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Up, Down or Sideways?   (November 14, 2006)


Since I am writing this Monday night, I have no idea what will happen to the stock markets on Tuesday. But here are the possibilities: up, down or sideways. Given the data coming up this week on inflation, sideways seems unlikely, so let's look at up or down. Here's a chart to consider:



Scenario #1 is the Dow runs in a straight line up to 13,000 or more. The trendline is undoubtedly up, and so the argument goes, why bet against the trend? Why, indeed. The counter argument goes: hmm, that's a double top there at 12,196 or so, and the markets are not far from that mighty trendline. Should it dip below, then a retrace to the previous high (in the case of the Dow, 11,723) would be typical for a market in an uptrend (scenario #2).

If the market loves the Producer Price Index (PPI) inflation number and October retail sales today, then it could run above the 12,200 ceiling, setting up a run to 13,000. If, however, the market takes a "buy on the rumor, sell on the news" direction and drops below the trendline, then a drop back to 11,700 could be expected.

Being a cautious sort, I dumped my call options on the DJIA this morning for a modest profit of 13% for the week and picked up some puts (a bet that the market will decline). The reason is that I engaged a friend's pet simian to toss some darts at the pages of the Wall Street Journal taped to a wall, and this was the result. Truth be told, the monkey's first dart-toss narrowly missed his owner's pet parrot, and the second just skimmed the cat. After some stimulus-response-reward behavioral training, the over-active monkey became less interested in darting his fellow pets and more interested in hitting the stock pages. The results are secret, but I think it is fair to say that only a fool follows a monkey's dart tosses.

NOTE: The part about the calls and puts is true, the part about the monkey is fictional. But back when the Wall Street Journal ran a contest between professional stock pickers and a monkey tossing darts, the monkey often beat the pros.


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copyright © 2006 Charles Hugh Smith. All rights reserved in all media.

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