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Turn In, Tune Out, Drop Off



"If you find yourself about ready to throw up your hands, you have to ask yourself why did you eat them in the first place?"

Yesterday was a heavy day for financial "news," which generally means the gibberish was as thick as molasses as we finally turned off the computers here last night. Oh well, it can't be helped. America invented financial gibberish, and jazz, and the three-point shot. Also, fast food drive-up windows.

As a country we know what our strengths are, usually, and they include the creation of vast amounts of gibberish, making certain kinds of music, and the rapid delivery of food products that taste exactly the same no matter where (or how) they are consumed over a country that spans 3.5 million square miles. That's incredible when you think about it. Lesser countries, poorer countries, can't transport eggs across the street without disaster striking.

Sometimes it's difficult to separate gibberish from truth. Sometimes it's not difficult so much as dangerous. Most of the time it requires something along the lines of a heavy gauge wire filter and a splatter screen like the kind you might find installed on the deep fryer at a typical fast food restaurant. I use the point and figure indicators as my filter and splatter screen.

As you might expect, the short-term indicators I follow weakened significantly yesterday. The percent of stocks above their 50-day moving average and the percent of stocks above their 200-day moving average fell for both the NYSE and the Nasdaq.

The context is still positive overall, but it is noteworthy that we continue to work toward making lower highs in both the NYSE and Nasdaq bullish percent indicators dating back to their peaks in January 2004. This simply means that during each rally fewer stocks have participated in a meaningful way as measured by their price action on a point & figure chart, and this shows up as lower highs even as we move toward elevated risk levels in the indicators.

Topping is a process, not an event, and so this is perfectly natural behavior as we work our way toward reasserting the larger structural bearish trend. Markets do not move in a straight line, and this is why it requires some type of disciplined process to avoid getting bearish on downticks and bullish on upticks.

Elevated risk is not in and of itself bearish. Markets move higher under high-risk conditions all the time. How one participates within the context of high risk, however, will often determine ultimate success. Evaluating risk/reward is the cornerstone of staying in the game and that's why we're focusing on that topic at MIM2 at Ojai.

One of the reasons I incorporate the point & figure methodology into my process is that the indicators, almost by definition, force me to become more bullish as the indicators move lower toward reduced risk conditions, and more bearish as they move higher into elevated risk conditions. They filter out the gibberish in the day-to-day swings; a pretty helpful thing when you get down to it.

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No positions in stocks mentioned.

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