Ahhh, c'mon! I swear if I see another article or hear another talking head tell us that finally, yes finally, they are right, that this is it and the stock market is heading for the depths of perdition where it truly deserves to be (what with it being so ridiculously overbought and all that stuff), I will just… well, just…. well, insert your own type of bodily function.
Where did all these types come from, another planet? The stock market has gone straight up for 12 months! What? You didn't expect some sort of correction? In all of my 40 plus years in this business, it has never gone straight up for 12 months. Folks, it is about time for some sort of correction. (Yes, yes, I know there was a tiny blip down in March — but negligible it was).
[Editor's Note:The 99 stocks you need to dump in 2007 . . . and the 10 to buy! Get our free report today.]
However, can't we please keep all this in some sort of rational perspective? The doom and gloom writers are having a field day, as well as are the analysts that have just plain missed the call on this rally and how powerful it swas, and, of course, there are the money managers that have left customers in cash for the entire run of the rally, now they can all finally say, "See, I was right!"
But, are any of them right? Well, let me put it this way: NO!!! If any one of them had any "chart sense" they would understand that, so far, all this is a very mild correction. (Anything less than a 30 percent pullback level is considered very mild.) Why, we haven't even retraced a "mild" Fibonacci 38.2 percent at this point.
Can it get worse? Of course it can, but so far it hasn't. And until we see a Dow of 12,500 or so, this is all just a pretty run of the mill pullback. So, until then, I really would appreciate it if the prophesiers of doom would please just crawl back into their corners for a bit! (Of course, they won't. I know that. Just felt good saying it.)
Story Continues Below
Oh, yes. Who (or what), you ask, is "Fibonacci?" Well, let me tell you a bit about this 1200 A.D. math guy. First of all, Fibonacci is the man that introduced the western world to the then Arabic math model, the 1,2,3,4,5,6,7,8,9,0 base we all use today. Pretty impressive!
But, it was a 1900s man named Elliott, who published several books on stock price predictions in the 1940s, that made the name of Fibonacci famous to chart and stock technical types everywhere. Elliott (influenced by several early 1900s math writers) found that the work of Fibonacci (pronounced Fib-on-notch-ee) fit perfectly into his "five wave" stock pricing model.
Then in 1980, a man named Bob Prechter published all of Elliott's writings in one book and used this book to promote, quite successfully for a while, his own prowess at calling market activity using Elliott's model. But, Prechter missed calling the 1987 crash and lost most of his admirers (a very fickle bunch these investors!)
However, the model Elliott set up and Prechter promoted is today still watched closely by chart types like me everywhere. Here is a compressed explanation of what it purports. Prices for stocks move in five "waves." Each wave's end price can be predetermined by the use of two important percentage numbers. I won't go into how the percentages are used, just that they are 38.2 percent and 61.8 percent. Technicians also watch the 50 percent level, too, though it is not actually part of the Fibonacci model.
These three percentages very, and I mean very, often can be found as the support levels of pullbacks down from rallies or resistance levels in temporary rallies up in a downtrend. You may question this model, but let me tell you that it works plenty of the time. I don't know if it is because Elliott (using Fibonacci's work) was right or because since so many investors are watching these levels so closely it becomes a self-fulfilling prophecy that these levels work. All I know is that they work, so the why is of little importance!
Okay! I can hear the rebuts from the current bad mouth crowd, even as I write this. "Well, Whitmore is one of those "chart" guys. They never look at the 'real' facts about companies, just look at the scratching on some chart. They miss the whole story about a company. What a waste of time." Or, "Whitmore just doesn't understand this business. Charts are just a small part of things. Why, he probably can't even tell you what IBM's second quarter sales are or its earning, for that matter." And, I suppose, there are probably a dozen more rebuttals out there that I just can't think of right now.
[Editor's Note:Buffett Says This Book Made Him Billions]
Well, let me tell you something about charts. Every price mark on a chart occurs because thousands, sometimes millions, of investors have put their money where their mouth is! They either bought or sold a stock. I really don't care what IBM second quarter sales are (they were $23.8 billion with $2.26 billion earnings, so there), what really counts is where the majority of orders are originating, whether with buyers or sellers. If buyers, you want to be a buyer. If sellers, you better be a seller, too. That is the bottom line.
Right now, the stock market is pulling back after a record breaking up move. In other words, buyers have become sellers for now and prices are falling. What else would they do, pray tell? Folks are just "locking in" some profits. Nothing wrong with that at all. What is important is how long the profit-taking lasts and how far back prices pull while investors do take some profits.
The rally that began in July 2006 went from about Dow 11,000 to Dow 14,000, a huge, record stomping, gut wrenching, whopping 3,000 points, nearly a 28 percent climb without hardly a breath!
Now, there is finally a pause. Looking at Fibonacci's three numbers, it is only a very mild pullback if we were to drop only 30 percent of the gain to Dow 13,100. At the Fibonacci number 38.2 percent, which would qualify as a mild pullback, it would be to about Dow 12,750 or so. If we see a "fairly standard" pullback of 50 percent (not a standard Fibonacci number, but closely watched by investors, as I said) the pullback would be to about the Dow 12,500 level.
Now, falling below the DOW 12,500 would finally be classed as a bit of a white knuckle experience. The 61.8 percent number, a crucial level, is about Dow 12,150 or so. If this level were to break, the "chart" guys (including me) would then begin to tell clients to take major protective measures, ones like increasing cash levels in the portfolio by selling some stocks, or using puts to protect the portfolio, etc., because, at that point, we may be in for a very big decline, quite possibly a very big one.
I have said this before, so forgive me for being redundant, but you need to understand this fact about chartists. We will never buy at the exact bottom or sell at the exact top. We will miss the first 10 percent or so of a rally or lose the first 10 percent or so of a decline. All we try to do is get the middle 80 percent or so in the bank. Seems like a good, measured risk way to do things, if you ask me.
So, until we break the crucial 61.8 percent level at Dow 12,150, the only steps I would recommend if you wanted to protect portfolio value right now might be to spend a bit of your cash funds on some short selling of the NYSE Spyders (a proxy for the Standard & Poor's index) in a sort of insurance measure.
In this instance, your shorts profit while your stock holdings lose value, a type of "freezing" of the portfolio value, if you will. Option puts on the Standard & Poor's index can also accomplish the same effect. But, until we see this "crucial" level, there is absolutely no reason to talk doom and gloom or to "run for the hills."
Believe me when I tell you that you are going to hear every argument to "run" that is out there while this pullback goes on. So, be prepared. You will hear how a falling dollar will destroy us (see my report last week for my thoughts on that one), or that the economy is way too soft for the market to continue up (poppycock, it will go up if there are more buyers than sellers, PERIOD!).
Or how about, "Interest rates have to go up or the economy will never be able to fund its huge debt." Oh, come on! That one has been out there for 8 years or more and the demand for U.S. Treasuries is as strong as ever. Do you think debt buyers see better debt to buy anywhere, and in the volume that we offer, or with the amount of true assets backing them up as we have, or with the political stability our government offers investors when they look around at other countries? Get real here!
Need I say more? If you think so, I suggest you go to cash in your portfolio right now, because you are fair prey for the doom and gloomers and only a totally cash position will make their words of little importance to you.
[Editor's Note:The 3 Best Income Stocks in the World]
Now, since I am a "chart guy" I am including my Whitmore Super Chart of the Dow since mid-2004 for your review.
Click to View and Print Larger Image
I have marked the 30 percent, 38.2 percent, 50 percent, and the rock bottom 61.8 percent levels for you to watch over the next couple of months. I have also marked my Super Chart Keyline (currently at Dow 11,838) which is the point at which a major market reversal truly begins in earnest.
This Keyline has called every major market reversal since 1965 when I first began its development. If you want a big picture of the chart, go to my archives at Moneynews (Experts Corner) to open the chart only and print it out on your printer. Paste it up right where you can see it often and that way we can watch together what the market tells us.
My own view is that the pullback will last 4-7 weeks, quite possibly, but it will hold the 50 percent level (12,500) at its worst pullback level. But, I am only guessing, you know. But, it is a guess that has 40 years of experience in reading charts behind it. But remember, it is still just a guess.
And before I leave today, I want to once again send you to my column of April 13 (see my archives) that called for the S&P target in the then on-going rally to be about 1520-1540 (cash basis). We actually hit 1552 as a high before the current pullback began.
And even more important, see my May 13 column. In that column, I am calling for a Dow of 19-20,000 in the next 3 1/2 to 4 years. And I, again, fully endorse this forecast. So, you better be watching to see if the base of this pullback does form over the next 4-7 weeks. And if it does, better plan on how you will take advantage of the potential 6-7,000 point Dow rally that is surely coming. Now, put that one in your pipe and smoke it. (Wait, that was what they used to say. People don't smoke pipes any more do they?)
Well, that's all for this week. Hope your coming investment week is a good one. In the meantime, you keep in touch. I do! See you next week!
Editor's note:
The 99 stocks you need to dump in 2007 . . . and the 10 to buy! Get our free report today.
The 3 Best Income Stocks in the World
Buffett Says This Book Made Him Billions
