Our friend Rajan from Singapore reads along on the BB here
on SI. He dropped me a note overnight with some speculation
on what to think about the next 6 to 12 months in the
market. I responded using some of the information that I
gave to Keith's group last evening. Here it is:
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Hi Rajan,
Thanks for the note. I don't know if my Idiot Wave falls
into the classification of Astrological Views or just
Asshole Views! But in any case, we're nearing the Low Risk
end of its range and that's only occurred five times since
I started the database in 1982. Each time there's been
terrific market rallies thereafter.
For reasons that might not immediately seem apparent the
IW's Low Risk periods always coincide with what seems to be
the most painful times for us as investors. Consider it a
first light seen at the end of a very dark tunnel. The
first week the IW heads into Low Risk doesn't mean the
market won't fall further, but it usually means it's very
near its bottom. It takes tremendous selling pressure, low
interest rates, fear and dismay over several weeks or
months to bring all four components to their individual
Bullish areas. It's quite rare that it occurs and even
rarer when it stays in such a condition for long enough to
get the moving averages, of which the IW is comprised, to
move the IW to Low Risk.
Here's some historical data:
DATE Weeks IW at Low Risk NASDAQ Comp. Change @ 6 Months Change @ 12 Months
08/27/1982* 1 week 177.60 +47.7% +63.5%
12/04/1987 16 weeks 292.92 +26.4% +27.6%
11/25/1988 5 weeks 365.07 +21.9% +25.1%
09/21/1990** 21 weeks 362.25 +3.0% +45.5%
10/12/1998 5 weeks 1856.56 +39.7% +55.5%
* At this time I only had data for three of the four
components which make up the Idiot Wave.
** This Low Risk signal came during the Iraq - Kuwait
invasion/occupation. Although different from the current
circumstances it distinguishes itself for two reasons.
1) the market recovery occurred only after the "Gulf War"
started in January of 1999.
2) It was the longest continuous period of Low Risk (21
weeks) that I have in my database. This may be instructive
for our current market conditions.
In talking with Keith Felkins' investing friends last
evening I said that the market doesn't like "uncertainty."
It takes away what my brother termed "sponsorship" of
stocks from the market. Fear has everyone selling which in
turn gets the institutions involved in the selling.
Currently we have lots of money flowing into various
retirement plans just as we did a year ago, but now those
funds are being directed into bond funds and other areas
deemed safer than the market. Again, deadened sponsorship.
Since we don't have as of yet a visible plan showing what
will happen in the near term there's plenty
of "uncertainty" again now. It looks like the Idiot Wave is
heading back to its Low Risk area again. Using 1990 as a
guide, we should expect the low risk period to last longer
than '82, '87, '88 and '98. It also may bounce in and out
of the Low Risk area as the market tries to rally now and
then on current events. Until there's some return of
confidence and "certainty" it will remain low and we can't
expect much of a market recovery. In 1990 the low risk
period lasted about 5 months.
I hope this will help you with your plans on how and when
to do your AIM investing. Keep an eye on the Idiot Wave
over the next weeks and months for signs that the market
has found some new direction. The signs will come in a rise
from Bullish to Neutral of the components and the IW
Oscillator turning back to positive numbers (currently it's
a minus ten). It doesn't appear we have to be in any hurry
to get fully invested!
Best regards,
Tom
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I think this pretty well summarizes what was on our minds
last evening.
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