Well, this week there won't be any charts and just a little market analysis because I want to talk about an event that doesn't occur often. I think the last time I saw it was in the beginning of the bull run in 1995. That means it has been nearly 12 years since this occurred. And that bull run lasted five years! What am I talking about? Well, allow me a bit of license today and I will tell you.
In every game where two sides take up positions and a whistle signals that they should have at it, one side usually wins something and the other usually loses something. In football, it is a struggle for the national championship. In baseball, it is (or was) the Yankees winning the World Series. In financial markets, it's the battle over the price of stocks and bonds.
But in most all this gaming, the contest must eventually and finally does come to an end. It is always after New Year's Day in football, and by late October for baseball. But wait a minute! When is the game over in the financial markets? Funny, but that game is never over. So, how does anybody win, you ask?
Well, the players — called bulls if they push markets up and bears if they push markets down — do have a way of keeping score. They use "market reversals" to mark the end a stretch of play. You know, a recession is one game, a rally is another game, and so it goes, ad nauseum. The funny part is that, as the game is being played, both sides are always sure that they are winning — well, at least that they are doing better than the other side, anyway.
And where do I fit into all this? Well, I am of that curious set called a financial commentator. My job is to watch all the plays as closely as I can and see if I can tell what the next play might be. Years of watching like this does sharpen one's ability to see what might happen next, of course, but, believe me, it is still tough to get it right.
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I do count my blessings that I have been fortunate enough to be right about the next play more often than I have been wrong. Not tooting my horn you understand, just looking back over the years and that's what I see.
So, why am I setting up the column today with all the game talk? It is because I sense that a seldom-seen play is about to occur. This one will be a near game-breaker, as I see it, and somebody is going to lose and lose big! It won't end the game of course. It never does. But, it will put one side or the other in sad shape for awhile.
So what's the big play? Well, the bears see the recent assault by the bulls on the Dow 14,000 level as a bad play by the bulls. The bears sensed pushing so hard may have exhausted the bulls, making them ripe for an attack. And, frankly, the bears were right — for a short time.
The market was shaky after its huge twelve month run-up. All it took was the smell of a subprime loan scandal, and the bulls caved. Well, almost anyway. In the end, it turned out, at best, to be only a mild correction. The bears never even got up a good head of steam, despite frightening predictions of a huge drop in the markets and rampant rumors of the end of the financial markets as we know them thrown in to boot.
But, if you are a regular reader, you know I never bought that scenario. All I did was watch my Super Chart Keyline and it kept telling me, steadily day after day, that the correction would be mild.
Then a funny thing happened. The Keyline turned on a dime, stopped chopping up and down and headed straight for the old Dow 14,000 record. And it got there in record time! On Oct. 9, the Dow raced right by the old 14,000 high and never even looked back, closing at a new record high of 14,164, with the S&P right behind, closing at a new record of 1,565!
This move by the bulls was a big gamble and it is either (1) going to ignite a sharp drive to truly lofty levels or, (2), as some bears fervently hope, it will have exhausted the bulls so thoroughly that this time the market will really plunge — big time.
So, where do I come down on all this? Well, a look at my Super Chart Keyline tells me that the current market momentum is sufficient to carry the Dow to the 14,500 area, possibly even by Thanksgiving.
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I have some trouble believing that prediction, but, as I said earlier, the Super Chart has made me right more often than wrong, by a good shot, so I will go with it and watch the developing momentum indicators closely for signs the prediction is going to be fulfilled — or, on the other hand, for signs that it is beginning to stumble.
Now, if the Dow 14,500 prediction stays on course, here is where the seldom seen play may soon occur. To repeat, this play hasn't happened since 1995!
I said back in mid-May's column that I saw this market going to the 19,0000 to 20,000. That still stands. But if this play unfolds like it now appears, it will get there even faster. Why? Because of all of the huge bets that the bears have been making by taking huge short positions along the way during the last 15 to 16 months. That strategy that has now put the bears in a very, very precarious position.
There is an old, old saying in stock market circles that goes something like this: "The market trend can last longer in one direction than your money can if you are betting against it." At some point, the bears will have to make the very sober decision that they are throwing good money after bad while at the same time missing a huge profit opportunity and they will, en masse, throw in the towel.
When that happens, and I now expect it sooner than later, the jump in the markets indexes will be huge, sharp, unforgiving, and relentless. Go back and look at what happened to the charts from 1995 to near 2000. If you are a bear, it is a frightening prospect!
So, this is the play I see coming. Can't tell you when it will get here, but it is surely coming and not too far away — my guess is, in less that six months. I believe the bears will lose this time. But don't feel too sorry for them. You see, they will be licking their wounds with the sure knowledge that their day will come.
And, as always I hear the question you are asking yourself, "But, Max, can you be wrong?" And, as ever, the answer is "Sure." But, I will know it well before the rest of the market does. My Super Chart Keyline will show the way and if you are a regular (and I hope faithful) reader, I will tell you what the Super Chart is telling me in plenty of time to cover your behinds.
So how might you take advantage of this play? I would suggest you look into calls, especially the long-term ones called LEAPS that expire well into the future, as long as two to four years in some cases.
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Buy the ones that are going to expire two to three years out, and use strike prices at least 50 to 200 S&P points above the current range, say the 1700 to 1750 strike prices. They will be cheap in today's market and help keep your investment cost down. If the play I envision does occur, you could see four to five times your investment, even more! Wow!
Now just before I close, I did promise a few words about the market's condition, according to the Keyline. What I see for the next week or so is a chart that is a bit over-extended to the upside. While we made new Dow and S&P highs yesterday, it carried the momentum indicators on both charts to near the +90 area (on a scale of 100) and that usually means a bit of price softness (not always, but about 80 percent of the time) while the indicators return to a near neutral position, around the 50 area on their respective charts.
For the moment, the charts seem to say the Dow 13,900- to 14,170-level may contain this adjustment. However, if we were to break below the 13,850 area, a test of the 13,650 area might occur. However, this is not too likely at the moment, according to the Super Chart. We will see.
One other chart I recommend you watch is the Dow Transportation chart. It is a chart that is part of the Dow Theory system reported on by the revered grandfather of all financial writers, Richard Russell.
He reports that to see a really good breakout, we should need to see the Dow Transport index set a new high, also, thus confirming the new highs in the S&P and Dow Jones Industrial Average indices. The Transportation index's current record high was 5,369 on July 13 of this year. It closed Oct. 10 at 4,933.
It will take some doing for a new high to occur here anytime soon. That doesn't mean we won't see the Dow and S&P continue to climb, but maybe just not as with as much conviction as they might otherwise have.
Well, that is about all for today. Thanks for letting me use a bit of license this week. Hope you enjoyed what you heard. So for now, hope your coming investment week is a good done. In the meantime, you keep in touch. I do! See you next week.
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Commodities Are Still in a Bull Market. Get Our Top 6 Recos for the Coming Year.
