The Deipnosophist

Where the science of investing becomes an art of living

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Location: Summerlin, Nevada, United States

A private investor for 20+ years, I manage private portfolios and write about investing. You can read my market musings on three different sites: 1) The Deipnosophist, dedicated to teaching the market's processes and mechanics; 2) Investment Poetry, a subscription site dedicated to real time investment recommendations; and 3) Seeking Alpha, a combination of the other two sites with a mix of reprints from this site and all-original content. See you here, there, or the other site!

16 August 2007

Market thoughts, part 1

Good morning, All.

Obviously, the markets endure a serious tumble the past 5+ weeks. With this decline now obvious, the questions become "Where to now?" and "What can I expect next?". This post provides a reply from two individuals whose market insights are well-respected. One is Jack Cory, who requires no introduction to many of this site's readers but for other readers, Jack has deep and broad experience in the markets' wily ways; the second is Eric Anderson, who views the markets through a statistical prism. Each person's analysis makes for interesting reading.

I will follow on later this morning (I hope) with my comments in part 2 of this post. I will state now, however, that it would not surprise me were the markets to reverse up from today's gap down openings and early morning lows, for at least a short term reversal. More anon.
-- David M Gordon / The Deipnosophist
First, Jack Cory...
Yesterday I reviewed a recent chart of the McClellan Oscillator. That appears so oversold as to encourage me to look at Oscillator result after today's (Wednesday 8/15) close.

The Oscillator is in the process of making a complex bottom, the type from which major market uptrends begin. Although the market was down significantly today and was extending its downtrend, including a continuation of a break down through a major up trendline, the Oscillator was barely able to continue to go down. This is very bullish.

I expect that the market will begin a rally either Thursday or Friday. However, I always look for a confirming "hook" in the Oscillator as a buy signal. That should probably come in the next few trading days. The wonderful thing about the hook is that it is almost unknown for it to fail as a great buypoint and as a confirmation of a new uptrend of significant proportion.

I should also point out that Bill O'Neil's buy point will come a little later, usually about 7 to 10 days after the bottom. Watch for a quick rise off of a complex bottom, followed by a three to seven days of sidewise action, and then a continuation to the upside.

Personally, I prefer the McClellan Oscillator hook as a signal. Usually both the hook and the O'Neil signals occur at significant market bottoms, but not always. On the other hand I cannot recall when at least one of these did not occur.

I will continue to watch the market and the oscillator and let you know my impressions of it.

And Eric Anderson...

Based on our talk I looked at some weekly S&P 500 data again, 1950 to present week. At this point in time we are some 5 weeks and 10% in the midst of what I hope to be a short term opportunity.

The odds, if you assume we have not yet reached the market cycle peak, then...
• 2 of 14 times a short two week 5% drop occurred (This did not happen),
• 8 of 14 times a 5-6 week drop of 10 to 15% occurred (This may be where we are now),
• The other four times the drop lasted 9, 10, 11,13, and 13 weeks for a 15 to 25% drop from recent highs. This may be where we are going...

So a bottom might happen in conjunction with the Aug, Sept, or October options expiration weeks. At this point, I am looking for lower lows in 5% increments for the S&P 500. This way I use either time and or percentage move.


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