Walker Market Letter
August 4th, 2003
lowrisk.com
...............................................
It has been quite some time between issues of the Walker
Market Letter. I apologize for the delay, but sometimes this
free publication slips down the priority list. If you want
to be sure to get ALL of our updates then you should
upgrade to our Walker MarketEdge. You can get all the
details here:
lowrisk.com
---
Our Signal Strength is still at 3. Our models are
completely out of the stock market.
I have included a market commentary below.
// -- MODEL UPDATE -- //
LowRisk Market Allocation Model signal strength = 3 (on a
scale of 0-20, with 20 being the most bullish)
***
Graduated Strategy - 100% money markets as of 02/06/2003
Timing Strategy - 100% money markets as of 06/11/2001
SuperBear Strategy - 100% money markets as of 12/14/98
SuperBull - 100% money markets as of 02/14/03
**********
In late June, with almost everyone "frothing at the mouth"
with bullish enthusiasm, I put out a very bearish market
letter.
As it turned out, neither the raging bulls or myself had it
quite right. The market has basically gone sideways for more
than a month. In fact, depending on which chart you are
looking at, this sideways market has lasted as long as 9
weeks.
This trading range has left a pattern on the charts that we
often see when we are watching the really short term charts.
We refer to this as a "cigar" pattern. We get this when the
market trades sideways in a narrow range - drawing out a
long, thin cigar on the charts. This is basically a lengthy
consolidation in a narrow range.
These patterns always break, and generally when they do the
volatility really increases. And we usually get an extended
move in one direction or another. The key point here is that
the pattern doesn't tell us WHICH direction the market is
going to move, it just tells us there is a big move coming.
Right now, the top of the cigar on the SP500 is at 1015. The
bottom of the cigar isn't as clearly defined... the first
level we are watching is in the 975-973 area. On Monday the
market flirted with that level... breaking below it for a
couple of hours before moving back over it.
The interesting thing here, with the market just over the
bottom of the recent trading range, is that the factors that
had me feeling bearish in June are still in place. Here is
the short version: investor sentiment is way too close to
euphoric for my taste, the market is struggling to get above
key resistance zones, and we have all kinds of bearish
divergences on our internal indicators.
In addition to those factors, there are indications that
this churning trading range (and even the entire rally this
year) has been an exercise in distribution by the smart
money. One example is insider selling, which is at an
extremely high level.
Basically, according to our work, the weight of the evidence
is on the bears side. Is this just a wall of worry for the
bulls to climb? Perhaps it is, but I think the danger in the
market is very high right now, especially as we move in the
most treacherous three months of the year for the market.
August through October is not a time that has been
historically friendly to the bulls.
Back in June I wrote this about a potential sell off:
"Of course, this will not happen all at once. The
rally has been quite powerful, and the bulls will
not give up without a fight. Expect to see some
powerful countertrend bounces."
The same logic still applies. After a very powerful rally,
the market just doesn't turn on a dime. However, a two month
long consolidation takes the wind out of everyone's sail...
including the bulls. This has basically been a case of the
market storing up energy for a big move. We will get one,
eventually. And right now I think that the move will be down.
In any case, no matter which direction the market breaks,
you can be sure to ALWAYS be take maximum advantage of our
strategies by upgrading to the Walker MarketEdge - you will
get all our extra issues, PLUS our Mutual Fund picks, PLUS
immediate Flash Updates whenever there are changes in our
models. You can get more details at this web page:
> > > lowrisk.com < < <
---
I have gotten a few questions lately about why the model has
been stuck at a 3 throughout the rally this year.
Fair question... but the answer is not a particularly easy
one, and I don't know how satisfying it will be.
Back in the mid-late 90's the bull market was roaring ahead.
And at the time, the one thing that was absolutely crystal
clear to me was that the market was setting itself up for a
huge crash. The model I built was designed to get us out of
the market when that crash came.
And that is exactly what it did. If you joined us before
2000, then you know that we simply stepped aside and missed
all the excitement as the market crashed.
And as the market crashed there were factors in the model
that basically slowed down its response so it wouldn't get
caught in the huge bear market rallies. Again, the model
basically succeeded. The market had some huge powerful
rallies that ended in utter collapse and lots of early bulls
getting burned. And, for the most part, we missed the fun
and games.
But now we have a case where we have had an extended rally.
This rally really hasn't gone much further than the previous
bear market rallies, but it has certainly lasted longer. And
our model has remained out of the market, and our Signal
Strength hasn't even budged. Part of this in the last month
or two is due to the market internals deteriorating, but a
bigger part is just the design of the model - after a change
to a secular bear market, it takes a lot to get the model
excited about jumping back in.
Now with all that said, I am looking at a very strong
possibility of making some changes to the model. The
conditions are very different than they were 10 years ago
when I started working on the model. I think some changes to
make the model a bit more momentum based could make the
model more agile and quicker responding. The question is
whether I can achieve this while maintaining the basic "low
risk" aspects of the model. I will keep you informed of the
progress.
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Finally, over the years we have frequently mentioned various
support and resistance levels in this newsletter. Support
and resistance is NOT built into our model, but they are a
VERY important tool we use to analyze the market.
We have lots of techniques that we use to come up with these
levels, but one of our "secrets" are Fibonacci levels... and
a good friend of mine has recently completed a full course
on using Fibonacci levels. The course is mostly aimed at
short term traders, but the techniques also carry over to
longer term investors. You can get more details here:
lowrisk.com
---
Good Luck,
Jeff
Copyright (c) 2003 by Jeff Walker, Bayfield, CO. This
newsletter may be forwarded, as long as you do so in its
entirety.
Disclaimer:
The financial markets are risky. Investing is risky. Past
performance does not guarantee future performance. The
foregoing has been prepared solely for informational
purposes and is not a solicitation, or an offer to buy or
sell any security. Opinions are based on historical
research and data believed reliable, but there is no
guarantee that future results will be profitable. |
