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SPECIAL REPORT: Stock Indices
Jan 28, 2008

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GENERAL OVERVIEW: Stocks are in a bear market until at least April with a secondary low into July. We think DOW 9500-10000 will be a minimum target, which is about S & P futures 1086-1100. The interest rate cuts and tax rebates will have an affect in the 2-year and lift the market higher into end of the year from the secondary low in July. Until then we need to keep selling rallies.

Short-term we are in a congestion pattern that should stay below 1390. If the March S&P futures close above 1400, it would allow for a much higher retracement. NASDAQ cycles and patterns are a bit friendlier and NASDAQ could hold up into Feb. 13-18 at the latest and go to 1930 and that would in turn hold the S & P up better in its congestion pattern.

CYCLES AND PATTERNS: We see a high into the State of the Union speech but the S&P is unlikely to take out 1370 although a very small chance for 1385 is possible if there is something new and brilliant offered and its been a while so a disappointment in the speech is more likely. We see a swing low into Jan. 31 a recovery higher into Feb. 4 and lower prices into Feb. 6 and generally sideways to lower prices into Feb. 8.

My latest theory is that if we quickly retest 1370 or hit 1385 overnight after the State of the Union, the market could be in a large 4th wave triangle pattern between 1370 and 1272 into the employment report then lift into Feb. 1-4 and then turn lower. We want to stay open for a breakout above 1400, but we are skeptical. Some patterns would allow the congestion triangle to break to the downside to 1232 or 1200 also so it’s too dangerous to be long this market except during Feb. 1-4.

The bond market thinks there is a 100% chance at the Jan. 30 meeting for a.50 bps cut and they are likely to be surprised.

OVERALL: (1/23) The FED lowered rates ¾ of a point for the first time mid-cycle in 23 years. There is a tendency that when the FED lowers rates that the stock market goes up for at least 2-3 weeks afterwards. If we are going to get a new low on the March S & P futures stay below 1390, then it may happen quickly into Jan. 31 or Feb. 1 and then a quick recovery and higher prices could come from there into the week of Feb. 10 into the 18. NASDAQ patterns and cycles are different and there was a cycle low due Jan. 21 that would be followed by a cycle high into Feb. 11-18. On NASDAQ, a 4th wave of 180 points would project 1878, which almost came in already, with an extended target of 1930.

FUNDAMENTAL MUSINGS: (1/22) It takes a long time to turn an ocean linear and that is what the economy is like. Rate cuts now will help the market in the second half of the year but you have to start somewhere. That goes with our movement lower in the first half of the year and we will not retract that unless the S & P closes above 1400. We think two more rate cuts will happen into June toward 3% and by July there should be signs of a better economy. Until then, watch out below. Even if we get a three-week retracement here, the other shoe will still drop.

NEAR TERM: (1/24) The emphasis has to be on accumulating shorts for position traders, as we have calculated the April and July cycle lows at the 1086 region and that suggests DOW 9900-10000. Still, there are enough mixed cycles and patterns at the moment that we may have to wait for higher prices and mid-February before the next sale sets up. One pattern would allow a high to 1385-1390 and then a quick drop for a new low to 1215 or 1230.

LONGER-TERM OUTLOOK FOR 2008: (1/22) We are generally bearish the stock market the first half of the year but how deeply the market fall will depend on how long the government can ward off the mess they have made the past year. We are thinking now that we will see S & P futures 1086. Rallies are not likely to get much above 1385-90 at any point now. We do see a sharp pullback much of the first 6 months of the year, with a dollar low due and U.S. stocks vulnerable. Still, politicians will find a way to plug up the dam because it’s an election year. The 120-year cycle analogue calls for a low into the third week of April, a secondary low into July and then a rally into the election. The second half of 2008 looks about as bright as we get and there is a good chance that a new government will be put in place that will represent the people rather than big business. War cycles from May-August 2008 may be disruptive but it is not really clear how involved the U.S. will be but the Middle East is most likely going to be a mess. How much this will spook the market is unclear.

LOOKING OUT TO 2009-2013: (1/21) There is a messy U.S. 7-year cycle that we last saw from 1889-1896 and it was a time when labor rose up and threw out the barons who were gouging them the previous seven years during the First Gilded Age when politicians and big business were in bed together--sound familiar? (The New York Times recently called the last eight years the second Gilded Age). In 1893, there was a major bank crisis and the stock market dipped substantially. Also during the period banks gouged home owners with mortgages with extremely high interest rates and forced many into to foreclosure. Will Bernanke and crew save us with their new subprime lending guidelines or will it tighten credit so much that many people will not be able to refinance or buy homes? The years 2009-2016 will not be an easy time for the U.S. The stock market did manage to make important highs into the equivalent of May 2010 and 2011 and it was really the year 1893, i.e. 2013 where the stock market fell 45% so maybe the period from August 2008-2011 will not be that bad for the stock market.

STATEMENT OF DISCLAIMER
Past performance is not indicative of future results. There is substantial risk of loss in futures trading.

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