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This is clearly shown in the chart of the S&P 500. Last week, it appeared that the neckline of a HAS pattern was broken. This would have suggested a price objective of about 1130 on the S&P. Instead, short sellers got whipped. The S&P closed just above its 50 day moving average on Tuesday. With good news out of Google, followed by a rosy State of the Union Address, and in spite of Amazon’s negatively perceived outlook, it appears that we are likely going to higher prices. Note that as the recent whipsaw developed, the appearance of relatively high volume signaled the potential for pattern failure and subsequent whipsaw. In a successful HAS reversal, following breakdown of the neckline, a low volume test of the neckline from below is common before the new downtrend resumes below the neckline. The index formed a broadening pattern in the Fall of ’04, and it appears that it may be making a second broadening pattern. This signals a market that is being whipped around by wild rumors and public participations as described by Edwards and Magee, and in this space last April.
The same situation exists with the small capitalization Russell 2000. Note how an intermediate uptrend has been broken. The bearish implications of the broken uptrend deserve respect. I think that the character and magnitude of the in-progress bounce will give us a clue as to the future intermediate trend of the market.
The action of the mid-cap stocks shows that they have leadership in the US market. Note that the apparent neckline was hardly touched from above. Note that the mid-caps also led the end of the technology stock market bubble compared to large and small caps. Is this the “echo bubble”?
The transportation average is showing that the faster they rise, the faster they fall. The companies that make up the transportation average are among the most visible out there; yet in this recent rally, they traded like speculative stocks delivering a steep and linear uptrend. If the formerly loved transports recover, this could spell more time for the bull to run its course. Yet if they falter, it will have bearish implications for the broader market. There appears to be some minor resistance near the 50-day moving average. The steep trendline has been decisively broken just after the New Year. With most of the indices showing somewhat bullish candlesticks on Wednesday, the Dow Transports put out a neutral doji. This is more evidence of newfound laggard-ship of the once-hot transports.
Similar action is occurring in the Real Estate Investment Trust Index. This sector was a leader of the rally from the August bottom. Yet this index is faltering and appears to be the weakest of those discussed tonight. The drop was too steep to discern any clear technical reversal pattern, yet the price action relative to the S&P 500 has produced a clear head and shoulders pattern. Thus far, the neckline has not been broken, and the 50-day moving average appears to be a distant memory. With the long bond performing well, this begs the question why the severe and decisive break in the REIT stocks? Wednesday, the REIT index put out a bullish gapping candlestick. Is this yet another whipping for REIT bears?
The S&P retail index has traced a broadening pattern. These patterns showed up in 1929 for individual stocks prior to the crash, and were rare since then – until recently. Yet today we see broadening patterns in entire sector indices. The chart below illustrates the S&P retail index. These patterns are difficult to trade on, yet their appearance indicates a market that is anything but healthy in the intermediate (months to a year) term. The completion of the pattern would occur when (if) the retail index breaks below 360. With valuations such as they are, one cannot rule out a result similar to ’29 – maybe not this week!
Know Your Long-Term Trends and the Big Picture The difference between long-term from intermediate and short term trends are similar to the difference between investing and trading. Investing with the long-term trends and trading with intermediate and short-term trends is generally the best strategy to employ. Short-term trends aside, it is clear that oil, oil service, gold and silver are in bull markets. The dollar is in a bear market, and bond prices appear to be heading down.
Silver has gotten hammered in the short -term, yet the size of the market is probably the reason for its short-term volatility. These fluctuations are nothing for “investors” to be concerned about; yet it would be advisable to keep position sizes appropriate for portfolio sizes. It's best to not put one’s self in the position where he will lose sleep due to short-term inevitable fluctuations.
As you can see from the long-term chart of oil below, the fundamentals are good and oil is in a bull market. Let the talk of OPEC meetings and the weather be a concern to the traders and speculators. As an investor, it’s easy to see that oil is in a bull market.
While everyone is getting excited about the stock market’s action, it is important to note that the last rally was sparked mostly by a depreciating dollar. Here’s a chart I wouldn’t want to buy into during a period of historically high interest rates and historically high valuations.
Stocks tend to do poorly during periods of rising interest rates (and lower bond prices), with the preponderance of short-term rallies occurring on news of slowing economic growth or some other negative piece of economic data. Yet looking at the 3-year chart clearly indicates that the bond price trend is down.
Is there a potential flaw in the analysis that suggests the interest rate trend is up and therefore, stock prices will go down? Utilities are not confirming the upward trend in interest rates. The Dow Jones utility average is in a clear bull market. Yet the bull market in utilities could be related to the falling dollar and investors parking money in utilities – an investment in tangible value, which cannot be diminished via monetary alchemy.
Today’s Market Following the President’s State of the Union Speech and poor results from Amazon.com, the stock market was little changed. The Nasdaq sold off a bit, while other indices finished little changed with a downside bias, all on relatively low volume. Additional weakness was shown by Cisco, which closed right on its head and shoulders neckline. I believe if Cisco decisively breaks the neckline on no company-specific news, it could signal trouble for technology stocks in general and speculative Nasdaq in particular. Yesterday saw Countrywide Financial, a purveyor of variable rate and consumer debt get hammered. When I saw this yesterday, I was surprised to see two other similar companies hold up pretty well in the market – Accredited Home Lenders (LEND), and Bank Rate, Inc. (RATE). But today both of these stocks sold off by 14 and 16.6%, respectively. In spite of this, Americredit (ACF) sits right near its 52-week high with a bullish chart and similar to its stock market peers, lots of short interest. In spite of the cracks, Fannie Mae and Countrywide are now sitting on support. As with the technology stocks, failure to hold support typified by the chart of Countrywide below, will be technically important and signal the time for bearish positions to be taken against the bursting of the Fed-induced consumer debt bubble. Unlike Fannie Mae where the action seems to be dominated by, ah-hem, “institutions,” I think the action of the private loan companies may be more telling of the condition of the consumer in the economy.
In a close, but separate sector within the age of the American Consumer are the homebuilders which just keep heading higher. This truly astounding runup in the stocks will probably end ugly; yet so far, it refuses to crack. Last fall after the Las Vegas/Pulte price decrease, these stocks appeared to crack, yet the technical damage was quickly repaired and the event was forgotten in the stock market.
Tomorrow, the monthly unemployment numbers will be released by the government. I’m predicting that the number will be right where it needs to be to not spook the bond market too much, and at the same time, not refute any of the optimistic tones of the speech given by the President last night. So to summarize, I think the number will beat expectations “by a penny.” The dollar is bucking up against short term resistance and looks like it wants to go higher. I feel that this is consistent with the unemployment statistic beating expectations “by a penny.”
The 10-year Treasury note appears to be truly undecided as can be seen in the chart below.
Even though oil was down today, the oil stocks I own seem to be acting well. Crude oil was down 0.24 cents closing at $46.45 a barrel.
Here’s the story on gold. It’s either an excellent entry point, or its getting ready to breakdown. As a fundamental gold bull, I took this opportunity to speculate with a stop loss, that the trend line will hold. We’ll see how that trade works out.
Peace. Martin Goldberg
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