels are defined, I will publish a new chart with a new statistical upside objectives for the Dow based on the 200-year history. In the meantime I won’t be able to answer questions, as I will be tied up with the programming. Terry Laundry

Update September 17 2004

For this week I am addressing the expiration of the current Short Range T and the expected, but not guaranteed, development of a new bullish Short Range T very shortly thereafter. This new T can start a strong rally after the next pullback that should produce good gains going into year-end as per the Advance-Decline T outlook noted in last week’s update. Click on the above image for a more detailed view of the Short Term picture.

As noted in the chart, the current T that will be expiring relatively soon is of the bearish type because it could not produce an uptrend from the center post as would be normal in a bullish environment. However the most likely outcome is that the next T will produce the bullish outcome and it will arrive as quickly as possible.

To anticipate this process through the long history of Short Range Ts, it is necessary to construct the old T as tightly as possible using the momentum construction in the lower portion of the chart rather than the longer construction in the upper portion. The reason is that the market is now rising out of the oversold condition allowed by the old Bear T and is technically ripe for the new advance that can come from the new expected bull T.

Using the tight, shortest, T construction requires the old T’s center-post low to be placed at the volume oscillator momentum low which is earlier than the price low. This interpretation calls for the current rally to be running into a topping action now because it approaching the right-end date of the shortened T construction. It is also overbought based on the volume oscillator and nearly fully overbought based on the upper channel envelope.
After topping and a correction, the old T can be considered expired and we can start looking for the next T that is likely to arrive fairly quickly. The new T, like any T’s time span has to be must be defined by the duration of the declining peaks in the Volume Oscillator as I have sketched in the daily chart. Assuming a topping near term and a modest decline for a week or two then a new T could start its projected advance very quickly. This new advance would normally be expected to be strong enough to carry the market well above its 39-week MA.

It will take a few weeks to get a handle on the next Short Range T formation but a new T is likely after the next short term correction and the market generally is likely to do well going into year-end. The most favorable way to get the new T started is to have the S&P hold its 55 day MA (1100-ish) on corrections so as to maintain the upside trend of the last month.

A final observation is that the arrival of a new Bullish T fairly quickly may not be difficult to anticipate since it looks to me to be predictable from the volume oscillator cyclical pattern. The pattern suggests the next rally will be coming as the Presidential election approaches. The obvious conclusion is that the market’s next surge will be made on confirmation of a Bush victory.

However the much more important question will be whether or not the new T’s rally can break the S&P out of its recent highs and re-establish longer term bullish momentum or simply stall into a mindless trading range. Terry Laundry

Update September 24 2004

The market transition from the old bear T to the expected new Bull T is developing normally. This weeks Wed -Thurs decline has reduced the overbought condition in the volume oscillator as per last weeks chart but support at the 1100-ish S&P level would still help the transition technically and produced a better advance into year-end via the new T. The big positive is the ongoing strength in the NY A-D line, which is a plus as a new T is forming.

Another area that I see as having a growing positive outlook is the Gold and Gold Stock area. Gold Bullion has completed a correction and from my cyclical interpretation is turning up into an early 2005 peak. Gold stocks have lagging but this is normal in the early stages. Gold stocks are turning up as well and should play catch-up, as the metal price increase looks more sustainable.

Terry Laundry

Update October 1 2004

The equity market is holding just fine and I continue to expect a strong year-end finish to the S&P based on a new Short Range T formation as per last week’s update. No new T can be confirmed now, but I expect it will come as part of a strengthening trend.

Also there is significant strength developing in the gold and gold stocks sector which will confirm a new long range Gold Mega-T once the price of gold can get well above long term resistance around $430/oz. I expect this confirmation relatively soon. It will represent a major change in investor preferences as a shift more towards physical stores of value. This includes natural resources of all types (Oil, Metals etc) and may be bullish for certain Real Estate and other geographic related stores of value generally known under the concept of “power of place”.

The loser in this scenario, in my opinion, are those big industrial US companies that had bet on the “power of continued earnings” based on the old pre-2000 business plans. In T Theory the most serious risk is seen in the Dow Jones Industrial Index blue chip issues because their 200 year history of T expirations, as detailed in my prior reports. This concept shows an expiration of the last great bull market with little prospects for any new blue chip bull market.

I will comment further on this great shift after we get a bit more data and my expectations are confirmed. Terry Laundry

Update October 7 2004

As noted in my daily chart above I am still expecting the formation of a new T as part of the recent recovery by the S&P 500. See my recent weekly updates. The outlook remains bullish as long as the blue volume oscillator continues to hold its rising bottoms pattern. This suggests a trend that is in the process of turning up from the recent decline. A rising oscillator bottoms pattern, while the S&P is making new lows, is usually interpreted as Accumulation. Click on image for a larger view.

The potential new T sketched in, but not confirmed so far, is expected as a consequence of other T Theory considerations such as longer range Transport and A-D Ts that I will introduce here in later Updates. To confirm the new T as sketched, the blue volume oscillator must break above the green cash build up line. So far there is resistance to further upside, no doubt due to higher oil prices, election uncertainty, etc. We will see if another week or two can force the upside breakout. A successful breakout will result in a sharp buying stampede. Terry Laundry

Update October 7 2004

As noted in my daily chart above I am still expecting the formation of a new T as part of the recent recovery by the S&P 500. See my recent weekly updates. The outlook remains bullish as long as the blue volume oscillator continues to hold its rising bottoms pattern. This suggests a trend that is in the process of turning up from the recent decline. A rising oscillator bottoms pattern, while the S&P is making new lows, is usually interpreted as Accumulation. Click on image for a larger view.

The potential new T sketched in, but not confirmed so far, is expected as a consequence of other T Theory considerations such as longer range Transport and A-D Ts that I will introduce here in later Updates. To confirm the new T as sketched, the blue volume oscillator must break above the green cash build up line. So far there is resistance to further upside, no doubt due to higher oil prices, election uncertainty, etc. We will see if another week or two can force the upside breakout. A successful breakout will result in a sharp buying stampede. Terry Laundry

October 15 2004 Update