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Today's Market WrapUp 12.04.2007 Mon Tue Wed Thu Fri Barbera Archive Marathon Man In last week's comments we pointed out that US Stock Indices were at a point where a potential stock market rally was a distinct possibility, if not a probability. While our commentaries in these pages tend to focus upon the big picture and the broad economic trends, we had noted a number of technical indicators were compressed enough to suggest a serious rally. We stated, “This is not to say that over the very short term, with stock market indices oversold, these stock indices could not experience another trading rally.” AND, “While it is again very possible to see a reasonable bounce in the American share market off an oversold condition near term, the bigger picture is one of distribution and a building top.” Since then, the US Stock Market has indeed enjoyed a sharp trading rally with the S&P 500 moving up from a low last Monday/Tuesday of 1406 to a recent high of 1489, a gain of nearly 6% in just a few market sessions. Yet, does this really change anything? In our view the answer to that question is absolutely not. For some time, going back to the beginning of 2007, it has been clear to us that stocks were in the 8th or 9th inning of this cyclical bull. Where “Time” is concerned, you can never be too sure, but like the Pirate's Code in “Pirates of the Caribbean,” there are certain “guidelines” we can lean on to at least give us a pretty good idea. In that spirit, it has been painfully clear that the S&P is overdue for a serious down cycle decline. In the chart below, we show the S&P 500 going back to 1950, wherein we have plotted the 50 Week Bollinger Bands. On the bottom clip, I plot the Barbera Time Span Counter which tracks how many weeks the S&P has gone WITHOUT hitting the lower 50 Week Band. Through Friday of this week, it will be 269 weeks with no contact on the 50 week lower band. That’s the second longest streak of the last 57 years, surpassed only by the streak which ended at 303 weeks on October 6th, 2000. While an ardent bull could state that this type of situation was the case earlier this year -- and it was -- with every passing week, we would seem to be moving one step closer to the final cliff.
Earlier this year, we pointed out a number of these long dated Time Spans which we review and update for you in today’s report. With regard to the 50 Week Lower Band we stated, “After all, a daunting Bull could argue well, maybe the S&P will run out the string a little longer. It did 303 weeks one time, and we are “only” at 222 weeks right now. What if it got closer to the 300 week market? That could mean it stays up for nearly another 80 some odd weeks, right? Wrong. One must always allow for time spent moving down as more often than not, declines to go from Point A (the upper band) to Point B (the lower band) chew up considerable amounts of time, all of which is included in the ongoing cumulative tally which does not stop until the S&P closes below the lower band, on a Friday close. So on that level, allowing 40 to 50 weeks for the market to decline, the current advance would hypothetically already be even more mature at between 262 to 272 weeks. Still, a bull can argue that market could go higher and possibly blow off a bit more, or simply hang out at these levels awhile longer.” In that vein, well, “hang out” it has as prices have moved in a giant sideways pattern for the S&P for the bulk of 2007. Note, that at 269 weeks and counting, we are now right in the heart of that extended time duration period of 262 to 272 weeks which we alluded to back in January of this year. Over the course of this year, the S&P has managed to “hold up” even though fundamentals have not just worsened, but have deteriorated dramatically. Thus, there exists an unusual and rare circumstance of a market trying to ‘decouple’ from its underlying deteriorating fundamentals. In this author's nearly 30 year stock market career, which harkens back to the late 1970’s and early 1980’s (a time of stagflation not unlike today), there have on several occasions been times like this. During those time periods, when orderly declines failed to materialize and adjust prices in the normal course of things, dis-equilibrium was ultimately countered by fast moving, disorderly declines, ‘violent declines’ which inflicted much greater harm and larger quantities of pain. So it is once again, where the stock markets valiant efforts to stay buoyant seem to be fighting the still building violent headwinds of broad based sinking fundamentals. In the chart below, we see the S&P (the thin line) and its YTD horizontal zero line cast against the Financials (thick line) and there breakeven horizontal line (also thick). Note that the Financials have collapse better then 20% and the S&P is still up 4%.
In the next chart shown above, we show the Homebuilders versus the S&P, with the Homebuilders once again in Bold. Here we are looking at a more then 60% decline this year, and still the S&P is up 4%. Bulls argue that the ‘problem is contained' and it is on that basis that the S&P still resides in YTD positive territory; that, and perhaps the fact that a lot of fat cats on Wall Street want their large bonuses and need a positive stock market. Yet Wall Street fat cats aside, do you see the disconnect? When this disconnect is reconciled, when the market seriously addresses or is forced to address the question of, “Is it Contained?”, the outcome is likely to look like a gruesome scene from the 1976 movie “Marathon Man” where in Dustin Hoffman was tortured by an evil dentist asking the question, “Is it Safe?” The shouts from a sinking stock market may resonate in an all too similar fashion with a forthcoming bear market, likely to be a downside marathon event – one few will have the constitution to endure.
In the next chart, we show a long-term view of the S&P 500 with its 39 week or 200 day moving average. This moving average just turned down for the first time in several years by a measure of .27 points on the S&P two weeks ago. It turned down for one week and only one week, and is now rising once again. In the Time Span Counter shown in the lower clip we ask the question, “How long has it been since the 39 week moving average for the S&P has turned down for four consecutive weeks?” Here again, the answer is virtually a record amount of time going back over the last 57 years. Thru this Friday, it will be 238 weeks, a time span surpassed by only the “once in a generation” mania seen during the late 1990’s tech boom. Ex-the Tech Boom, this stock market is due, way overdue for a more serious decline, a decline that in 2007 has at times started, but been thwarted from fully materializing. In markets, there are certain immovable forces, and when markets are extended like this, their very nature of being self-correcting tends to come to the fore, plunge protection team or no plunge protection team.
In addition to the S&P, other averages are also showing all sorts of earmarks that hint at a maturing bull. In the case of the DJIA, we plot a chart above with the 50 day and 200 day moving averages. A very popular combo, known as the ‘Golden Cross,’ the 50 day is the equivalent of a 10 week moving average, with the 200 day (allowing for holidays) the equivalent of a 39 week moving average. So, we asked the computer to show us, “How long has it been since the 10 week crossed below the 39 week MA?” For the DJIA, we went back to 1920, a period of 87 years. Once again, we are looking at a mature cycle where the Time Span Counter is climbing steadily higher.
For the DJIA, another long term time span can be seen by comparing weekly prices with their two year moving average. We detrend the data to get a long term price oscillator which is then smoothed using a 10 week moving average. Here again, note the pendulum affect of prices moving up and down through the zero line. A couple years above the line, a couple of years below. ‘Action and Reaction’ is the name of the stock market game. Where are we now? Well, back at the same time total Time Duration seen at the 1929 high, that’s where! Nearly twice the Time Duration of the 1973 peak! In other words, “trusting” the stock market at these levels is like handing a knife over to a serial killer and hoping for the best.
And finally, getting back to the S&P, there is still more evidence to consider. In the next chart shown above, we plot the 9 week RSI for the S&P 500 with a horizontal lower line set at +30. For the 9 week RSI, the conventional parameters of overbought and oversold are +70 and +30. Clearly, we see evidence on this graph of the markets ‘pendulum’ affect, its tendency to self correct and move back and forth between overbought and oversold values. Note how many occasions we have seen sub +30 oversold readings. Now, in the close up chart shown below, we zero in on just the last few years. Notice anything in particular? As it happens, there has NOT been a full reading on the 9 Week RSI below +30 since the middle of 2002. Yes, the market did come very close in August 2004, but close does not count.
As we can see by way of the Time Span counter on the lower clip, it has now been an amazing 270 weeks without a fully oversold reading below +30 on the 9 week RSI for the S&P 500. This has never happened before. Are we being told that the stock market has fundamentally changed its stripes? Are deep oversold values now a thing of the past? Our answer to that is no way. The Stock Market is driven by human emotion, and while technology and living standards may change, the human psyche has changed very little and as a result, markets still regularly make the trek between extremes of optimism and fear. The Time Span shown above suggests we are historically overdue for a date with “Fear,” and in the spirit of Marathon Man, that leads us to wonder out loud, "Is it safe?" Stocks ended the day with about a 1/2 percent decline, the DJIA finishing down 66.41 at 13,248.16, with the S&P 500 down 9.68 index points at 1462.74, and the NASDAQ down 16.70 index points at 2620.43. Gold moved higher gaining $14.10 to finish at $802.40 with the 10 Year Treasury Bond ending with a yield of 3.89%. That’s all for now, Frank Barbera Copyright © 2007 All rights reserved. CONTACT
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