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Today's Market WrapUp 07.17.2007 Mon Tue Wed Thu Fri Barbera Archive Unforgettable Perhaps if we were trying to hum a few bars to describe the current love affair investors have with global equities, the great love song “Unforgettable” by Nat King Cole would come to mind. “Unforgettable, in every way, Unforgettable, that’s how you’ll stay,” as this advance in equity markets around the world will likely come to an “Unforgettable” end in the weeks ahead. In fact, perhaps an even better song title would be “Unsustainable” -- as that’s what this is. Indeed, “Unsustainable” encapsulates the way we view the runaway advance that has been on going for these last 12 months, starting at the low in late July of 2006, and on a cyclical basis, dating back to the major lows of 2002. Perhaps nowhere in the world has become more “Unsustainable” than the Pacific Rim, which we thought deserved the lead spot in today’s article. A positively unyielding advance, the PACRIM has been on a tear as illustrated by the continuing strong gains seen in 2007, building upon the gains recorded in 2006.
Yes, we know that South East Asia will likely be the center of growth for the coming decade, and that wealth is rising in the East. On the secular case for Asia, we find no argument, --‘no cause for pause,’ as the portrait of a fast growing Asia will likely dominate the economic landscape for years to come. Yet, being long time students of the market, we are also aware of the fact that historically, no trend has ever moved in a straight line, as the pattern of human progress has always been detailed in the vein of two steps forward and one step back. At the moment, we wonder whether markets have simply moved for too long a period in one direction, and whether they are now becoming overdue for that one step back. Of course, we have often discussed the Shanghai Market in these pages in recent weeks. Having blown past 2,000, 3,000, and 4,000 all in the last 15 months, is Shanghai the current day revival of NASDAQ 5,000? In our view, the answer remains very likely, YES, as the Shanghai market has come off a set of important highs seen in the low 4,300 area over the course of the last few weeks. Thus far, the decline in the Shanghai Market has been contained, holding near the very important lows seen on June 5th and July 6th at the 3,650 level. As of last night's close of 3896.19, the index remained below the 50 day moving average (resistance at 3917.04) and above the 100 day moving average (very important medium term support at 3545.18). At present, the 100 day or 20 week moving average is rising approximately 10 points per day, and will shortly be reinforcing the support at 3,650.00. In our view, that would add extra importance should the market at some point break that 3,650 level, as that would no doubt kick start a much larger, and more sustained decline. Another hint at the possibility that a large decline is in the offing comes from the action of the medium term MACD – momentum gauge shown in the next chart. Looking back, we note that MACD peaked in January of 2007 for Shanghai and made lower, ‘failing’ highs even as prices made new higher highs going into the Double Top peaks of late May and late June.
Below: Shanghai Composite with the Daily Intermediate MACD Gauge, now moving below zero. Note extensive momentum divergence.
Could this market merely be setting up an extended sideways consolidation, one in which prices ‘work off’ the over-extended condition with a flat, perhaps ‘triangle’ type consolidation? That is possible, although given the high volatility that has punctuated this market, for now it is probably too soon to tell. In looking closely at some of the hourly gauges on Shanghai last night, I noted the possibility of one final short term rally toward the low 4,100 area over the next few days. In my view, there is now very strong price resistance filling in at the zone between 4,130 and 4,160 and that looks like it should be a difficult area for the market to sustain any move above. While 4130-4160 looks likely to contain the market over the next 5 to 10 days, any two consecutive closes below the 3,650 support zone would, in our view, tilt the scales firmly into the bear camp, with a close below 3,600 signaling the likely death knell for the bull. Of course, another market which is closely aligned with China’s Shanghai Index is the Hong Kong market, measured and tracked by the Hang Seng Index. Over the last few weeks, the Chinese “H-Shares” have been leading the Hong Kong market ever higher with the Hang Seng up 2,442 points or 11.84% in just the last five weeks. Since the mid-March low, the Hang Seng has been up 12 of the last 17 weeks. What’s more, over the last year, the Hang Seng has now been up 36 of the last 52 weeks! That’s an amazing 69.23% of the time where the index has closed the week ending higher. What does history say about this type of one sided advance? Going back to 1969 on a weekly basis, we find that the all time record for the Hang Seng was set back in March 1973, where for the balance of that month, the Hang Seng was up 39 to 40 weeks out of the prior rolling 52 week calendar. What followed that extended ‘hyper-blow off’ was also quite memorable. Namely, a market decline that lasted 21 months during which time the Hang Seng fell from a peak on March 8, 1973 at 1774.96 to a final closing low of 157.21 the week of December 13, 1974 -- a total decline of 91.15% in 21 months. Since then we have seen a number of important market peaks develop with readings on the “Weeks Up Per 52” gauge in the 34 to 36 week zone.
Above: “Weeks Up Per 52”, thru last Friday’s close, the Hang Seng has now been up 36 of the last 52 week or 69.23% of the time during the past 12 rolling months. While no indicator is ever perfect, very long advances often come to an end with the “Weeks Up Per 52 Gauge” in the +34 to +36 range. For the Hang Seng, the major market peaks of 1980, 1987, 1994, 1997 were all highlighted by the same type of extended market condition we see present today. The peak readings associated with those highs were: 11/14/80 +35 weeks, 11/21/80 + 35 weeks, 9/11/87 +36 weeks, 9/18/87 + 36 weeks, 12/3/93 +35 weeks, 1/7/94 + 34 weeks, 7/25/97 +34 weeks, 8/1/97 +34 weeks, and leading into a serious correction in March 2004, +34 weeks. Again, thru last Friday, we have now seen 36 weeks out of the last 52, where the Hang Seng was higher matching the readings last seen in September 1987, just before the great crash.
Above: the Hong Kong Hang Seng Index with 2 year moving average (top clip-thick line) and 14 week RSI (lower clip). So far, RSI is failing on the latest rally. Other factors we are watching in our analysis, include the usual battery of momentum indicators which for Hong Kong, are to this point still NOT confirming higher highs. Using the Wilder 14 Week RSI, we note that the momentum peak for the Hang Seng was seen back on November 24, 2006 at a value of +77.92, and on January 5, 2007 at a value of +77.76. Back then, the Hang Seng was in the 19,250 to 20,200 range. Flash-forward to July 2007, and we see a recent peak value of +74.67, with prices near the 23,000 mark. As a result, while the index had a fair amount of room available to it, in order to run up and become ‘overbought’ following the mid-March lows, we have not taken up the bulk of that slack, with what appears to be a potentially final failing rally. Yet another element, we observe is the concept of “Time Spans” which we calculate on common place movements seen in all things traded. Note on the chart above, that the RSI moves back and forth like a pendulum, between overbought and oversold. Note that prices routinely move above and below their moving averages, and back and forth between Bollinger Bands. In traded markets, these price swings are routine and commonly observed by all technicians. In our work, we pose the question to the computer, “how long has been since this event was last seen?” In the case of the Hang Seng Index, we plotted a simple two year moving average of price and asked the computer, “How long has it been since the index lasted closed below the two year moving average?” The answer to this question is pretty amazing, as at the present time, the Hang Seng Index is now pressing the outer limits of past historical precedent having now gone 206 weeks WITHOUT a close below the two year moving average. The last time the index was below the 2 year moving average was back in July 2003. Prior to that, the three other longest time spans ever seen ended at 217 weeks 11/25/94, 164 weeks 10/23/87, and 190 weeks 10/16/81. None of these prior three long dated time spans ended with a gentlemanly decline, as the index ‘doubled back, suddenly, and with little warning” into serious 25% to 40% plus declines.
Above: the Hang Seng Index weekly going back to 1970 with Time Span Counter on lower clip tracking the number of weeks it has been without a close below the 2 year moving average. We are pushing historical limits, and the 2 year average is a long way down. With the Hang Seng Index ending last week at 22,953.94, its two-year moving average closed at 17,535.48, implying a decline of nearly 5,400 points or 23.6% just to generate a close below the moving average and end the long dated Time Span. So what about other Asian markets? Are they also historically extended? Our short answer is: You Bet They Are! with some implications present for a downside reversal sometime fairly soon. Let’s take a moment and look at South Korea, where the KOSPI Index has been blowing off in a classic parabolic curve. Since the mid-March low of 1375.84, the KOSPI Index has advanced to a recent value of 1784.44, a gain of over 400 points in four months, or 29.69%. That annualizes out to a gain of nearly 90% per year. Clearly, nothing can sustain that type of advance without a corrective breather. In our view, that “breather” is likely dead ahead, as the market has now gone a hefty 70 trading days where it has remained above its 50 day moving average. Over the last 10 years, shown below, we have only moved beyond 70 days on four prior occasions, each one of which was followed by a substantial pull-back and/or consolidation.
In addition to the over-extended short term condition of the Korean market, we also note that the market has had an incredible run, rivaling that of Hong Kong in early 1973 wherein the Weeks Up Per 52 gauge is currently just under 40, at a reading last week of 39. That means, the South Korean market has closed higher, 75% of the weeks comprising the last 52 weeks on a rolling calendar basis. Put another way, it has been minting money, and has been the quintessential “one directional’ market. Can this continue indefinitely? History says the answer is No. With the next few charts, we show similar phenomenon in Singapore, Australia and Taiwan, rounding out our view of what presently a very historically extended group of Asian markets. Will the long-term trend remain up for these markets? In our view, the growth trend in Asia over the long haul is virtually undisputable. Yet, consulting prior history tells us that the trend of progress will be punctuated with sizeable counter-trend moves, which many of these markets suggest could soon be close at hand.
Above: the South Korean KOSPI Index with “Weeks Up Per 52” gauge. Historically, over-extended at a reading last week of 39 weeks.
Above: the Singapore Strait Times Index with Weeks Up Per 52 now at 39 to 40 over the last three weeks.
Above: the Singapore Strait Times Index (1970 to present) with its 2 year moving average and lower clip, a Time Span counter showing the number of weeks it has been since the index last closed below the 2 year moving average. Like Hong Kong, Singapore is historically overdue for a major reaction back to the moving average.
Above: Australia and the All Ordinaries Index and its 2 year moving average. We are now on the third longest streak ever seen going back to 1972 on the AllOrds, with both prior streaks this long ending in sharp declines. Will it happen again ? We’ll see.
Above: The Taipei Weighted Composite Index, at the classic reading of 34 on the Weeks Up per 52 gauges. Taipei has also seen a scorching advance, up nearly 23% since just mid-March. Markets ended Tuesday in mixed fashion with the S&P 500 closing lower by .15, to end the day at a reading of 1549.37. Elsewhere, the DJIA and NASDAQ gained ground with the Dow ending higher by 23.25 index points to close at 13,974.23, and the NASDAQ adding 15.00 to close at 2712.33. The Ten Year Bond ended up +.04 basis points to close with a yield of 5.08%, while nearby August Gold ended lower by $.40/oz to close at $666.20. That’s all for now, Frank Barbera Copyright © 2007 All rights reserved. CONTACT
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