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----- Original Message -----
Subject: Gordon Harms report
5/26/06 MARKET
CLOSE
TIMING IS EVERYTHING -- THE TREND IS YOUR FRIEND
MARKET CLIMATE/OUTLOOK- Unfavorable
Liquidity is unfavorable.
Market psychology: 4 are neutral
Interest rates are moving up.
40 and 20 week cycle price trends: 8 of 8 are moving down.
5 and 10 week cycle price trends: 4 of 8 are moving up.
NYSE dominant over NASDAQ: Unfavorable market outlook from
4/24/06.
May through Oct is seasonally unfavorable on average.
The small cap signal trading systems bought money funds on
5/12/06.
The NASDAQ/RUT-I weak 9 month low in Feb. is considered an
inversion.
Next 9 Mo. cycle low is due mid Oct. to mid Nov.
2006.
Market valuation long term: Unfavorable. Current P/E is 22% above
avg.
ECONOMIC OUTLOOK: Favorable
Personal income(3 sma)is up 5.7% from the last year. Was up
6.3%.
Unemployment rate is low at 4.7%. Was 4.8%.
Gross Domestic Product is 5.3 last qtr. Was 1.7 previously.
Purchasing Manager Index is 57.3(favorable > 50). Was 55.2.
Capacity Utilization is 81.9%; Was 81.4%.
INFLATION: 3 month moving averages; 2 down, 1 up
CPI, Apr. 3.50% (3 Mo. Avg. Inflation), down from 3.65% in
Mar.
PPI, Apr. 3.71% (3 Mo. Avg. Inflation), down from 4.28% in
Mar.
JOC-ECRI(Industrial Price Index), May. is 1.10%, was 1.06% in
Apr.
10 yr TN rate/FF rate is 1.02. Recession NOT expected. Was
1.06.
Expect recession when ratio is < 1.0. Ref: 1989-1990 and
2000-2001.
MONETARY LIQUIDITY: Unfavorable
Eight week ROC of M2 money is 0.01%, was 0.26%.
Money Market yield is 4.47%. Was 4.44%.
Money Market funds are 2075 billion, was 2058 billion. Up 17
billion.
Dollar index is down 7.77% from 11/16/05. Was down 8.09%.
PSYCHOLOGY: 4 neutral
CBOE Equity Total Vol. Put/Call Ratio: .59, last week was .71.
Market: Bullish
> 0.60 and Bearish < 0.30
Market Vane(Commodity/Futures): 59% Bullish, last week was 65%
Bullish.
Market: Bullish
< 25% and Bearish > 65%
AAII 33.0% bull and 45.5% bear. 3 wk SMA Ratio = 1.00. Was
0.78.
3 wk SMA Ratio > 1.10 = Bullish, >> Bullish = > 1.50, <
0.35 = Bearish
USB Index of Investor Optimism 64 May. Was 63 in Apr.
Estimated bullish < 41, bearish > 142. Mid-point
is 91.
BOND PRICE TRENDS: Just turned up.
STBI Bonds are down 6.68% from 1/18/06. Was down 6.70%.
Zero bonds are down 4.91% from 1/17/05. Was down 4.97%.
High Yield bonds up 5.45% from 10/13/05. Was up 5.38%.
BOND CURRENT YIELDS: Interest rates favorable.
The 30 year U.S. Govt. bond real yield is 1.66%. Was 1.67%.
The historical
average real yield is near 3.00%.
The average 30 year U. S. Govt. historical bond yield expected
is 6.50%,
current yield is 5.16%. Was 5.14%.
2 Yr Note Yield is 4.96%. Was 4.99%.
5 Yr Note yield is 5.00%. Was 5.03%.
10 Yr Note yield is 5.11%. Was 5.14%.
20 Yr Note yield is 5.36%. Was 5.37%.
20 Yr Note yield divided by 5 Yr Note Yield is 1.07. Was 1.07.
10 Yr Note Yield divided by 2 Yr Note Yield is 1.03. Was 1.03.
STOCK MARKET PRICE TREND Indicators: Unfavorable
NYSE Volume Sum Index turned down 4/7/06.
NASDAQ Volume Sum Index turned down 4/7/06.
SP-CP is 1.70% ABOVE 1259 the 200sma which is rising. Was
0.73%.
SP-CP is 1.38% BELOW 1298 the 50sma which is falling. Was
-2.60%.
RELATIVE VALUATION: Favors bonds over stocks
S&P500 Inflation adjusted real dividend yield is -1.54%.
Prior week was
-1.53%. BUY at greater than approx.-1.50%.
S&P500 is 4.62% UNDERVALUED below an estimated 1342 fair
value,
based on
historical S&P 500 earnings, P/E and US30 bond yield.
Stock Value Index is 1.04, was 1.04. Buy greater than 1.03.
13 week T-Bill yield divided by S&P 500 yield is 2.31. Was
2.47.
5 Yr Note divided by S&P 500 yield is 2.62. Was 2.62.
10 Yr Note divided by 13 wk T-Bill is 1.08(4sma). Was
1.08.
STOCK MARKET LONG TERM VALUATION: Unfavorable
The S&P 500 P/E ratio is 17.63(4 to 20 is range: 1870 to
1997)
based on
trailing earnings. Trailing P/E was 45 in April 2002.
The long term average of S&P 500 P/E is near 14.5, median is
11.
S&P 500 past year earnings growth rate is 20.31%. Was
20.31%.
DOMINANT STOCK MARKET INDICATOR(Beasley): Unfavorable for
Stocks
OTC-C Neg
Env, Score 0/15(IN > 4/15), OUT 5/12/06.
NYC-N DOMINANT Neg Env,
Score 1/13(IN > 3/13), OUT 5/15/06.
Total score is 1 of 28,
last weeks score was 1.
PRICE TRENDS- 5 WEEK 10 WEEK
20 WEEK 9 Month(40 wk)
WIL-5 OS-Up,05/25/06 OS-Dn,05/12/06 OS-Dn,05/15/06 N-Dn,05/12/06
DJ-30 OS-Up,05/26/06 OS-Dn,05/15/06 N-Dn,05/18/06 OB-Dn,05/17/06
RUT-I OS-Up,05/25/06 OS-Dn,05/11/06 OS-Dn,05/11/06 N-Dn,05/11/06
NDX-X OS-Up,05/25/06 OS-Dn,04/24/06 OS-Dn,05/05/06 OS-Dn,01/25/06
N = Stoch >20 <80, OS = Stoch <20 OUT/Buy, OB = Stoch >80 Hold/Sell
SECTOR Averages ranked by percent gain from 10/20/05:(Last intermed.
LOW)
Precious 53.4 Bd-High Yield 5.0
Latin 35.7 VMFXX
2.4
DJ-20 29.0 Health 2.4
New-Asia
28.6 Bd-USGOV -0.3
Emerge 25.2
Bd-Zero -2.1
NCALPHA Mutual Fund Trading Systems using Mc2x small cap
signal.
Signal went to SELL on 5/11/06. Trades were made next day.
SYSTEM.....HOLDS.....GAIN%........CAR/MDD.....ONE YEAR
SHARP......VMFXX......0.18.......29.6/5.0.......39.1
LOSDF......VMFXX......0.18.......32.1/4.1.......23.5
MDSDF......VMFXX......0.18.......29.5/4.7.......23.0
NCALP......VMFXX......0.18.......35.5/5.9.......48.0
S&P500.....VMFXX......0.18........8.5/13.1.......3.4
OTC-C......VMFXX......0.18.......14.5/20.2.......0.7
RUT-I......VMFXX......0.18.......21.9/9.4........4.4
S&P500....Buy/Hold................2.6/40.8.......6.9
OTC-C.....Buy/Hold................4.1/51.9.......6.7
RUT-I.....Buy/Hold...............11.0/37.5......18.7
REF: Data from Barron?s weekly magazine.
Buy/Hold is for one year. Compound annual rate of return(CAR)
and maximum draw down(MDD)of holdings are for the last 5
years.
Gains are real time achieved. CAR/MDD and ONE YEAR are back test
results.
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