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The Decision Point Alert provides weekly commentary, analysis, and forecasting, as well as a daily report of relevant statistics. Compact, timely, insightful. Carl Swenlin delivers a unique and flexible perspective on what the market is doing and where it may be going.


DECISION POINT ALERT WEEKLY COMMENTARY
March 5, 2005

WEEKLY RESULTS




                    03/04      WTD    MTD     YTD                  Weekly 

                    Close   %Price %Price  %Price     Weekly     New  New

Name                Price   Change Change  Change   Adv Decl    High  Low

---------------- --------   ------ ------ -------  ---- ----    ---- ----

Dow Industrials  10940.55    +0.9%  +0.9%   +1.5%    20   10       6    1

S&P 500           1222.12    +0.9%  +0.9%   +0.8%   351  148     114   19

S&P 100            583.23    +0.8%  +0.8%   +1.4%    67   33      23    3

NYSE Comp         7441.18    +1.1%  +1.1%   +2.6%

Nasdaq Comp       2070.61    +0.3%  +0.3%   -4.8%

Nasdaq 100        1520.58    -0.4%  -0.4%   -6.2%    51   48       8    3

Russell 2000       644.95    +1.2%  +1.2%   -1.0%

S&P 400 Mid-Cap    679.06    +1.3%  +1.3%   +2.4%

S&P 600 Sml-Cap    336.51    +1.5%  +1.5%   +2.3%

Dow Transports    3830.97    +3.1%  +3.1%   +0.9%

Dow Utilities      361.75    +1.6%  +1.6%   +8.0%

Gold Index (XAU)    99.80    +0.9%  +0.9%   +0.5%

NY Gold            433.60    -0.3%  -0.6%   -0.8%

NY Silver            7.34    +1.1%  -0.1%   +8.1%

Light Crude Oil     53.78    +4.4%  +4.4%  +23.8%

CRB Index          309.16    +3.0%  +3.0%   +8.9%

30-Yr Bond Price   112.97    -0.4%  -0.4%   +0.5%

Dollar Index        82.53    -0.1%  -0.1%   +2.1%




MARKET POSTURE

The following is the market posture suggested by our mechanical, trend-following tools. These are not short-term trading signals. See the Weekly Commentary for qualifying comments and caveats.




                                Days   Index   03/04   Points  Percent

Index          Posture    Date  Elap  @Start   Close      P/L      P/L

-------------- ------- -------- ---- ------- -------  -------  -------

Stocks (SPX)   Bullish 10/29/04  126 1130.20 1222.12   +91.92    +8.1%

Gold           Bullish 02/28/05    4  436.10  433.60    -2.50    -0.6%

30-Yr Bond     Neutral 09/16/04  169  112.56  112.97     ....     ....

Dollar         Bearish 02/28/05    4   82.52   82.53    -0.01    -0.0%

CRB Index      Bullish 02/11/05   21  286.18  309.16   +22.98    +8.0%

Crude Oil      Bullish 01/24/05   39   48.81   53.78    +4.97   +10.2%


ANALYSIS

VALUATIONS: Bearish. With the S&P 500 P/E at 21 it is above the top of its historical range of 10 to 20. Falling prices and/or rising earnings can correct this situation over a period of several years. Historically, prices have either moved sideways in a wide trading range for a decade or more while the P/E dropped (see the 1960s and 1970s), or they have dropped quickly so that valuations are brought in line primarily by price correction (see 1929 to 1932). Regardless of how it finally resolves, I expect the long-term corrective action to last until the P/E is around 10 or lower.


CYCLES: Bullish. Prices are moving up from a 20-Week Cycle trough. Assuming that a bullish cycle bias persists, we should look for a price top associated with the 9-Month Cycle around the end of April.


SENTIMENT: Neutral. The Rydex Cash Flow Ratio is about midway its two-year trading range, which makes it medium-term neutral. It is also midway its trading band structure, which makes it short-term neutral.


SEASONALITY: Bullish. We are in a six-month period of bullish seasonality until April 30. The next period of short-term favorable seasonality begins March 30 and ends April 7.


MARKET TREND: Rising.


MARKET CONDITION: Neutral. Medium-term indicators are still rising in the neutral zone, but short-term indicators are becoming a little overbought.


TREND BIAS: Neutral. Because the uptrend has resumed, the next short-term overbought condition may not stop prices from continuing to rise; however, we must assume that Trend Bias is neutral until proven otherwise.


GENERAL DISCUSSION: Alan Newman, one of our TAC contributors, asked my permission to use our Investors Intelligence Advisor Sentiment chart (the 1978 to Present version) for one of his web site articles. He drew a rising trend line on the Percentage of Bears portion from 1994 to the present, which emphasized how advisors have been less inclined to be bearish since 1994. It is really quite remarkable to note that the Percentage of Bears hasn't come close to triggering the 50% threshold (signaling a price bottom) since 1994, not even during the 2000-2002 Bear Market that took the market down 50%.

When we can't get close to 50% bears during the worst bear market in a quarter century, I think it represents a secular change in the way people are viewing the market, and it is not a good thing at all. Secular changes don't give good timing signals, but they do provide us with a warning that the ice is getting very thin. During the 1990s people became indoctrinated to the view that the stock market was the best (the only?) place to invest money for retirement or other purposes -- buy and hold for the long term. The current bull market has only served to reinforce that belief. I does not seem reasonable to me that this situation can continue indefinitely.

Nevertheless, the bull market is not over yet. With valuations above their normal historical range, we ought to be getting nervous, but price action continues to be favorable. Participation is narrowing -- the Dow and SPX broke out on Friday, but the Nasdaq 100 couldn't quite manage the task. I expect that the NDX will break out next week, but its continued under performance emphasizes that the bull market top is probably close at hand. While the NDX is still sluggish, it is encouraging that it did at least manage a Thrust/Trend Model (T/TM) buy signal this week; however, it is by no means a robust signal.

Seasonality and cycle projections are in sync -- the six-month period of favorable seasonality ends April 30, and the 9-Month Cycle is due to crest at about the same time. Of course, neither of these things can be depended upon to perform on an exact schedule, but the fact that they are more or less running together gives me more confidence that an important top will be forming within the next several weeks.

As I said, participation is narrowing. This is not only evident in the failure of the NDX to keep pace with the Dow and SPX, but most notably in the indicators we use to measure participation. Stocks above their 200-EMAs, percentage of PMOs rising, and percentage of PMOs crossover buy signals are generally much more anemic than at the January and mid-February tops. We could put this in a positive light by saying that they still have plenty of room to go before they are overbought, but it is probably more realistic to acknowledge that they have formed negative divergences and are not consistent with a market that is making new highs.

BOTTOM LINE: The breakout on Friday was long awaited and expected. Most short-term indicators are not excessively oversold, so we should see immediate follow through next week, although it is possible for the market to continue higher at a slower, more tedious pace than we would prefer, consolidating each small step. The worst case would be for the breakout to fail. If that were to happen, I don't think there will be a second chance. A good stop loss would be 1165 on the SPX, but I think the T/TM will provide a safe exit signal.

Assuming that the breakout holds, I expect the market to continue higher until around the end of April, plus or minus a month.

-- Carl Swenlin

**********************

BONDS: On Monday the 30-Year Bond broke down from the rising wedge pattern drawn on the daily chart. On Friday there was a snapback rally back to the bottom of the rising trend line. I still think a long-term top is being put in place.

**********************

GOLD: Gold is rising and is about midway its long-term rising trend channel (see weekly chart). The weekly and monthly PMOs still show long-term internal weakness, but last year's highs could easily be challenged before this rally is over. The XAU island reversal of which I spoke last week failed develop further. Instead the gap was filled, and a subsequent bounce has resulted in another breakout.

**********************

U.S. DOLLAR: The Dollar Index is headed down for a retest of long-term lows. Short-term support is at 82, but the major support is around 78-80. The weekly and monthly PMOs still point toward a long-term bottom, and there is an descending wedge (bullish) on the weekly chart. Nevertheless, our trend model, which is shorter-term in scope, has us in a bearish market posture until (or if) a successful long-term bottom is made.

**********************

CRUDE OIL: Crude oil is still being contained by the short-term rising trend channel on a closing basis. On Thursday oil spiked up above $55, but closed below the middle of the day's range. It is becoming overbought short-term, so I expect that it will be contained by the resistance line drawn across the October 2004 top (about 56.50).

**********************

COMMODITIES: The CRB Index is approaching the top of the long-term rising trend channel drawn on the weekly chart. The weekly and monthly PMOs are rising again, so the top I was expecting has been postponed. I can see the possibility that the CRB could challenge the 1980 highs of 337.60 before the top is finally in place. There is a little intrinsic strength, but commodities prices are primarily being driven by weakness in the dollar.

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THE PUBLISHER OF THIS NEWSLETTER IS NOT A REGISTERED INVESTMENT ADVISOR. INFORMATION HEREIN IS INTENDED TO ASSIST RESEARCH AND SHOULD NOT BE CONSTRUED AS A RECOMMENDATION TO BUY OR SELL ANY SECURITY.
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