Trouble in China?

Stocks bounced around yesterday during a relatively light volume trading day. The Dow was down over 40 points at one point, and up over 50 at another. It finished modestly higher but small caps and the tech heavy Nasdaq did very well.

The night before last, China's Shanghai Composite reached an all time high of 4,336, going beyond where we thought we'd see some resistance. Tonight is a different story (I am writing this Tuesday night) as the index is down a whopping 4.5% with about half a day's trading to go. This could affect not only the other international markets, but the U.S. markets as well. To be honest, I don't even know what is causing it as I am still in vacation mode and don't really care. I will care what happens, but not so much why.

Today (Wednesday) the FOMC meeting minutes will be released and that could cause some fireworks. But other than that, it could be another light volume trading day. That is unless there is something serious going on in China. Whatever it is, I'm sure we'll read more about it today.

I posted the June historical data chart at the bottom of the page. It looks like June tends to come in strongly, but last year we did get a decent dip beginning on the first Monday of the month.

I will leave you today with Trader Fred's new commentary. It seems we have yet another submodel moving to a buy signal:

UPDATE: Close of Business Tuesday, May 29, 2007

Submodel Z gave a Buy signal, so it is now participating in this trade. That means there are now four submodels that have given Buy signals: A, W, X, Z. The TSP Trade system is in the market. The stop for the trade remains unchanged at $16.69 using the C Fund. The C Fund had a small percentage gain today, as did the C, S, I Fund allocation. Overall, this trade is within a third to half a percent of its previous high prior to last week’s excitement. Checking in each day with the TSP Talk web site is recommended during a trade.

The first image shows the C Fund’s Gain-Strength chart. This chart shows how the market is behaving during this submodel trade. The Loss—Gain value (horizontal axis) has moved back into the Gain region. The market strength value (vertical axis) remains unchanged. Heading East is a desirable direction during a trade.

The overall market strength (blue line) is unchanged, and continues above green line in the second image. This means the market has entered a period of strength. This chart is a leading indicator of the market’s behavior by at least week or more. The vertical location of the black line has no relationship to the vertical location of the green or blue lines, whose scale is on the left. The C Fund (black line) scale is on the right.

The historical back testing results for Submodel Z are given below for general information. The possibility always exists a submodel trade may not be profitable. Investing in the stock market is always a gamble, as past performance does not guarantee future performance.

Submodel Z Stop Rules

1. Historically, there have been 25 Submodel Z trades from mid-July, 2004 to April 2007.

2. Those Submodel Z trades lasted for about two weeks. The total time in the market went from a week to a month.

3. The average gain during the back testing for a Submodel Z trade was just under one percent.

4. The gains and losses went from +2.0% to -3.5%.

5. 8 of the 25 Submodel Z trades during the back testing did not have a daily loss during the time the trade was in the market.

6. 17 of the 25 trades did experience one or more days when they lost money during the back testing.

7. 10% of the days the Submodel Z trade was in the market there was at least one day that had a loss of between -0.1% and -0.5%.

8. 15% of the days the Submodel Z trade was in the market there was at least one day that had a loss of between -0.5% AND -2.0%.

9. 9% of the days the Submodel Z trade was in the market there was at least one day that had a loss of between -2.0% AND -3.5%.

10. Based on the back testing and using the C Fund, the stop for Submodel Z is if on any one day the percentage loss is greater than or equal to -1.5%, then the trade is exited the next morning.

-- Trader Fred