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Charts of the Week (submitted 08/27/01):

Amazingly, the S&P 500 has dropped from above 1300 to below the 1200 level, and yet the CBOE Volatility Index is lower at 22.29. Increased bullishness in the face of declining prices is not a healthy sentiment picture. Moreover, short selling (see chart above)is little changed as the components of the major averages saw only slight increases in their short interest ratios - far from levels that would encourage us to try the long side of the market. Long time readers are aware of the factors that have tempered our enthusiasm. Apart from the appalling technicals, the seasonal factors we follow have now led us to this nexus for the market. The most significant seasonal period is September and October, annually the weakest months for the market - in a year (2001) that our cycles show to be severely negative. There are sectors that have performed relatively well (health services, consumer non-durables and finance), but we are very skeptical about the overall market. From a timing point of view, this is a time to sell, not buy. Our focus is on the top 3 sectors, but we would watch to see if they hold up during any forthcoming weakness before adding positions. Maintain your most defensive posture for now.

Charts of the Week (submitted 08/13/01):

The action of the NASDAQ during 2001 has to be classified as sub-par. This chart (above) shows the month by month change from a historical (seasonal) view and for 2001. This chart shows better than average performances for January, April and June (seasonally the strongest months of the first half of the year). The weaker seasonal months of the first half of the year are Feb, Mar and May. July is typically flat. The NASDAQ significantly underperformed during these four weaker months, as the table below demonstrates.

Overall, the cumulative 2001 NASDAQ "Jan through July" performance is 23.59% below its typical "Jan through July" performance. Therefore, during 2001, the NASDAQ has done much worse in seasonally weaker months than it has done better in seasonally stronger months. We mention this because the months ahead, specifically September and October, are the seasonally weakest months for the NASDAQ. We are going to learn much in these months about the primary trend for the NASDAQ. If its 2001 behavior persists, new lows are likely. In the unlikely event that the NASDAQ behaves strongly through October, then and only then would we be encouraged.

Charts of the Week (submitted 07/30/01):

If a market performs better than its seasonal cycle, it's a bull market. The reverse is a bear market. The worst 4 months of the year for NASDAQ issues are July through October (see July 9th Squeeze Play). Interestingly, the NASDAQ has underperformed during the seasonally favorable months that preceded(see chart above), which identifies the current market as a bear. To make matters worse, the sentiment picture couldn't be worse. Short selling is historically light relative to market volume. The VIX and VXN volatility indices are at levels associated with excess bullishness. The Investors Intelligence measure of bearish market letter writers is down to 23.7% (the 5 year high low is 47.5% and 22.6%). This lack of bearishness is in the face of a slaughtered NASDAQ, multiple 16 year lows in the NIKKEI, costly bank failures, and unexpected earnings and revenue downfalls.
The "can't get any worse" thinking has followed every disappointing development this year. We need to see "can't get any better" thoughts before a bottom can be contemplated.
To get bold about stocks now before the September/October period is unwarranted speculation.

Charts of the Week (submitted 07/09/01):

We were thumbing through our copy of Trader's Almanac and found an interesting study on Nasdaq seasonality. We decided to do the math ourselves, and came up with the chart above. Essentially, the worst 4 month period of any year for the Nasdaq is July through October. This is especially true in years other than an election year. September and October are the only months to average negative returns (-1.12% and -0.94% respectively.) We are concerned because our 20-year seasonal cycle is also extremely negative for another year. With short selling relatively light and insider selling seemingly heavy (see Barron's this week), the technical/sentiment picture remains poor. The current decline phase is not yet mature, since the VIX (25.09) is still well short of the 35 area. We reiterate our cautious stance.

Charts of the Week (submitted 07/02/01):

One phenomenon has been a huge factor perpetuating our bearishness: everyone else's bullishness. Throughout the decline of the markets, and especially throughout the huge decline in Nasdaq issues, the "slope of hope" has dominated the sentiment landscape. Now we believe that picture is getting worse.
The newest "volatility" measure on the block is the CBOE's VXN (Nasdaq Volatility Index). This is based on the implied volatility of the Nasdaq 100 index (NDX) and is based upon the hypothetical at-the-money NDX option with 30 days expiration. We are concerned about the behavior of the VXN. It is very low at a current reading of 45.49 (and falling). The last time it was this low was (seasonal gulp!!!) last July. Remember last July? That was the beginning of the aggressive portion of the Nasdaq's demise. Most importantly, it was preceded with a sicking expectation for higher prices. Why sickening? A sick market is one where bullishness expands despite lower prices. Bullishness normally expands as prices rise and vice versa; but last July the VXN sank from 51.65 (7/14/00) to its low of 40.56 (8/31/00). This was despite the fact that the Nasdaq failed to move higher (see dashed lines).
This "sickening" bullishness is happening again. From the reaction highs in January 2001, the Nasdaq has had a steady string of lower highs. This decline has been met with increasing bullishness as measured by the falling VXN. From our point of view this is approaching a point of risk similar to what was experienced a year ago. Until the current decline phase is mature, remain very selective.

Charts of the Week (submitted 06/18/01):

After the trouncing last week, it is reasonable to expect somewhat of a breather. However, we are not out of the current decline phase. Last week's closing VIX was a paltry 26.33 (60.55 for the VXN). We need to see higher numbers like 35 and 75 respectively before the requisite level of angst sets the stage for the next advance phase. Moreover, there was heavy call buying in IBM on Friday - not the kind of speculation you want to see in a decline phase. As the chart to the right suggests, the S&P 500 touched key resistance at the end of the last advance phase... we expect a good test of the March lows before the decline is done. If the March lows fail, the downside follow-through could be nasty.

Charts of the Week (submitted 06/11/01):

Over the years we have benefited from the examination of the VIX (CBOE Volatility Index). The VIX is a superb barometer of market health because it reflects core sentiment on the part of equity options traders. A high VIX reflects the willingness of equity options traders to overpay for put options versus call options. As can be seen in the chart above, the market has had its best times when there were "too many bears". The market plummeted when there were "too many bulls". The current observation is that there are "too many bulls" - a reason to be cautious.

Charts of the Week (submitted 06/04/01):

Leadership trends do not instill much confidence in us about the market's near-term prospects. The high beta technology sector has fallen flat on its face. The meaningful rotation we do see is into inflation-sensitive and defensive issues

Charts of the Week (submitted 05/21/01):

Short interest and sustained put buying have given support to the breakout in precious metal issues.

There is a lot of overhead resistance in issues such as VRSN, but this is a case where the short sellers are being squeezed and the put buyers are losing.

Charts of the Week (submitted 05/16/01):

Charts of the Week (submitted 05/08/01):

Charts of the Week (submitted 05/03/01):

The indices have "retraced" their bear market declines to various degrees. The DJII (below) has risen just above its 61.8 retracement level - that was the best index move. The S&P 500 retraced about 38.3% of its primary trend decline. The Nasdaq 100 Index retraced 18.8% of its decline. All indices have risen to test resistance levels, which is a setup for the next decline phase.

Charts of the Week (submitted 03/30/01):

While the long-term posture of the market remains bearish, the current advance phase represents a meaningful relief rally. This rally is expected to continue until the VIX gets below 30 (and likely back down to the mid 20s). We are also watching key stocks like IBM. Currently, IBM is in a "LONG" trading mode. We determine this by evaluating the posture of IBM's equity option trading activity (see chart). In late October and again in late December, the "put" activity clearly dominated the "call" activity - indicating excessive negative bets and a time to buy into any signs of price strength. Such signs soon followed as IBM's price rallied above it's displaced moving average (DMA) lines. We again see a similar if somewhat diminutive posture in IBM's options trading - and price is now above it's DMA lines. But a word of perspective: Note in our IBM chart that there were trading setups to sell IBM - these were in September and late January when "call" activity dominated over "put" activity. These were also in sync with the primary bear trend, and thus had results far superior to the long trades. Current long trades are contrary to the bear trend, and thus are speculative and risky. Stop losses should be tight and expectations kept to a minimum. If the VIX gets to 25 or so, take these long chips off the table.

Charts of the Week (submitted 03/26/01):

Last week the markets again reacted negatively to a Greenspan rate cut. As the disheartened increased their selling, the all important 9600 level (that had contained the entire 2-year Dow foray into 5 digits) failed. However, Thursday's (03/21/01) intraday low of 9106.54 finally brought the VIX CBOE Volatility Index (above) to 40, which we envisioned would be needed before the next advance phase.

As we noted in our interim report (and contemplated in many previous writings), the 9600 level was critical. Now that this level is broken, it becomes the first line of resistance for the current advance phase. This 9600 violation also creates a nasty looking overhead pattern for the Dow that has a downside count below 8000, but that downside objective is perhaps destined for some future decline phase. For now, the focus is on how constructively the current advance phase unfolds. The most important thing to watch is how quickly the VIX drops. We would expect something in the mid to high 20s to be coincident with the end of the advance phase. For the Dow, resistance levels are 9600-9700, 10,000 and possibly 10,500.

Charts of the Week (submitted 03/21/01):

The Dow just traded intraday below the 9600 level that we have discussed recently. 9600 represents the lower end of the two year pattern of the Dow Industrials. If the Dow closes below 9600 and continues to head south over the next few days, this pattern becomes a rather nasty looking top with resistance at 9600 and a minimum count down to the 7600 level. We have recently voiced concerns about Dow stocks, given their tendency to be the last to fall in a bear market.

Charts of the Week (submitted 03/12/01):

Sentiment remains poor as call buyers (red line) dominate over Put buyers (green line). Until the sentiment picture changes, the "long squeezing" will continue.

Charts of the Week (submitted 03/02/01):

TOO MUCH CALL BUYING!!!!

Charts of the Week (submitted 02/26/01):

Many moons ago, before the Dow first surpassed the 10,000 milestone, we contemplated 12,000 as a long-term objective. 12,000 seemed a level high enough to make 10,000 "appear" as support. The Dow indeed did hit 11,750.28 on 1/14/00 - close enough. Since then the path of the Dow has etched out 2 hard tests of the 10,000 level, with a descending level of peaks (see dashed lines on chart, above). To technicians, this is a potential descending triangle - a bearish pattern. The level to watch for the Dow is 9600 - if that level fails, the descending triangle pattern will be complete, leaving lots more downside potential. The Dow must break above the dashed trendline above its declining peaks to improve the pattern. Overshadowing this pattern are two major negatives - poor sentiment and poor seasonality. Sentiment remains poor as short selling is light and market opinions remain overly optimistic - we need more fear. Seasonality is poor for the next 12 months as depicted in our 20-year cycle.

Charts of the Week (submitted 02/20/01):

Last week's action was all about toilets. Both electronic and health technology issues were summarily flushed down the toilet, while investors blew the lid off toilet maker stock prices (see chart of American Standard, below). While the bifurcated market continues, we must point out that sentiment remains awful. Too many have been focused on technology issues while real moves are underway in the seemingly more mundane worlds of drillers, medical distributors, autos, drug stores and toilet makers. Moreover, the CBOE VIX (plotted in yellow, above) remains at poor levels (25 and below) . Until the VIX can get back to the 35 area (we still would love to see 40), overall market indices aren't likely to go anywhere.

Charts of the Week (submitted 02/07/01):

Thought you might like to see our Erlanger 2000 chart of Cisco (CSCO). It is a classic pattern of weakness. The yellow "Type 4" classification marks CSCO as a poor relative strength performer combined with poor sentiment numbers - a long squeeze! Short selling is low at .87 (see chart below), far from those earlier days when short sellers lacked faith it CSCO's former strength. For example, on 11/9/99, the short ratio was a heavy 1.74, and price climbed this wall of worry until its peak in March 2000. Time and again it seems that prices fall when most are overly optimistic. Our analysis of options trading, a shorter-term measure of sentiment, shows similarly optimistic expectations just before the earnings report. Our call/put ratios(red lines)had climbed to high levels and our Trading Rank fell back. Until the crowd hates CSCO, price will remain under pressure, sliding that slippery slope of hope!

Charts of the Week (submitted 01/22/01):

Technology has made a moderate move in our rankings . We are in the November-to-February positive market season, when one would expect much out of high beta stocks like technology. The media is making much out of the "spectacular" percentage gains made in some technology stocks this month. A little perspective, please. Everyone who first purchased technology stocks on January 1 please raise your hands. OK, now everyone who owns technology stocks purchased over the prior three years raise your hands. Our chart of electronic technology (above) depicts the mountainous overhead supply that exists in technology. On heavy volume, technology has broken down from a decade long pattern. Until the bulk of technology ownership turns over so that the cost basis of most shares is lower, the burdensome overhead supply will persist. Moreover, the daily volume advance/decline line fails to confirm this month's rally. Bulls should remain very short-term oriented.

Charts of the Week (submitted 01/15/01):

This past week we observed something rather unusual - a very narrow dispersion of our sector power (and technical) rankings. 11 out of the 18 sectors we follow have a neutral power ranking within a very narrow 3.70 point range. Consumer non-durables is ranked 4th at a 56.75% Power Rank while non-energy minerals is ranked 14th with a Power Rank of 52.96%. The difference between these 2 Power Ranks is statistically insignificant, which is to say, for the moment, that a Power Rank of 4 is basically equivalent to 14 - a very rare occurrence. To us, this is an indication that the market has gone limp (that's a technical term). We wish we could say the same for sentiment. Our OEX chart (above) shows a new high in the OEX Call/Put Ratio, and our overall Trading Index is approaching the dangerous "0" level. Sure, the market can rally a bit, but overhead supply is vast, and any rallies from here will most likely worsen the sentiment picture.

Charts of the Week (submitted 01/02/01):

Over the course of 2000, we have favored health services, finance, and energy sectors, along with other defensive groups like tobacco and pharmaceuticals. We have eschewed technology. Looking forward, we recognize the temptation to bottom fish the weaker issues, but we would rather see some clear relative strength emerge first. Moreover, the sentiment picture is all wrong for technology - the call buying in QQQs (above) remains excessive relative to put buying, and the short interest of the Nasdaq 100 issues (click on "Current Index Short Ratios" - right) remains extremely light.

Charts of the Week (submitted 12/18/00):

Perhaps the VIX (above) is a clue to why the market has left rally expectations unfulfilled. Since September when the S&P 500 broke its uptrend (see dashed trendline), the VIX has stayed in the 30 area. The 30 level often precedes a rally - but what does it mean when a rally fails to materialize, even after 3 months of the VIX at the 30 level? We believe this failure is a definition of a weak market. Before we get a meaningful rally, we will need to see at least 40 on the VIX, and a change in sentiment from one of hope to one of worry. It looks like two Grinches will be big stars this year - the Grinch movie and the Grinch market!

Charts of the Week (submitted 12/11/00):

It was the best of times, it was the worst of times - depending on what sector you've been invested in lately. By now all creatures stirring are aware of how technology stocks have had the "Dickens" beaten out of them. However, it has been a virtual bull market for health services, finance, consumer non-durables and utilities - areas we have favored for the last few months. We continue to hold great expectations for these while the last of a minor positive seasonality plays itself out. This seasonal period will last no further than the 2nd Quarter of 2001. The lack of participation of the high beta technology issues is especially damning considering the better relative performance of the NYSE High Beta Index (above). The uptrend of this measure's relative strength will be a significant key to the market's future. Should the NHB's relative strength line fail to confirm future rallies (see chart in early 1998), all high beta issues will be in peril. For now the bifurcated market continues.

Charts of the Week (submitted 12/01/00):

Not what we wanted to see. Despite the lower lows, call volume actually increased over put volume. The QQQs show a similar pattern. Too many are looking to buy here. Rallies should help to define resistance... once again.

Charts of the Week (submitted 11/15/00):

This chart of Intel is a good example of the trading pickle that currently exists. The trading rally that began in mid October ended when price sank back below the DMA (displace moving averages) six trading days ago. Now price is rallying back up to the DMA channel. For the technical condition to improve, price must rise above the channel. This will be more difficult than usual because the Erlanger Trading Rank (blue line) is on the low side - this means too many are buying calls versus puts. If price weakens after a resistance test of the DMA lines, this would be a signal to short. A lot is riding on price near-term behavior.

Charts of the Week (submitted 11/06/00):

This OEX chart shows the Erlanger Ratios and Trading Rank. Late October saw much put activity in the options activity for OEX options. Currently some of these "put" excesses have been worked off, but we have yet to see excesses in "call" activity that would signal the end of the current advance phase. Stay tuned!

Charts of the Week (submitted 10/30/00):

This weekly chart of the OEX shows some of our options indicators. They are signaling a substantial degree of negative sentiment on a short to intermediate term basis. The VIX, the Erlanger put/call premium ratio, and the Erlanger Trading Rank all suggest an advance phase is due.

Charts of the Week (submitted 10/23/00):

We were impressed by the action in one stock - INTC. As can be seen above, following an extreme of enthusiasm in August (see call/put ratio), INTC entered a sharp decline phase of its own, which ended last week after extreme pessimism (see put/call ratio). INTC finally moved above its DMA (displaced moving average) line , so the recent lows appear a good stop loss for a long trade. For more on DMAs, see our White Paper. Moreover...:

INTC also touched very long-term support (see weekly INTC chart above).

Charts of the Week (submitted 10/16/00):

Perhaps due to overall market influences, major banks sank to the bottom of our finance sector's groups. The charts above show the volume A/D lines for major banks and smaller banks - major banks look toppy while smaller banks show stronger accumulation.

Charts of the Week (submitted 10/10/00):

By now it is becoming clear that technology issues are in a bit of distress. What may not be so clear is the degree of distribution that is underway in technology. Our longer-term picture of electronic technology's volume advance / decline line (above) shows the greatest regurgitation of shares occurring over the last month. One of the inevitable consequences of such aggressive selling is a lot of overhead supply - this supply exists in the form of shareholders who wished they had sold, but didn't. These shareholders will be glad to "get out" at better prices...unfortunately the market rarely lets such "weak hands" shareholders out gracefully. Until we see true capitulation and a reversal of this trend of distribution, we recommend avoiding the temptation to bottom fish.

Many of the stronger sectors can be reasonably classified as defensive. The recent improvement in consumer non-durables (above)is a case in point. There is a lot of volume accumulation in this sector - in fact, the volume accumulation has been underway for the past 2 years.

Chart of the Week (submitted 10/02/00):

The CBOE Volatility Index (VIX) is a great "barf" indicator - just look at the 40-plus reading in the 3rd Quarter of 1998! This 40-plus reading reflected major "barf" sentiment on the part of put options traders, and coincided with a major low point for the averages. Despite the beheading of Intel and Apple, the current VIX is barely above 20. It appears more downside is needed to achieve the desired "barf" mode.

BONUS Chart of the Week (submitted 09/26/00):

Electronic Technology is experiencing extreme volume distribution!

Chart of the Week (submitted 09/25/00):

Intel and technology in general had been slipping in terms of the technicals. Our sector rankings for technology had been "all over the place", which is to say no positive trends could be sustained. More importantly, an excess of enthusiasm preceded Intel's September slide - first the evaporation of short interest (above), and then an excess of "call" option buying around Labor Day (above). Moreover, while Intel had scored a new high in late August, this was not confirmed by the average relative performance of the semiconductor group which peaked in early March (see Erlanger Avg. Technical Rank, bottom of chart above). Most disturbing is the complacency before the end of the day on Friday, when the calls for a reversal/new advance were legion.

Chart of the Week (submitted 09/18/00):

Group and sector analysis can make the process of selection easier. One sector that has steadily outperformed in our numbers is Health Services. For the past 18 weeks this sector has ranked 5 or higher out of 18 sectors. Currently it is ranked second, but in terms of our Erlanger Technical Rank, it is the strongest sector with a powerful reading of 72.19. This means that on average, Health Service issues sport the best relative strength patterns. More comforting is the chart above, which shows this sector's "daily volume advance/decline line". Note the positive divergences over the last 12 months, leading the way at intermediate turning points. This indicates continuing accumulation underway. Too bad most sectors fail in comparison!

Chart of the Week (submitted 09/11/00):

One of the factors that drives stock prices is sentiment. The more people favor an issue, the more interest there is in buying. There comes a time, however, when enthusiasm can become overdone - perhaps all the buying that could happen has happened. It is at this type of sentiment extreme that a stock is vulnerable to a trend change. Our Trading Rank is a normalized expression of our Option Composite. The Option Composite reflects volume, open interest, premium and money flow analysis on a put/call and call/put basis. The higher the measure, the greater the put activity versus the calls (reflecting greater negative sentiment). The lower the measure, the greater the optimism. The current measure for IBM (see chart above) is very low, somewhat similar to early June, when IBM sold off sharply. We believe this is a vulnerable time for stocks like IBM that are coming off recent strong advances.

Chart of the Week (submitted 08/22/00):

One of our favorite measures is the CBOE Volatility Index (VIX). It measures the willingness of options traders to overpay for put options. Levels of 30 and higher have represented times when expectations were negative in the extreme - often associated with intermediate lows for the market. Reading on the VIX of 20 or lower represent times when options traders are less willing to pay for puts because their expectations are extremely positive. These are often intermediate market tops. The current reading of 19.42 brings us into a danger zone from a sentiment point of view. We view this as particularly precipitous because the averages have not gone to new highs for the year...yet the VIX is at its most enthusiastic reading since July of 1999. The market is doing a lot less to create greater enthusiasm - use any advances from here to raise cash!

Chart of the Week (submitted 08/14/00):

The Health Services sector again rose to our number 1 sector ranking. This graphic shows a variety of our measures, and deserves a bit of explanation and interpretation. The top line is the average Erlanger Technical Rank for the sector. It reflects the relative strength of the constituent Health Service issues. The higher the number, the greater the percentage of outperforming Health Service issues. Currently it is at historic highs, and trending nicely. The rest of this graphic shows the Erlanger Type classifications as a percentage of the entire Health Services sector. For example, on average Type 1 short squeezes are dwindling...but so are Type 4 long squeezes. Type 3s are at low levels, which means no one is successfully short these issues. The key is the Type 2 measure (blue line)- it reflects issues whose strength are widely recognized. Type 2s have strong relative strength but few short sellers. So the conclusion to all of this is that the Health Services sector is broadly strong, and more and more investors are recognizing their value. They are therefore in transition from "buys" to "holds". The fact that our number 1 sector is a hold says much about this market, n'est pas?