May 2007

ABC led the news Tuesday night with a tuberculosis scare. Tuberculosis!? The last time I can remember anyone making a fuss about tuberculosis was in Thomas Mann's novel, The Magic Mountain, which is set in a sanitarium. Perhaps Tuesday was just a slow news day? In any event, if we'd known in advance that TB would top the headlines on a given night, we might have laid in an emergency supply of bottled water and canned food. The TB scare involved a man infected with an evidently incurable strain of the disease who flew from the U.S. to Europe and back a few weeks ago. Perhaps ABC should have emphasized the dog-bites-man aspect of the story ' that we can all breathe easier knowing there were more than three hundred million Americans who were not on that flight. But to lead with the story? Sometimes the toughest choice an editor can make is when there is no news ' other than the kind that doesn't belong on the front page. I faced such a dilemma myself once when I worked as a news editor for a daily paper in New Jersey. The editors met at dinner time each night to discuss the placement of stories in the next morning's edition. On one particular occasion, the only local news item we had was a gruesome story off the police blotter involving the fatal mauling of a small child by a household Sheepdog (aka "Nana"). The choice was made more difficult by the fact that the dog was not a pit bull, nor was the neighborhood a 'bad' one. In fact, the accident occurred in one of the toniest resorts in Southern New Jersey, and the way it happened could have occurred in any household with a large dog. Forbearance carried the

Seasonality usually romps on Wall Street ahead of Memorial Day weekend, but this year the party was relatively subdued. As much might be said of the Rick's Picks chat room, where things quieted down around mid-morning as regulars departed, presumably for exotic getaway spots around the world. I'd offered a few trades for Friday in the Touts section, all of them geared toward bottom-fishing a weak opening. It was not to be, however, and we never even came close to grabbing a piece of Google, the Diamonds or the Cubes before they wafted higher from the opening bell. Stocks seemed buoyed not so much by enthusiastic buying as by a relative dearth of sellers. Placid as the day may have seemed, it began with the Nasdaq 100 (QQQQ) teetering on a ledge. For, in fact, it would not have taken much of a fall beneath the previous day's lows to create a bearish impulse leg on the daily chart. The last time this occurred was in February, when the Martin Armstrong swoon had us convinced for a brief instant that something important was happening. The QQQQ chart was reproduced in Friday's Touts to show graphically just how precarious is the life of a seemingly robust bull market. We all know some tennis or golf buff who collapsed in mid-game, dead of a massive heart attack not even a week after we saw him looking fit as a fiddle. Well, that's about where the stock market is right now ' and where it shall be when the bear comes on like�a coronary. We can all enjoy it while it lasts. Have a great holiday weekend!

In featuring the outlandishly bullish thoughts of Nobel laureate Vernon Smith here yesterday, I said that it would be churlish of me to take issue with the economist, given that a rampaging stock market has placed the burden of proof squarely on the bears for the moment. Yesterday, however, stocks reversed 200 points to the negative, so it's probably as good a time as any to try and rebut the implausible and factually challenged ideas of an ivory-tower egghead who evidently was encouraged by a Journal reporter to go, so to speak, off his rocker. I didn't wake up feeling churlish, incidentally, but dreaming of...Drew Barrymore. I am old enough to be her father, yes, but we spent the entire dream ' as far as I can recall ' looking for my car, which evidently had been stolen. Not such a bad thing, either, since it was a 1969 BMW I once owned whose routine maintenance used to cost me as much as half of the $7500 I made at the time as a cub reporter. Commodities Walloped Anyway, churlishness came a little later in the morning, when every commodity that I was bidding for got shelled like the deck of an aircraft carrier under siege by a squadron of Zeroes. Typically, when a Hidden Pivot support gets walloped, I will tend to assume that still lower prices are likely. In this instance, though, commodities in particular were getting whacked so hard that one might have thought the deflationary collapse I've been predicting for so long was beginning to move its slow thighs. Which brings us back to Mr. Smith and his off-the-spectrum bullish ideas. ('[He] is so bullish on stocks that�' is how the Journal story began, Rodney Dangerfield-style.) One of the professor's theories is that the dot-com crash of

The Wall Street Journal pulled out all the stops yesterday, hard-selling a bull market that we continue to view as an episode of mass hysteria. In the lead story, the Journal trotted out a Nobel laureate, no less, to say in so many words that this time it really is different. Could this renowned egghead be onto something? Quite possibly. We're not inclined to argue the point right now, since, whatever the cause, stocks are undeniably moving higher, and dramatically so. The Nobelist is a man named Vernon Smith, and he is credited in the story with having the good sense to have let the dot-com boom pass him by. To hear him tell it, and there is no reason to doubt his tale, he wisely would not have touched a dot-com stock with a ten-foot pole back in 1999. This time, though, he really does think that things are different ' so much so that he says he's been buying the shares of small drug companies to hold for the long term. Smith won the Nobel prize for designing role-playing games that helped economists determine how investors might act in the real world. He came away from these experiments convinced that if you gave investors enough money, they would eventually create an asset bubble. That's what happened in 1998-2000, as we all know. But it was the bursting of that bubble that has left investors with a residual cautiousness that persists to this day, says Smith, and that is why today's bubbles ' in real estate, financial assets, or what have you ' are less dangerous than the dot-com bubble from which we supposedly learned our lesson. An Impolite Question In a more churlish mood we might ask the professor a question that one hopes would cause him to

With a U.S. recession just a statistical heartbeat away, any sane observer might conclude that the stock market is staging for a spectacular plunge. In fact, it is within mere hundredths of a point of opening up a lush new pasture for bulls. The chart below shows why this is so according to the Hidden Pivot system, the analytical method I use to avoid letting my innate bearishness blind me to the obvious. In determining trend strength, the simple rule I use is that a rally leg must surpass two prior peaks to renew the trend and keep the bull healthy. Although the S&P 500 Index did not quite achieve this when it reached a new record high on Monday, it came within a mere 0.22 points of doing so. A month earlier, the S&Ps easily surpassed the 'internal' #1 peak, warning off any bears who intend to survive the 'Stocks Gone Wild' lollapalooza of 2007. However, it remains for this key index to surpass the somewhat more daunting 'external' peak #2 in order to clinch smooth sailing for at least the next several months. This interpretation is somewhat unconventional in that most chartists are focused on the questions of whether the S&Ps will exceed the all-time high at 1552.87; it was recorded six months earlier than the one-off high I've flagged. But it is the lower peak that counts most in my estimation, and if it is exceeded without an intervening pullback of more than a week, that would all but guarantee that the bull will demolish the higher peak. 'Go away in May'? Not if the S&Ps hit 1500.10 before next Friday.

Gold has chastised and disappointed bulls so many times since last May that we want to be quite certain of our indicators before sounding the all-clear. Unfortunately, the coldly mechanical Hidden Pivot method that we use to forecast price trends has mostly glum things to say about bullion at the moment. Yes, that could change in as little as a day or two if certain things were to occur even on the lesser charts. But as of yet there have been no such signs to warrant even cautious optimism, let alone an outpouring of bullish predictions. The chart below, of Comex June Gold, shows why. (Click on chart to enlarge) Notice how yesterday's rally from point 'A' failed to surpass any of the visually distinctive peaks that had occurred over the previous week. In our experience, important rallies almost invariably begin with a thrust that surpasses two or more prior peaks on the intraday charts. Moreover, if those peaks were etched on the way down, the impulsive thrust that has surpassed them is properly regarded as having been even more impressive. Peaks #2-#5 in the chart above illustrate these 'external' peaks, while #1 is a less-imposing 'internal' peak. Definitions aside, yesterday's tentative stab did not exceed much of anything, and we take that to imply that gold bugs shouldn't get their hopes too high, at least not right now. Please note, however, that it would take a mere $10 rally to blow past no fewer than four of those peaks -- twice the minimum 'priors' we require to turn us bullish for the near-to-intermediate term. An impulse leg that impales four previous peaks without, so to speak, drawing a breath, would imply that a far more powerful eruption is percolating below the service. We'd be bullish as all get-out were

Like all rally targets before it, our DJIA objective at 13587 gave way on Friday, inundated by a flood tide of buying that lifted the Indoos to yet one more all-time high. Paradoxically, and despite the market's strength, the short I'd advised from 13587 would have been an easy winner, if only for little while, since our target came within a single tick of anticipating an intraday high that endured for more than five hours and which gave way to a correction of nearly 40 points. Each time the bullish herd tramples logic itself as it did yet again on Friday, ignoring mounting evidence of a U.S economy whose deterioration is beginning to accelerate, we remind ourselves that Wall Street's occasional flights of insanity can go on for quite a while longer than the disinterested observer might expect or even imagine. I might have assumed I'd seen enough in 35 years of market-watching to prepare me for the Krakatoa of delusion that we are witnessing today. There was casino-stock mania in the late 1970s, and the amazing short-squeeze in UAL when it operated hotels as Allegis Corp. in the 1980s. I watched a friend on the options floor lose his entire net worth resisting Nike's unlikely success transforming the lowly sneaker into an object of worship. And now, Apple shares, propelled by the same quasi-religious devotion, are approaching similar levels of absurdity. Money Is Cheap Yet, none of this prepared me for the Bull Market of 2007, with its Babel-onian ascent into the heavens, even as a credit-glutted economy teeters on the brink of the steepest recessionary cliff since 1973-74. How could investors be so foolish? The answer, very simply, is that there is practically no limit these days to the amount of money that can be borrowed for financial

The Indoos sputtered out yesterday a tad shy of a promising Hidden Pivot target at 13538. A sign of perilous fatigue? Hard to say at the moment, but if the blue chip average kisses that number as the week draws to a close, we'd be mighty tempted to take a short position over the weekend. Although the Dow finished off 11 points, the blue chip average was actually up 30 points until fairly late in the day. Considering crude oil prices were in the throes of one of their sharpest one-day gains in years, the stock market's resilience was mildly impressive. But if Wall Street can shrug off the ongoing real estate collapse and a by-now more-than-faint whiff of recession in the retail sector, as it has been doing, then it sure as heck can contrive to ignore the threat of $5 gas and $50 airline fuel surcharges by Labor Day. Perhaps investors are looking on the bright side ' i.e., envisioning a summer when fewer RVs will be cluttering the roads. They should come to Colorado, where half the miles are downhill. Find an 18-wheeler to draft on the climbing segments and you can squeeze Prius-like fuel economy from a Hummer. Better yet, use your AAA card to get a free tow up to the Continental Divide, then you can coast practically to Utah. Crossing the Divide, the Colorado road that takes one from the city of Estes Park into Rocky Mountain National Park ' Trail Ridge Road ' is the highest paved highway in America. With its hairpin turns and spectacular, moose-filled views of the valley far below, driving this stretch can be quite a thrill, especially for someone like me who was raised at sea level in New Jersey. The highest spot in the city where I

We left some money on the table yesterday in the shares of Goldman Sachs (GS) but still managed to extract a theoretical gain of $500 from a small overnight trade in the stock. I'd recommended buying Goldman shares on Tuesday at 224.27, a Hidden Pivot support that missed catching the exact low of the day by a single penny. The next day began delightfully, with the stock opening on a bullish gap that allowed us to easily sell half the position at 225.90 as recommended. GS shares subsequently climbed above $227, but I was briefly too busy to notice, and we wound up exiting the remaining half of our position at 225.20, well off the day's highs. We weren't so fortunate in the E-Mini S&P, where we lost about $60 after getting aboard comfortably via a buy-stop entry at 1510.00. The futures subsequently rose to 1513.75, but that wasn't quite enough of a rally to trigger a trailing stop to protect our profits. We remained in the trade and stayed marginally profitable for another hour or so, but when the futures eased moderately we stopped ourselves out around 1508.75. (I'd suggested raising the stop to break-even levels in the chat room but am assuming that at least some subscribers stuck around for the ride.) Loss aside, we should take note of the fact that the S&P 500 Index on which the E-Mini is based seriously lagged the Dow Industrials yesterday. The rally is getting narrower and narrower, for certain, and anyone who fails to notice this deserves to go down with the ship. Gold Warning We did nothing in Gold as it fell sharply, although I'd done my best in Wednesday's Touts to warn bulls away from the stuff. Here is what I wrote just prior to yesterday's $15 smash: