Words, Graphs, Tables, Or Analysis, in Whole Or in Part, Without the Express Consent of 13000 Mcclellan Financial Publications Is Strictly 0.1 Prohibited

450 INSIDE 445 N WHAT QEINFINITY MEANS P. 1 440 LA THE CLEL POMOS SHOW MKT MOVES P. 2 435 c KET GOLD TO $2900?! P. 4 AR BC INDICATOR UPDATE P. 5 430 T TIMING MODELS P. 6 425 OR REP T-NOTE COT DATA P. 7 420 APPLE: THE GHOST OF RCA P. 8

415

Prepared After the Market Close, September 25, 2012 Report #419, September 26, 2012

Fed Turns Money 3.4 1700 3.2 Projected path with $40B/mo of MBS buys Spigot Wide Open 3 The FOMC answered all of the 2.8 1500

questions about whether there would 2.6 ever be a QE3 by announcing on Sep. SP500 2.4 13 that it would be doing more QE for 1300 the indefinite future. Even though the 2.2 past two rounds of QE have not had the 2

$Trillions 1.8 desired effect of resuscitating the pro- 1100 ductive economy, the Fed seems to be 1.6 adopting the slogan of “The beatings 1.4 will continue until morale improves”. 1.2 Size of the Fed's Balance Sheet 900 QE might not have done all that 1 was desired for the unemployment rate, 0.8 but it has been an unqualified boon to 0.6 700 the stock market, at least during the 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 periods when it was going on. When the Fed tried to pull away the punch- modeled in what an additional $40 bil- well as the one below that looks at the bowl, we got the Flash Crash of 2010 lion per month would look like, assum- combination of the Fed’s balance sheet and the ugly decline of August 2011. ing that no counteracting changes were and the ECB’s. The lower line in the The FOMC’s Sep. 13 announcement made. That’s not necessarily a good bottom chart looks at a 3-month rate of said that the Fed would be buying up assumption, because banking shifts and change in the combination of the two $40 billion of mortgage backed securi- adjustments go on all the time. But it balance sheets, and you can see that ties (MBS) per month, with no sched- does help us to visualize what the there is a pretty good correlation. uled end date. The top chart compares effects of these big numbers would look The implication is that if the Fed is the behavior of the SP500 to the size of like. indeed going to be increasing the size of the Fed’s balance sheet, and we have And it is not just the Fed’s balance its balance sheet, and if the ECB is sheet which matters. Back on April 13 going to follow suit as Mario Draghi BOTTOM LINE we published a weekly Chart In Focus has announced, then we should see sev- By promising the markets the chance to article that featured the chart above, as eral months of a positive rate of change, pass “GO!” and collect $40 billion each 24% 1600 month, the Fed has changed the stock mar- Market went higher despite ket picture dramatically. More QE is defi- balance sheets shrinking: 20% nitely bullish for the stock market, but now May 2010 Flash Crash ensued 1400 SP500 we don’t know for how long. We still 16% expect stocks to run upward into Novem- 1200 ber, as suggested by our eurodollar COT 12% leading indication, but then we’ll have to 1000 see how the Fed is playing its cards. 8% T-Bonds and T-Notes are poised to fall in 4% 800 price from here (rising yields), as lumber’s rise over the past year points to a limited 0% improvement in the economy. That may 600 -4% End of contain how long the Fed keeps up this QE2 400 round of QE. Gold is due for a mid-cycle -8% End of dip as part of its 13-1/2 month cycle, with Total of ECB and Fed Balance Sheets QE1 in Dollars, 3-Month Rate of Change a bottom ideally in October. Gold does -12% 200 have an overbought condition to work off. 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

and thus a rising stock market. 1480 40 The Fed’s actions within the bank- 1460 FOMC announces 35 ing system also matter on a daily basis, 1440 QEinfinity not just on the monthly basis shown in 30 1420 SP500 the charts on page 1. The chart here 1400 25 on page 2 looks at the net value of all 1380 Permanent Open Market Operations Scheduled20 1360 purchases (POMOs) done by the Fed. That plot 15 1340 or sales is shifted forward by two days, to take out the lag induced by the 4-day look- 1320 10 1300 $Billions back, and to reveal that the surges and 5 1280 pullbacks of Operation Twist correlate 0 nicely with the SP500’s behavior. 1260 Normally there is a pretty good 1240 -5 1220 correlation, but the FOMC’s Sep. 13 -10 announcement brought a big celebra- 1200 -15 tory rally for stock prices that was not 1180 Net Value of POMOs, Last 4 TD Sep. 12 part of the POMO program. We liken 1160 Shifted Forward 2 Days -20 it to when an asteroid falls into the 03/05/12 04/03/12 05/03/12 06/04/12 07/03/12 08/02/12 08/31/12 10/02/12 ocean, it tends to overwhelm the surf had resisted all the previous breakout going to be with that effort. Its mone- forecast. attempts. Anytime a trendline is broken tary efforts might get overpowered by One interesting point about this there is the expectation that there will fiscal changes that show up as a result POMO data is that the Fed tells us a be a pullback to or toward the trendline. of the elections, or from the resolution month in advance what it is planning to That appears to be what is taking place of the “fiscal cliff” by Congress. do, and then tells us the same day what now, with the Summation Index having Chart 6: The Volume Oscillator also it actually did. The red portion of the topped out and now in a decline from its put in a quite satisfactory high to con- plot shows the remaining portion of the lofty +3689 high. With no divergences firm the NYSE Comp’s breakout. It has announced purchases and sales, and it evident yet, the path should be clear to been more one sided than the A-D suggests that there is an up move com- higher price highs on the next Summa- Oscillator by spending much more time ing for stocks in the next few days. We tion up move. and at greater amplitude on the north will get the next month’s schedule on Chart 4: The Volume Summation con- side of zero following the June 4 low. Sep. 28. tinued its progression of higher highs With the Volume Summation up at such Bottom Line: Quantitative Easing (QE) and higher lows in September. In the high levels, it will be difficult for the may not have saved the economy yet, center of the chart, there was a much Oscillator to make more than low level but it has been bullish for the stock mar- lower divergent top on the Volume moves above zero. ket whenever it is used. Summation to go with the highest price Chart 7: The DJIA Price Oscillator ran Page 3 Charts highs of last spring’s top. With the to a higher high as the DJIA broke out Chart 1: The A-D Line has pulled back Federal Reserve continuing to pump up above the highs that it made last spring. down to its 10% Trend from the all time the economy with QE3, it is very A pullback to test those spring highs high that it made on Sept. 14. That unlikely that a final price top would be could be setting up the extension of the would be just a normal consolidation put in just as this new QE program is price move that would be expected with event, if it is able to stabilize near this getting started. The stock market did the Fed’s introduction of QE3. If the level. The lower left to upper right pat- not top until after the end of each of the Price Oscillator can stay up in the +100 tern on this chart is clear evidence that three prior programs, QE1, QE2 and the to +200 area, then a quite satisfactory the Federal Reserve is being effective in Twist. With no announced end to QE3 trending price move can result, just as it providing liquidity to the market. that could make identifying the end of did in the middle of the chart while Chart 2: The Daily Volume Line gave this current uptrend much more diffi- Operation Twist was taking place. a mighty effort, but was not able to cult. But its end should drive the Sum- Chart 8: The CBOE Volatility Index make a new higher high on Sept. 14. mations well below zero, just as the end (VIX) dropped below last spring’s low There has been an orderly pullback of the prior three efforts did. as the SP500 probed those price highs down toward the 10% Trend. Should Chart 5: The McClellan Oscillator had recently. The SP500 backed off while the VIX bumped up through its 50-day there be another surge higher following a good pop up to +192 on Sept. 14, and moving average. That turned out to be this consolidation, then it should be able that was high enough to show some ini- the set up for the SP500 (and DJIA) to get that mission accomplished just as tiation while at the same time pointing breaking out to higher highs.while the it did earlier this year in the move up out that an overbought condition had VIX dropped back below its lower and away from the 1% Trend. arrived. The quick drop back below zero is working off that overbought band. The upper band is very close to Chart 3: The McClellan A-D Summa- the downtrend line that can be drawn tion Index moved up 3 ticks short of condition. If the Fed is going to be across the Nov. 9 and June 4 VIX tops. 1000 points from September 5 to 21. effective with QE3, then the Oscillator So, any serious penetration of the upper That was a big enough show of energy should reflect that by returning back into to positive territory. How soon that band could be an indication of a more to pop the NYSE Composite above a serious price drop and VIX run up. downtrend line originating in 2007 that occurs and with what kind of pattern should tell how effective the Fed is

NYSE CUMULATIVE ADVANCE-DECLINE LINE DAILY CUMULATIVE UP-DOWN VOLUME LINE 255 125 250 1 120 2 115 245 110 240 105

235 100

230 95 Millions

Thousands 90 225 85 220 80 215 CUM. A-D 5% TREND 75 CUM. UV-DV 5% TREND 210 10% TREND 1% TREND 70 10% TREND 1% TREND

205 65 01-Sep-11 01-Nov-11 03-Jan-12 05-Mar-12 03-May-12 03-Jul-12 31-Aug-12 31-Oct-12 01-Sep-11 01-Nov-11 03-Jan-12 05-Mar-12 03-May-12 03-Jul-12 31-Aug-12 31-Oct-12

McCLELLAN SUMMATION INDEX: ADV-DECL McCLELLAN SUMMATION INDEX: VOLUME 9000 850014000 8500

8000 12000 3 8100 4 8100 7000 10000

7700 7700 6000 8000

5000 ***** NYSE COMP 6000 NYSE COMP *** ****** 7300 7300 * **** * ** ***** *** * *** ********* 4000 * * 4000 ***** **** ** ******* ** * ****** **** * *** ****** ** ****** **** ** * * ** * * 6900 ******** ** * *** * 6900 ******* ** **** * ** ** *** ** * 3000 *** ** * **** **** ***** ** 2000 **** * ** * ** ** * ** * *** * ****** **** *** * * ***** **

* * Thousands * * * * * * * * ***** ********* **** * ** * ** **** * * * * * * * * *** *** ** **** * * *** * 6500 ** * ***** **** *** ** 2000 * * ** 0 ***** ****** ** ** ***** ***** ****** 6500 * ** * ** * **** * * ******** * *** ****** * ********** *** **** ** ** * ** ** * * ** * ***** ** * * ** * * ***** * ** * * * *** 1000 * * *** -2000 * * *** ** ** 6100 * * * 6100 * * * * * * **** * * * * ** ***** ** * * ** *** * * * 0 *** ****** * * * -4000 * * * ** * ** *** * ** * ******* ******* *** ** ******* ** ********* * **** ***** 5700 5700 -1000 -6000

-2000 5300-8000 5300 01-Sep-11 01-Nov-11 03-Jan-12 05-Mar-12 03-May-12 03-Jul-12 31-Aug-12 31-Oct-12 01-Sep-11 01-Nov-11 03-Jan-12 05-Mar-12 03-May-12 03-Jul-12 31-Aug-12 31-Oct-12 McCLELLAN OSCILLATOR (ADVANCE-DECLINE): NYSE McCLELLAN OSCILLATOR (VOLUME): NYSE 400 600

300 5 6 400

200

200 100

0 0 Thousands

-100 -200

-200

-400 -300

-400 -600 01-Sep-11 01-Nov-11 03-Jan-12 05-Mar-12 03-May-12 03-Jul-12 31-Aug-12 31-Oct-12 01-Sep-11 01-Nov-11 03-Jan-12 05-Mar-12 03-May-12 03-Jul-12 31-Aug-12 31-Oct-12 DJIA CLOSE & PRICE OSC CBOE VOLATILITY INDEX (VIX) 14000 6001500 84

13500 78 7 5001400 8 SP500 13000 72 400 1300 66 12500 300 60 12000 1200 54 ***** ******* 200 11500 * * *** *** ********** ******* ****** **** ***** ** **** * ****** ***** 1100 48 * **** ******** **** ** 11000 * * ** **** ** ** ***** *** * * ** ** ** * *** ** ** 100 * * **** ** ******* 42 ** * ** * * **** *** * * ** ** ** ** 10500 * *** ********** * ****** 1000 * * * ********** * * ** * 0 36 * * * ** * ****** 10000 ** 50MA, 1-Sigma BBands * * * 900 30 * ** * -100 * *** * 9500 * * **** * ** * ** 24 * ***** ** *** * ** *** ** 800 ******* -200 9000 ** 18

8500 -300700 12 01-Sep-11 01-Nov-11 03-Jan-12 05-Mar-12 03-May-12 03-Jul-12 31-Aug-12 31-Oct-12 01-Sep-11 01-Nov-11 03-Jan-12 05-Mar-12 03-May-12 03-Jul-12 31-Aug-12 31-Oct-12

Mid-Cycle Low For 3.3 Gold Due in Oct. 3.2 Near Month Gold - Log Scale Gold has had quite a nice run 3.1 ? upward in honor of the upward phase of 3 its 13-1/2 month cycle. That cycle is Mid- Mid- usually all about marking the important 2.9 Cycle Cycle Low Low bottoms for gold prices, although this Mid- latest one had the unusual behavior of 2.8 Cycle Low Another splitting into two separate lows, each 2.7 split in 260 equidistant from the ideal cycle bottom In 2006 2012 it split in 250 date. That is not unprecedented. We two saw a similar split like this back in 240 2006, at the left end of the chart. And 13-1/2 Month Cycle 230 the 9-month cycle for stock prices split 220 into two separate bottoms back in the 01/03/06 01/04/07 01/04/08 01/05/09 01/05/10 01/04/11 01/04/12 01/04/13 fall of 1998, on Aug. 31 and Oct. 8 of that year, when the ideal cycle low was 1900 NEAR MONTH GOLD 650 due in September. So it can happen. 600 One other attribute of this cycle is 1700 that it typically sees a mid-cycle low 550 right as the cycle is topping out. This is 1500 known in cycle terms as a “half-period harmonic”, meaning that there is a half- 500 cycle embedded within the larger and 1300 450 more important 13-1/2 month cycle. 10% Trend Thousands That mid-cycle low is ideally due in 1100 October, but it is not a very punctual 400 phenomenon. You cannot set your 900 Total Open Interest 350 watch by it, but it is still real enough All Contracts that it can be useful to know when it is due, and thus what to expect prices to 700 300 do as it draws nearer. 12/31/10 04/01/11 07/01/11 09/30/11 12/30/11 04/02/12 07/02/12 10/01/12 The run up in gold prices attracted a more rapid than we have seen on past way measuring structure for a trending lot of attention, from the surge into gold gold price rallies. move. Edwards and Magee wrote about bullion ETFs we discussed last time to a We often get asked about how far them extensively. A lot of the stock rise in total open interest of gold gold prices can run up, and that is a market bar charting techniques do not futures. That latter item is shown in the hard question to answer especially when work the same when transplanted to middle chart, and it generally rises and we don’t know for how long the Fed other markets, and so we are leery about falls along with gold prices. It is when will keep running the printing presses. applying them to a commodity market we see a really dramatic rise in open But there is one measuring technique such as gold. But there is sufficient interest that we can infer that sentiment that we have borrowed from conven- precedent to show that they can work. may have run a bit too far. That seems tional bar chart analysis that may have The bottom chart shows gold prices to be the case now, since the rise in gold some utility. plotted on a logarithmic scale. At the open interest has been much bigger and A “flag” structure is typically a half- left end of the chart is the big run up 3.4 that occurred during the 1970s, after President Nixon finally broke the gold 3.2 Log of Spot Gold standard. There was a big initial surge Source: Foundation for the Study of Cycles Data upward to a top at the end of 1974, just 3 before Americans were finally allowed 2.8 to start owning gold in 1975, and the Objective Projects to rest of the world tried to front-run that 2.6 ~$2900 expected bump in demand. 2.4 Taking the height of that initial runup and using it as a measuring “flag 2.2 pole”, we find that the second run

2 upward out of the pause did meet the upside objective. In fact it exceeded 1.8 that objective slightly, which is fine for how these measuring objectives work. 1.6 At the right side of the chart, we see 1.4 similar behavior, with a rapid run up 1966 1970 1974 1978 1982 1986 1990 1994 1998 2002 2006 2010 2014 into the early 2008 top. If the big cor-

rection that year is a halfway measuring 1.8 structure, then that projects to an upside objective of around $2900. We could Log of Spot Gold get more precise in our calculations, but 1.7 Source: Foundation for the Study of Cycles Data that would not be warranted by how these things work. There is even older precedent for Objective using this technique on gold prices. 1.6 Back in the 1860s, the U.S. government had to print a bunch of extra money to help fund the Civil War, and then later 1.5 “reconstruction”. There was a big initial surge to a top in February 1863, then a drop from $33.18 to $26/oz that 1.4 year before gold surged again to a final Civil War high of $53.35 in July 1864. On a loga- money printing rithmically scaled chart, we can see that 1.3 the upside objective conferred by that 1858 1860 1862 1864 1866 1868 1870 1872 1874 1876 1878 halfway pause was indeed met and growing M1 at more than 9% per year. ies we found that sometimes it can exceeded. So this appears to be a legiti- And in each of the examples shown invert. That’s why we still label its mate measuring methodology for really here, gold prices have exceeded the turning points as “implied” tops or bot- big time frame moves in gold prices. flags’ measuring objectives. toms in the table on page 6. Could gold go on beyond $2900/oz? BC caught the timing of the recent Certainly it could, especially if the Fed BC Indicator up move and top pretty well, although keeps interest rates at zero, and keeps When we first shared our BC Indi- interestingly the magnitudes that BC cator a few years ago, we labeled it as shows do not necessarily match up all 450 “experimental” because we had not 445 that well with how prices actually N 440 LA done all of the testing and investigation THE CLEL behave. The 9/21 top shown by BC 435 c T ARKE that we think is needed to fully under- 430 hardly seemed like anything, compared T stand it. We still have not done all that 425 R REPO to the 8/13 top, but it brought a big 420 we should, but we rolled it out because price response. it was definitely interesting enough to It is also interesting that what we Sherman McClellan want to share. call the little “saddle” wiggles do not Publisher The exact methodology of it is still necessarily have to be tops or bottoms, Tom McClellan proprietary, but it would be fair to say but instead they tend to mark a volatility Editor that it is a collection of lesser cycles that cluster for prices, after which the mar- can be projected out well into the The McClellan Market Report, ket gets back to doing what it was doing future. One look at the chart below before. ISSN 1094-8163, is published 24 makes it obvious that there is some kind times a year by email & web access. Up ahead, BC calls for an implied of interesting relationship between BC bottom due Oct. 24, and an implied top Annual subscription rate: $195 and the movements of the stock market, just after the election. Neither of those Visa, Mastercard, and Discover cards although exactly what that is seems has yet been confirmed by our regular accepted, or mail payment to: changeable. Timing Model signals. But the implica- McClellan Financial Publications The turning points that BC shows do tion of a post-election swoon is an inter- P.O. Box 39779 seem to matter, but early on in our stud- Lakewood, WA 98496-3779 esting one to contemplate. Phone (253) 581-4889 fax:584-8194 Subscriptions: (800) 872-3737 14000 0.2 or at www.mcoscillator.com email: [email protected] 13500 DJIA ©2012. All rights reserved. Any reproduction of the words, graphs, tables, or analysis, in whole or in part, without the express consent of 13000 McClellan Financial Publications is strictly 0.1 prohibited. Analysis is derived from data 8/13 believed to be accurate, but such accuracy or 12500 2/10 completeness cannot be guaranteed. It should 5/20 not be assumed that such analysis, past or future, will be profitable or will equal past per- 12000 9/21 11/12 formance or guarantee future performance or 1/2 7/18 trends. Information is provided to assist readers 0 in forming their own understanding of market 11500 10/24 structure and no statements made herein should 9/3 be construed as recommending any specific 6/4 These little "saddle" course of action. All trading and investment 11000 wiggles usually see decisions are the sole responsibility of the 12/2 a temporary reader. From time to time the principals of Experimental BC Indicator upsurge in volatility. McClellan Financial Publications may have 10500 -0.1 open positions in the markets covered. 01/02/12 04/02/12 07/02/12 10/01/12 12/31/12

TIMING MODELS Stock Indices (DJIA, SPX, Nasdaq, NYSE Comp., etc.) Bond Market (Corporate & Treasuries)

SIGNAL SOURCE PREDICTED ACTUAL SIGNAL SOURCE PREDICTED ACTUAL Top Nasdaq ST Price Osc Sep 5 Sep 7 Bottom T-Bond Close/Sum Sep 5 Sep 7 Top NYSE Summ Index Sep 10 Sep 7 Bottom TYX ST Price Osc Sep 5-10 Sep 7 O Bottom DJIA ST Price Osc Sep 10 Sep 10 Bottom T-Bond Price Osc Oct 1 O Bottom NDX Summation Sep 10 Sep 10 Bottom T-Bond ST Price Osc Oct 5 O Bottom SP500 ST Price Osc Sep 12 Sep 10 Bottom TYX Price Osc Oct 30 O Bottom Uncommon A-D Osc Sep 13-14 Sep 10 O Bottom DJIA ST Price Osc Sep 14 Sep 10 Gold and Precious Metals Stocks Bottom NYSE A-D Osc Sep 19 Sep 18 SIGNAL SOURCE PREDICTED ACTUAL Bottom NDX Summation Sep 19-24 Sep 18 Bottom XAU ST Price Osc Sep 7 Sep 5 Bottom NYSE A-D Osc Sep 27 Top XAU ST Price Osc Sep 24 Sep 21 Bottom Nasdaq Price Osc Sep 28 Bottom Gold Close/Sum Sep 27 Top SP500 ST Price Osc Sep 28 Top XAU Price Osc Oct 9 Bottom SP500 Up-Down Osc Oct 2 Top XAU Close/Sum Oct 12 Bottom NDX A-D Osc Oct 8 Top XAU Up-Down Osc Oct 12 Bottom NYSE Summ Index Oct 10 Top XAU Up-Down Osc Oct 24 Top NYSE A-D Osc Oct 10-11 “Event” risk like The “implied top” that was suggested Top DJIA ST Price Osc Oct 11 this is a factor at by our experimental BC indicator did Bottom Uncommon A-D Osc Oct 15 any time, and can seem to turn out right. You can see a Bottom Nasdaq A-D Osc Oct 15 trump other techni- chart and more discussion of that on Experimental New Indicator, “BC” cal factors if the page 5. Predicted Signal How It Turned Out event is big enough. What To Expect Implied Top Sep 21 Top Sep 20 That appears to be the case with the We are not seeing any major (bold Implied Bottom Oct 24 Fed promising to lettered) signals for the stock market, Implied Top Nov 12 drop money out of nor any big clusters of signals. We still Implied Bottom Dec 2 helicopters well into do not have any signals for the major top for November that is forecasted by the indefinite future. our eurodollar COT leading indication, The Signals The immediate effect was to dampen as discussed in MMR 417. There is one These signals detect the ripples in the out the mid-September bottom cluster implied top from the BC Indicator due liquidity stream, ripples which can have (O). Things appear to be dampening echoes later on in price behavior. They Nov. 12, which would match nicely down now, and stocks appear to have with the eurodollar COT message. have been shown over the years to work started to dip out of the recent plateau, pretty well, as long as somebody or T-Bond signals have almost totally toward 2 bottoms due Sep. 27-28. dried up, except for a pair of bottoms something does not intervene to inter- Several readers wrote to ask what it fere with the normal market operation. due Oct. 1 and 5, which sort of match a means when the table shows only bot- minor stock market top due Friday, Sep. We saw just such an interference this tom signals for a protracted period, as month, when the FOMC did a giant 28. was the case in our last Report. It really In the gold table, we have an unusual “cannonball” jump into that liquidity only means that these are the signals stream with its announcement of cluster of top signals generated by indi- that have been generated. A turn can cators for the XAU, calling for a top QEinfinity. The waves from that move certainly come without a signal to fore- due Oct. 9-12. That may be related to a served to swamp the market’s own tell it, and so if there are two widely- pair of stock market tops due Oct. 10- natural waves, and only now are things spaced bottoms then we just have to 11. starting to settle down and get back to infer that sometime between them there normal. will be an intervening top. HOW THEY WORK These models do not catch every market turn, but the signals usually These timing models are based on our proprietary calculation method. show some effect in the market action. It is important to understand that the This technique involves a computationally complex comparison of two or market does not have to go up from a bottom; it may just stop going down. It more carefully selected indicator values. This yields the date and direction of does not have to go down from a top, it may just stop going up. Some bot- a projected future turning point. Making several such comparisons can help toms turn out to be just a flat spot before a continuation up. paint a picture, one reversal point at a time, of the future structure. The BC indicator is an experimental new tool, not related in method to Once generated, signals remain in effect, though the result can have the other signals. greater or lesser significance based on what the market is doing when the date "Actual" dates listed for NYSE Indices are for the NYSE Comp/Dow arrives. Certain indicators are slightly less accurate in pinpointing the exact Jones Industrial Average. Letter groups (A, B, C, etc.) denote clusters of sig- date, so we may print a range of dates. Price Oscillators and Summation nals. ST Prc Osc means “Short Term Price Oscillator.” Index signals are usually more important, though sometimes not as precise in Past performance of these mathematically generated turning point pro- time. Uncommon A-D refers to an oscillator derived from NYSE stocks that jections in no way guarantees future results. These dates may be useful in are not part of the Common Only list in Barron’s. Dates in bold denote sig- planning for the future, or giving greater confidence at turning points. We nals of greater potential strength according to our research. would not, however, attempt to trade any of the markets based solely on these models.

20% 136 COT Data Say More Near Month 10-Year T-Notes Bond Price Decline 15% 132 Staying short 128 10% as prices declined Ahead 124 Every Friday in our Daily Edition, 5% NET SHORT we feature updates on the most perti- 120 nent developments from the weekly 0% Commitment of Traders (COT) Report, 116 -5% NET LONG published on Fridays by the CFTC. It 112 shows total open interest for a big vari- -10% ety of futures contracts, along with how 108 -15% many of those contracts are held by the 104 various categories of traders. Futures COT: COMMERCIALS' NET SHORT POSITION -20% 100 brokers have to report these positions as AS PERCENTAGE OF TOTAL OPEN INTEREST of each Tuesday, and then the data all -25% 96 get tabulated for the Friday report. 01/04/10 05/05/10 09/02/10 01/03/11 05/04/11 09/01/11 01/03/12 05/03/12 08/31/12 01/02/13 The “commercial” traders are the and perhaps telling behavior. It sug- interest rate series, with the exception of category for the largest traders, and they gests that there is more of a price the shortest maturities which the Fed is are presumably the smart money decline to come, or at least that was the artificially keeping at zero. because they are the big money. So it meaning back in 2010 when they were The lumber price plot is shifted for- has been fascinating to see a decline in exhibiting a similar behavior as a group. ward by a year to reveal how its move- T-Bond and T-Note prices since June The idea that we could see a bond ments tend to get echoed a year later in 2012, while the commercial traders of price decline is also borne out by the short term interest rates. Almost a year T-Note futures have actually been middle chart, which looks at the leading ago, lumber futures prices were bottom- upping their net short position as a indication for interest rates that is given ing, and since then have risen from the group. Usually they will unwind a short by lumber prices. In this case, we are vicinity of 210 to above 300. This sug- position as a price decline progresses, displaying the 6-month LIBOR rate, but gests that we should see a rise in short and so to see them increase it is unusual this relationship also works for other term rates as we head into 2013. But you may notice that this rela- 12 450 tionship does not work as well with the 11 Near Month Lumber Futures magnitude of the moves. It gets the 400 10 Set Forward by 12 Months timing of the turns pretty well, but how

9 350 far the interest rates actually go can be affected by other factors. 8 300 Rising rates imply a stronger econ- 7 omy, and thus a greater need for capital 6 250 which creates competition for the avail-

5 able money. The rise in lumber prices 200 since early 2009 has pointed to an 4 improving economy, although lumber 3 150 prices are still quite far from the heights

2 that they saw at the peak of the housing 6-Month LIBOR 100 bubble. 1 The bottom chart uses the same 0 50 technique of shifting lumber prices for- 01/02/97 01/07/99 01/04/01 01/06/03 01/04/05 01/04/07 01/02/09 12/31/10 12/28/12 ward, but in this case we are looking at 240 360 the HGX Index for the housing sector. Lumber peak April Near Month Lumber Futures 21, 2010. Blowoff It has had a nice run just recently, and 220 Set Forward 54 Weeks 320 extended due to gotten a lot of attention from the finan- squeze from Chile 200 earthquake. 280 cial TV types. This chart reveals that the recent run up in the HGX was the 180 240 echo of a similar pop in lumber futures prices just over a year before. Looking 160 200 ahead, this relationship says that hous-

140 160 ing related stocks are due for a tumble into a bottom that equates to around 120 120 Oct. 14, but then housing stocks should be able to trend higher in a more sus- 100 80 PHLX Housing Sector Index - HGX tainable way heading into 2013. If so, that supports the idea of bond 80 40 prices coming down, and rates going 60 0 up. 01/04/10 07/06/10 01/03/11 07/05/11 01/03/12 07/03/12 01/02/13 07/05/13

660

600

540

480 Apple Corp. 420 2007-2012

360

300

240

180

120

60 RCA Corp share price history, 1924-1931. Source:

0 globalfinancialdata.com General Electric formed RCA and site at www.globalfinancialdata.com. Apple’s Big Run launched it on its way with sole-source To create this comparison chart, we Looks Strangely government contracts that helped it overlaid a chart of Apple Corp’s price grow into a major electronics company history, taking care to make sure that Familiar that pioneered many of the things we the horizontal time spacing was the Halloween is still over a month still use today, like the NTSC standard same as the RCA chart (i.e. no accor- away, but it is not too soon to start get- for televisions. dion style stretching of time to make it ting warmed up for it with a scary look- Apple, by comparison, was started fit). It is not an exact match, and indeed ing chart. In thinking about Apple’s by two guys in a garage, and grew with- no pattern analog ever is. But there are impressive run recently, we got to con- out much government support or super- enough points of similarity to say that templating other notable uptrends in vision. It had a much different this is a very interesting comparison. technology stocks. Comparisons to the approach to the market place as well as The bubble in RCA’s stock occurred heyday of the Internet bubble in the late a different management style. One in tandem with an overall stock market 1990s did not seem quite right, because might think that this should lead to dif- bubble in the late 1920s, something that was a bubble that was spread out ferent stock price behavior, since those which it is hard to argue that we are see- across anything tech-related. Apple are the factors that we are told are ing again now. So the dramatic decline seems to be a phenomenon all its own. important in business and investing. that RCA saw from the 1929 top to A better analog might be the rise And yet despite those differences, 1932 was exacerbated by the overall and fall of the Radio Corporation of we still see such strong similarities in decline in the stock market then, and America, which is better known as the structures of their price plots. The thus we should not necessarily expect to RCA. The history, management style, chart of RCA is one that we found at see something that big happen to Apple and structure of Apple and RCA are the web site of Global Financial Data, just because of this comparison. vastly different stories. RCA was born which is the leading provider of histori- Still, with Apple zooming up so fast, out of the ending of a U.S. government cal financial data for a variety of pur- and so similar to the structure of RCA’s monopoly over all radio communica- poses. Their chart is republished here advance, it is hard not to think that the tions as part of the war effort for WWI. with permission. Check out their web similarity might continue into the 3000 850 future. RCA went from $10/share in 800 1925 to $105 in 1929. Apple has also 2800 NASDAQ 100 INDEX had a 10-fold increase from 2008 to 750 2012. RCA made a double top in 1929, 700 2600 and the timing of that second top for 650 this analog equates to about January 2400 600 2013 for Apple to make the corollary, if 550 it is going to. That’s coincidentally 2200 500 when we inaugurate whoever gets elected in November. Hmmmm.... 450 2000 As the largest cap stock in the U.S., 400 Apple has a big weighting in the major 1800 Apple Corp. (AAPL) 350 averages. So if Apple is going to top in 300 1600 January as the RCA chart suggests, that 250 would have big implications for things 1400 200 like the Nasdaq 100 shown at left. 07/06/10 01/03/11 07/05/11 01/03/12 07/03/12