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MSR here Sample Report One more week of darkness (and then there’s light) We’ve entered what I believe is the final “wash out” stage of this market correction. The initial wash out stage of the corrective decline that began in October occurred around the January 22 low. At that time investors far and wide could be heard screaming “1929!” and almost everyone was scared out of their wits. Investor sentiment measures showed that capitulation was at hand and that the 3-month decline had taken a profound toll on investor psychology. Investors by the millions were giving up hope on the stock market. That major exhibition of extreme fear and panic that coincided with the January 22 stock market low marked the initial stage of the bottoming process. This was followed by six weeks of lateral movement in the major indices as the Dow, the NASDAQ and the S&P 500 traded in a tight range and made little net progress, but at least the indices kept above the January 22 lows. Now the market is in the process of testing those lows and investor fear is once again on the rise.  What we’re now seeing here is the dreaded secondary low. We’ve discussed this before and as previously intimated, secondary lows always take a much worse emotional toll than primary lows. The primary low was on January 22. The secondary low to this correction currently underway will probably make a lower low on a closing basis (which is common) although the internal damage is actually less severe than the first low six weeks ago. To give you an idea how bad things were internally at the Jan. 22 low, there were a record 1,100 stocks that made new 52-week lows that day. Since then the number of stocks making new lows has diminished significantly and the highest 1-day total since then was 361 new lows on Jan. 23. On Friday there were 354 new lows even though the Dow made a lower low on a closing basis compared to the January 22 low. So while some major indices have already made lower correction lows, the internal market as measured by the new highs/new lows is well above the lowest level made six weeks ago. History shows that anytime there have been an excess of 600 new lows, a bottom of intermediate-term proportions has never been far off. This strongly suggests that January 22 was the internal market low of this correction.  The primary *external* low was January 22 and the secondary external low is now in the making. One proof that the January low was of major significance is the psychological profile of the market at that time. Several super bearish headline stories appeared on the front covers of the major U.S. news magazines. These are the type of stories that appear only once every few years, not just at short-term lows. They mark significant intermediate-to-longer-term lows.  Just today I received the following e-mail from a subscriber: “He was just spotted by me on the cover of CBS Marketwatch homepage Fri 523P CST . Will he make to the cover of Time, Newsweek , or Biz Week for Monday?” The reference was to this growling grizzly shown below. It couldn’t have come at a better time (from a contrarian’s perspective)!  This is strictly anecdotal evidence, of course, and by itself shouldn’t be used to make a decision to “buy the market with both hands.” We’re still awaiting the ultimate sign that the final low is in and that this correction has finally run its course. That will come from the final arbiter of buying and selling pressure, which is the tape itself. When we see an improvement in the new highs/new lows and the return of buyers in the form of upside volume, we’ll know that we’ve passed out of the darkness of the tunnel and into the light of day. Next week the 20-week cycle is scheduled to bottom. That means the market will be extremely vulnerable to negative news for the next few days until the cycle bottom is in. All the important HILMO (hi-lo momentum) indicators have also peaked on a short term basis and are down for at least a few more days. What I’m guessing will happen is that some, if not all, of the major indices will end up testing the Jan. 22 low and possibly going lower on an intraday basis. This will panic all the chart readers and classical technicians into screaming “Apocalypse now!” I’ve already seen at least one highly publicized prediction for a 1929 style crash making the e-mail rounds. This super-scared mindset will set the stage for the final wash out of this correction, which I believe will occur next week. Following the final wash out, an interim bottom should be in place and we should finally see this market get some traction once the cycle is behind us and the 90-day HILMO turns up again. Based on rate of change calculations that will happen during the second half of this month once the tape improves. As mentioned in a previous report, a rising 90-day HILMO is always bullish for the stock market. Joining 90-day HILMO in turning around will by the 60-day HILMO indicator, which represents the internal trend for the NYSE broad market. With a rising 60-day and 90-day internal momentum we’ll have the dominant internal trend and the major interim momentum gauges in a rising mode, which is a bullish combination. But before we get to that it looks like we have one more week of darkness to get through until we get to the end of this tunnel. Next Issue MSR sample
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