It was a hot summer in 2007 – one of the hottest on record. But the summer heat was totally eclipsed by the record amount of fear and panic felt by the masses as the mainstream media dropped one big “fear bomb” after another on investors from July through September.
A picture is worth a thousand words, so here’s a graphic depiction of just how much fear there was in the summer of ’07. It shows a record spike in public short sales this summer as the average trader reacted to the barrage of negative and crisis-related news stories by betting the farm on a system-wide financial collapse. So far those short positions haven’t paid off and if Tuesday’s response to the Fed lowering interest rates was any indication, those short positions won’t pay off.
Here’s a press clipping I saved from one of the media’s many scare tactics of the past summer: the so-called “Bin Laden Option Trade.” According to a widely circulated article across many Internet sites, an unknown trader placed an options bet on S&P 500 put and call options that won’t pay off unless there is an extremely large price move in the S&P between now and the end of September. Another press report claims that a “mystery trader” has placed a put option bet that the Dow Jones Eurostoxx50 index will crash by 25% by options expiration day this month. These high-profile “mystery” trades were just some of the fear tactics used by several independent and mainstream media outlets to conjure up images of another 9/11-type terrorist episode. Indeed, Halloween was early in coming this year for many.
I predict the promoters of this particular fear campaign will simply put their hands in their pockets, walk away and whistle a rousing rendition of “Dixie,” all the while conveniently forgetting they ever made such dire predictions in the first place. Their mission was accomplished: they convinced millions of everyday investors and observers to hit the panic button and run for cover while they, the fear promoters, profited immensely on the very fear they engendered.
Before any major trend in crowd psychology finally exhausts itself there’s always one final move that seems to take the prevailing emotion of the crowd and compress it into last explosion of emotion. Call it the “last hurrah” or the final “blow-off” in the crowd’s extreme pessimism of the past year. It’s a necessary cathartic exercise as the crowd releases all that pent-up fear and emotion in one final “whoosh” before finally letting it go. And when the crowd finally catches its breath after its summer scare-fest and its collective sanity returns, it is only then that the crowd will realize what it feared most didn’t come to pass. Indeed, the exact opposite will have transpired. It will then realize the truth of the old maxim, “The anticipation of fear is often worse than that which is feared.” After this realization sets in, the crowd will slowly lose its fear and begin adjusting its attitude to suit the current investment climate, a climate which is increasingly bullish.
From a chart standpoint, the final exhaustion of crowd emotion normally manifests in a parabolic move, whether up or down. In this case the final exhaustion move is a parabolic dome. When you’re looking at crowd psychology from the vantage point of the charts (an excellent place to start!) you can see the beauty of this final release of fear as the old downtrend trend ends and a new uptrend begins. With that in mind, let’s start our analysis with one of the best benchmarks for analyzing the psychological state of the broad market -- the NYSE Composite Index. This particular market average is best for parabolic analysis as we’ll shortly find out.
Notice the former conflict of the “dueling bowls” in the NYSE Composite shown below. Now look at the parabolic bowl that has so far managed to contain the August correction. The outer rim of the bowl isn’t important as its slope could change. What is important is that the market’s August correction bottomed to the left of the bowl’s center or vertex, which is technically bullish. That means the stock market remains in strong hands and the bigger of these two conflicting parabolic structures, namely the bowl, is the stronger one. The NYSE Composite should succeed in eventually climbing back to the previous high at 10,200. Can a new all-time high be made before this new bullish move has run its course? Sure it can, and it should happen based on the market’s psychology composite.
The NYSE has just blasted its way out of that small parabolic dome that had kept the market in a fear-laden trading range and prevented a challenge of the all-time high made in July. The dome is really irrelevant; the important thing to note about this chart is the large bowl formation in the NYSE chart. (Incidentally, traders who bought the August low on my previous recommendation, take some profit at this time).
Now that two major “freak outs” appear to be over (namely the anxiety over the Fed’s interest rate decision and the Bin Laden options trade), how much more fear remains for the average investor? That remains to be seen and only the aggregate psychology indicators will tell us that. For now they are sending a bullish message as they have been since the August correction lows. There is still a lot of short interest out there for the market to feed off before the public’s fear turns to jubilation. That means the stock market’s “Wall of Worry” is firmly intact and the intermediate-term upside potential remains heading into the fourth quarter.
Now for an update on the PM sector. Back in August we took at look at the Ishares Silver Trust (SLV, $127.07) which tracks the silver price. We concluded that a tradeable rally lay ahead for SLV and the silver price based on the super-oversold indication coming from the 5-day and 20-day price oscillators for SLV. “The decline in silver along with the PM stocks in the recent panic selling in August was overdone and the indicators suggested the market will compensate for the extreme selling that was done by taking price back up to its pre-panic level,” we wrote.
Since then SLV has rallied back up to its pre-August crash level around $127. Take some profit at this time and prepare for a pullback or consolidation since SLV is now overbought based on the oscillators. The above chart shows the key 20-day oscillator (blue line) is very much in the overbought zone of the chart which is the proverbial “danger zone” in the very short term. Silver traders will need to tread cautiously in the next few days until the price oscillators for SLV show us the recent internals excesses have been worked off.
What about the silver stocks? Let’s turn to the silver stock internal momentum indicators for a glimpse of what to expect in the near term. Once we get past the current correction process, the SS HILMO momentum indicators for the silver stocks tell us to expect another rally attempt that should allow the actively traded silver to make a higher high above the most recent rally peak. This expectation is based on the observation that the 20-day and 30-day momentum indicators should continue rising beyond the current week and into the later part of the month. When 20-day and 30-day momentum is rising it generally puts an upward bias on the short-term outlook, allowing the stocks with the best short-term chart patterns to push higher.
The upward turn in the 30-day internal momentum should provide buoyancy as well as a continued upward bias for the leading silver stocks in the short term outlook. In other words, higher highs are expected for most of the major actively traded silver.
Clif Droke is the editor of the three times weekly Momentum Strategies Report newsletter, published since 1997, which covers U.S. equity markets and various stock sectors, natural resources, money supply and bank credit trends, the dollar and the U.S. economy. The forecasts are made using a unique proprietary blend of analytical methods involving internal momentum and moving average systems, as well as securities lending trends. He is also the author of numerous books, including "How to Read Chart Patterns for Greater Profits." For more information visit www.clifdroke.com