The Anals of Stock Proctology

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Maximum Strength Stool (10/22/02)

Doc is back from vacation. So let's do some catching up on those things we missed.

To sum up, the worst may be over, and the end may be nigh, but there's still no light at the end of the tunnel, as the bear shits in the woods, and we wait for the next streetcar. Going fo-wad, we expect that there will be an inflection point, and that visibility will improve, as long as you are looking backwards. That's the way the cookie crumbles.

Other than that, it's still a bear market, in spite of what the poodits and analcysts would have you believe, but it's not your father's bear market. Because of increasing wave magnitude and duration variation, timing is everything! What else is new?

Doc will leave you with these final thoughts. The trend is your friend. Cut your profits and let your losses run. (That one always confuses Doc. Does it confuse you too?) Don't fight the Fed, and most of all, don't fight the freaking tape...

Dammit.

And now, the numbers.

The Feed did $2 billion in overnight repos, resulting in a net add of $2 billion because there were no rollovers. That $2 billion will expire Wednesday. There are no other expirations. The minimal addition had no impact on either the Feed Index or the Feedometer. The action over the next few days will tell us whether the Fed still wants to maintain the 8% growth channel.

Three trends are evident on the Feed Index, which is the total Fed holdings of loans and securities. One is the 10% growth trend beginning in May of 2001. Feed growth has recently been at or below the lower boundary of that trend. The blue channel going back to last December suggests that Al may now be targeting an 8% growth rate. Then there's the golden box which says he's stopped growing Feed altogether over the last three months.

The Feedometer still shows that Al has the markets on a starvation diet.

The Feedometer theoretically measures excess Feed available for bond or stock market jamming.

Big problems in bond land continued. Up a stunning 60 bp's in 9 days. To put this in perspective, this would be like rates moving from 7% to 8.25 % in the bad old days, which may be about to return. Doc's wife, who does interior deco faux finishes, has a client who cancelled a job today because the mortgage on the new house he was about to close on blew out. Evidently he wasn't locked in. This story is the top of the iceberg and is being repeated by the thousands every day all over the country. A lot of mortgages aren't going to fund, which means that a lot of builders won't be able to pay off construction loans on schedule. There's a major credit blow up and liquidity crunch in the making.

The upside cmap on the 6-7 week cycle is 4.28. However, it seems likely that 4.50 is on the horizon in the short run. Note that the 10-12 month cycle is just turning up from the lows. Given that the index is already nearing the upper edge of the 2 year cycle channel (dark blue), the 2 year cycle and longer waves are also likely to head up over the next couple of months.

8 Minute Bar Charts 10/22/02
Dow Jokes Inflatables -88.08

The charts at left show the prior day's action in 8 minute bars with stochastics at %K 26, %D 18, a proxy for the 1 day cycle.

The market gapped down at the open into a 5 hour low at 10 AM. It then rallied into a concurrent 1 day and 5 hour high at 11 AM. A slow drift followed into the 5 hour low at 2:30 and 1 day low retest at 3:30. Then, a closing blast upward off the concurrent lows.

The 5 day cycle is in a mild down phase that should make a low Wednesday. The 13 day cycle appears to have topped out. The down phase should last 4-6 days. The slope will tell a lot about the condition of the 10-13 week cycle rally.

Dow Jokes Inflatables

The 13 day cycle cmap of 8500 was hit and the cycle should be in a down phase for 4 days. However, both the 4 and 6-7 week cycles have cmaps of 8700, and the 10-13 week cycle is also still headed higher.

Portfolio Sphincters Index-SPX -9.56

Nasgap -17.01

All of Doc's cycle charts are powered by METASTOCK. (Sorry about the bull.) You've seen the software advertised on TV. Buy it now at Doc's bookstore! Best price anywhere!

Portfolio Sphincters Index (SPX) and Sentiment

Long Term

While the whole world is fixating on the "4 year cycle low", Doc thinks it's a non-issue. Since October 1998 was a bottom, virtually everyone was expecting a 4 year low in this time frame. But bubbles are peculiar. The tsunami wave spawns atypical wave responses. The November 1929 low was at a 3 year anniversary. The next important low was in July 1932. At other times we have seen cycles run 4.5 years, or 3 years. Focusing in a 4 year low is a bad idea. Cycle lengths vary, and long term indicators do not suggest that the ultimate bear market low is at hand.

The most obvious long term wave this time has been around two years in duration, and the last low was in mid 2001. So we should look for the next one around mid-year next year, give or take 3 months either way. That would also correspond with the 10-12 month cycle which bottomed in July and is now in the midst of a weak sideways up phase. This up phase shows every sign of manifesting as a broad trading range in which highs fall short of past highs and nominal new lows are made on downswings.

The current rally is part of a 6 month cycle top within the 10-12 month cycle up phase. As a result of the rally, the downside cmaps Doc had been posting are no longer valid on the current 5-6 month cycle. The 10-12 month cycle is headed up. Significantly lower lows look like they will be delayed until well into next year.

Sentiment and Momentum Indicators

The 17 day rate of change is a proxy for the 6-7 week cycle. the 29 day rate of change is a proxy for the 10-13 week cycle. The dark blue overlaid line is the 10-13 week cycle oscillator, while the red line is the 6-7 week cycle oscillator. The VIX is a measure of implied options volatility reflecting relative fear or complacency. It is plotted below on an inverse scale to better show the relationship to the price chart. The "Stool Bands may reflect either 6 month or 10-12 month cycles.

Short Term Cycles

Still no sell signals from the cycle or rate of change indicators. However, the short cycle oscillator in the chart below is in the top zone and looks ready to turn down. The down phase is likely to be shallow. The 4 and 6-7 week cycle cmaps still point to slightly higher prices but time is running out on the up phase.

10-13 Week Cycle

Still up with from 1 to 3 weeks remaining. Still no upside cmap. there's too much ambiguity in the projections.

VIX

The VIX continues to flirt with the top zone on the inverted scale stool band chart.

Cycle Chart
The red channel is the idealized 2 year cycle. Dark blue is the 10-12, or 6 month cycle. Teal is the 10-13 week cycle. Purple is the 4 or 6-7 week cycle.

The Cycle Conditions tables include cycle phase and a wild guess as to number of periods to the next turn, in days for the shortest cycles, weeks (W) or months (M) for the longer ones. This is a fluid exercise, in other words, the projections are likely to be wrong, but they force us to be vigilant for key turning points, and frequently work well enough to prevent costly misreadings.

SPX Cycle Conditions as of 10/22/02

Cycle	Phase/PTT	Target
6 Month	Top-Down/3-4 Mos.	??
10-13 Week	Up/7-22	??
6-7 Week	Up-Top/0-5	915-940
20-25 Days	Up-Top/0-1	915-940
8,13 Day	Top-Down/0-4	905-915

PTT - Periods Till Turn
L-Low, H-High
SWD= Sideways Down Phase- Trading Range
SWU=Sideways Up
p: preliminary
Too Early: Too soon to project
No Factor: Low amplitude is dominated by larger cycles

Nasgap Charts

Long Term

The "4 Year Cycle" looks like it bottomed last year, lasting only 3 years as a result of the influence of the tsunami bubble wave. The Nasty may actually have been in an up phase since then, with the current rally being the rigor mortis rally before the Nas heads for its ultimate price objective of negative 400. By 2007, the Nas will be the National Toilet Paper Exchange. (Assuming that this interpretation is correct, of course.)

In the meantime we'll have to grit our teeth until the current 5-6 month cycle top phase within this 10-12 month cycle sideways up phase is complete. That should be within 1 to 3 weeks. Doc doesn't think the up phase will exceed 1330-1340.

Cycle Chart
The stoolicator is a proxy for the dominant trading cycle, either 6-7 or 10-13 weeks. The 17 day rate of change is a proxy for the 6-7 week cycle. The 29 day rate of change is a proxy for the 10-13 week cycle. The teal channel is the idealized 2 year cycle. The light green channel is the idealized 10-12 month cycle. The dark blue channel is the idealized 5-6 month cycle. The red channel is the 10-13 week cycle.

Short Term Cycles

The 13 day cycle has hit its cmap and should be in a shallow down phase for the next 4 days. The 4 and 6-7 week cycles have cmaps of 1330-50, but that could change. Cycle highs are due within 5 days.

10-13 Week Cycle

The 10-13 week cycle also apparently has a cmap of 1330 but that too could change. The up phase still has 1 to 3 weeks remaining.

Nasdaq Cycle Conditions as of 10/22/02

Cycle	Phase/PTT	Target
6 Month	Top-Down/3-4 mos.	??
10-13 Week	Up/7-22	1330
6-7 Week	Up-Top/0-5	1350
20-25 Days	Up-Top/0-1	1340
8,13 Day	Top/0-4	High1310

PTT - Periods Till Turn
L-Low, H-High
*SWD= Sideways Down Phase- Trading Range
SWUP=Sideways Up
p: preliminary
Too Early: Too soon to project
No Factor: Low amplitude, dominated by larger cycles

Long Bong Hit - See top of page.

AM Edition Features (Previous) These features are in morning edition, published between 7:30-8 AM ET US, or the Saturday Weak End Edition, published, uh, let's see, Saturday!

Golden Stool

HUI turned yesterday. On schedule! The index double bottomed at a cyclically appropriate time, after testing downside cmaps for cycles up to six months. At his point the best thing for gold stock bulls to do from a technical perspective is to keep your fingers crossed. The first order of business is to get out of this base and move above 114.

Uncle Buck's Illness

If the incipient upturn in the intermediate cycle oscillator fails, Buck could be in trouble. Short cycle sell signal suggests a move to the low end of the recent range.

Suctor Watch and Stoolwethers- Now posted on separate page. Updated each morning between 8 AM and 9:30 AM NY time.

See you in Intraday Stool.

Dr. Stepan N. Stool
Chairman of the Department of Stock Proctology
A.S.S. Endowed Chair
American Society of Shortsellers Endowment
American Academy of Stock Proctology

Share your thoughts on the Stool Pigeons Wire.

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Explanation of Intraday Commentary-Build charts at http://www.livecharts.com. For custom time bars insert a comma after symbol and number of minutes, e.g. compx,90. This will give you a bar chart of the Nas with 90 minutes per bar. The one day cycle is usually most clear with 8 minute bars and 26/18 stochastics. It varies from day to day. Sometimes 6 minutes works best. Experiment to find the best fit for your trading style, and the market's dominant frequency at the time.

The goal here is primarily to monitor the condition of the 8 and 13 day cycles. I typically use 90 minute bars with 26/18 stochastics for the 13 day cycle proxy on the indices during regular trading hours. Other cycles use 26/18 stochastics with the following:

8 days- 60 minute bars
5 days- 40 minute bars
3 days- 24 minute bars
2 days- 16 minute bars
1 day- 6, 7, or 8 minute bars

On the 24 hour futures charts, use a time per bar approximately 3 to 4 times the above number of minutes, to represent the cycles listed above.

ABBREVIATIONS:

cma: centered moving average
cmap: centered moving average projection
os or ozzie: oscillator
sto: stochastic
swup: sideways up phase
swdp: sideways down phase