Hi Keith, The Idiot Wave components, during average risk markets, wander around on their own and usually not in concert. However, in times of extreme market stress, like '87, '90 and last year in the Fall the four components usually line up together as all being Bearish.
Then after the pressure is relieved, they'll usually all fall to Bullish status. We can have high and low risk indications without all four components being in agreement. I don't ignore these events, but feel having all four in harmony is more significant.
I "designed" the components to be high values during bearish periods. Then their sum gives us a high IW reading which corresponds to a very high Cash Reserve being suggested. Last Fall we had all four components showing Bullish conditions starting October 19th. Here's what they looked like at the time:
Relative Valuation - 18.74; Bullish
Speculation - (4.9); Bullish
Divergence - 0.5; Bullish
Zeal! - (3.0); Bullish
Value Line's P/E was down to 14.5, Treasury rate was 4.242, the best performer in Value Line was up 73.2% while the worst was down 78.6%. It took just an 18% gain to make the Best list, while your stock had to be down nearly 62% to make the Worst list! There were only 30 New Highs while there were 868 New Lows! The total number of issues on the Nasdaq and NYSE was dropping quickly, down from 9450 to 9200 between July and October.
You can't ask for better Bullish signals that those - and all in harmony.
This last summer's High Risk reading had, at most, three of the four components in Bearish agreement. In my way of thinking, that's not as serious as when all four are working together. Right now we have two neutral, one bearish and one bullish. Mixed signals and the IW is in about the middle of its long term range.
If we look back at last Summer's high risk reading and see where the DOW and NASDAQ have gone since, it wasn't a bad call. It was suggesting only a 49% commitment to equities back then and now is saying that 57% is good. That's quite a shift. In the mean time the market has consolidated nicely.
Since Jan., '99 the NASDAQ has risen 38% to its yearly high. The DOW rose about 31% to its peak. There should be fat capital gains out there. There are also some nasty losses since the broad market hasn't participated as much as the averages would indicate. This could make for a busy "tax selling season." The very fact that you are asking about it here at this time indicates that it's probably already starting nation wide.
Tax selling usually means a messy market for as long as it lasts. People sell their losers and pump the money into their winners. So the bad get worse and the good get better! This actually causes some "seasonality" in the Divergence component.
If you think of market risk as being like climbing an extension ladder in a wind storm, then you can understand that our risk now is lower because we've backed down several rungs! Lucky for us Mr. Lichello is holding the base of our ladder!
Best regards, Tom |
