Stock Market Forecast & Comments
 September 26, 2005                

                                              Open Season on You                                               

If you own stocks, equity mutual funds or even have exposure to equities though a pension fund, you are about to get clobbered. Very simply, too few investors participate directly in the stock market for it to function efficiently. Program trading as a percentage of total volume is now spiking above 70% again. For years your betters have been telling you that program trading is directionless. In theory it is. It certainly serves the needs of the financial community for everyone to think that it is innocuous. Program trading abuses, along with corrupt derivatives transactions, will be at the center of the next stock market scandal.

                                         Options and Stock Volume

The growth in derivatives volume has been staggering. It is a popular misunderstanding that there is a way to earn a high return on money without taking risk. Like program trading, option writing strategies are designed to generate high profits while being close to risk-free. The prospect of making money without risk is so alluring that both of these trading styles have become saturated with participants. When competition drives profits down to unacceptable levels, the motivation to create profits illegally through price manipulation becomes overwhelming. 

                                                   Strong Market?

Undoubtedly, many have earned fine returns buying and holding mid-cap and small-cap stocks this year. Because of the growing popularity of sector funds and index funds, these kinds of stocks have been bought on a shopping list basis. Many have also been bought as parts of various covered option writing strategies.  For forecasting purposes, we must never lose sight of the fact that just a few large capitalization stocks account for the majority of equity value in the economy.  Our best tool for forecasting the overall market has always been that of analyzing the charts of the largest stocks. Regardless of any current economic news, most large stocks are either weak or look like they are making tops. For many months Exxon-Mobil has been a market leader. The current divergence with the accumulation/distribution line is indicative of a top.

Wal-Mart is one of the world's ten largest companies. On a very short term basis, it has completed a bullish engulfing candlestick pattern. Realistically before turning around completely, it is likely to go through a lengthy base building period.

Very often statistics like up volume and down volume are used to calculate various indicators that give various overbought and oversold signals. I find there is often more meaning in looking at data in its most raw form. The chart below is a simple 10 day moving average of down volume for the Russell 3000 components. The current level matches the level that is typical at some intermediate bottoms. This early in a correction, heavy downside volume with relatively little price movement is more likely an indication of more weakness to come. Usually, this indicator will begin to diverge with price before a bottom occurs.

     

                                           When Gifts Are Expected

We have had our share of disappointments this year. We started the year on a bearish note and haven't wavered in that position. We are down thirteen percent for the year as a result. Unfortunately most of what affects the market is unpredictable. Our indicators provide limited certainty, and our analysis of the socio-economic scene adds a little more. We can position our portfolio for what looks like a down market, but we cannot predict when the government will take affirmative measures to support stock prices. 

We were taken totally off guard last spring when the government flooded the market with liquidity to avert an untimely sell off. We were again taken by surprise when there was a liquidity pump following hurricane Katrina. Now that a precedent has been set, we have some indication of what types of circumstances will prompt federal action. We also now have some idea as to how the market will react. Any fix that the government provides is likely to be short lived. Any sell off that the government prevents will only set the stage for a larger one later.

The market is again ready to fall, and we believe that it will this time even if government preventatives are initiated. Federal initiatives are being anticipated now and discounted early. They have gone to the well too often.  Quillian & Taylor is staying negative on the market going into next week.

James Quillian

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The Stock Market Forecast and Comments is provided complements of the Quillian & Taylor Private Investment Company. 
Contact: news@quillian.net , 325-869-5255, Published each Sunday, usually between 11:00 a.m. and 1:00 p.m. CS

       

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Thanks,

James Quillian
 

                             It's Not Just Oil   

Oil gets all the attention, but some other commodities are going up also. When a number of commodities begin to rise in price, it is time to watch for an overall inflationary effect to follow.  The price of oil is in a short term correction while copper, lean hogs and gold have completed short term bearish candlestick patterns. The stock market reacts every time crude prices change by even small margins. It is important to follow key commodities markets to get an early handle on inflationary pressures.  Commodities prices are a two edged sword. With the U.S. savings rate at about zero, price increases can be translated into less consumer spending very rapidly. Falling prices can be a sign of weakening global demand.

               Last Week's Forecast Reconciled

Quillian & Taylor forecast a down week. Major indexes were down.

                 14% of our up picks advanced.
                 76% of our down picks declined.
                 54% of our picks overall, were correct. 

     The vast majority of Dow Jones stocks look ready to drop.
 

                Quillian's Dow Jones Calls