Technician: More Weakness Ahead for Stocks; Dollar Could Be Entering "New Structural Bull Market"

Major stock market indexes like the S&P 500 (SPY) and Dow Jones Industrial Average (DIA) made record highs last month before correcting lower. As they were attempting to hold their 50-day moving averages, our featured technician John Kosar at Asbury Research explained why the market had become top-heavy and would see “more pain to come” in the near-term and were likely to get down to their 200-day moving averages before resuming, he believed, their upward trend (you can read his comments here).

Near-term caution on the market was echoed again by our most recent technician on the show, Louise Yamada, as the major indexes attempt to stabilize. She sees “continued deterioration” in a number of key indicators beyond what we’ve seen so far this year and believes this may be the start of a cyclical correction of around 10%.

Here is a partial transcript of her interview that recently aired at Financial Sense Newshour and in iTunes (see here):

Most of the major indexes have broken through their 50-day moving averages. Do you think we’re going to stabilize at these levels or continue to head lower?

“Well I think that given the continued deterioration that we’ve been seeing in the indicators as the year goes on, and now we’re in a situation where new highs vs. new lows is in negative territory, and the new lows are starting to expand, which we really haven’t really seen in some of these shorter term corrections. And the percent of New York Stock Exchange stocks above their moving averages are all the way down to 42 and I suspect that after today's activity, it will be even lower. I think we’ve begun something here that should at the very least be a cyclical correction.”

Would you mind defining a cyclical correction for us just so we’re clear on what you mean? If we were to get as much as a 10% correction, would that be considered cyclical?

“Yes, that would be considered cyclical. A rule of thumb: anything up to a 10% decline off the high is a consolidation. Ten to 20% is a correction, and 20% or more is a bear market.”

What explains some of the differences in performance between the major indexes? Are there some clear warning signs that you’re looking at in terms of divergences?

“Well the [Dow] Transports have really been one of the strongest indices across the board and I suspect that it’s probably because the transportation of oil that's taking place that’s really boosted them. But the other interesting thing and I’m not advocating that we’re looking at a bear market here, but the rails were also the outperformers right into the peak of 2007-2008, which is interesting. But we don’t see the kind of distribution necessarily there [for a bear market]; however I will say the S&P Small Cap and the Russell 2000 have given what we define as a monthly momentum sell signal which they also gave in 2011 so the suggestion here is that perhaps we do see something that is a little bit more than these four percenters that we have seen throughout the year.”

What are your thoughts on interest rates and bonds?

“Bond yields have been relatively flat. I still think the long end is tracing out a multiyear base for an eventual reversal to a new cycle of rising rates. But we know historically that transitions from falling rates cycles to new rising rate cycles have taken two to fourteen years, usually because there is some deflationary pressure, which of course we’ve been dealing with for quite a few years. But it appears to us that the long end has probably seen its lows. Could it go back and test them? Possibly. I wouldn’t be happy to see that, but it would all be part and parcel of an extended basing process in our work.”

Let’s move onto the dollar. There’s a lot of money flowing into the U.S. with continued problems overseas. What sort of move do you see taking place?

“In terms of the dollar, the interesting thing is you had a nice breakout in the DXY itself but if we were to look at the broad trading dollar—the U.S. trade-weighted broad dollar, which includes all our trading partners and not just the top few—that has actually lifted through a 12-year declining trend. So from that perspective we could argue that we’re seeing a new structural bull market for the dollar, [however]…there is no exact correlation between the dollar and direction of stocks—it is very mixed and depends on the situation and the time. But at the moment, I think you’re right, there is a lot of flight away from the lesser performing currencies and the lesser performing economies and I think we’re beginning to be perceived as a safe haven from that perspective. You’re seeing it a little bit more in the dollar that you are in the rates falling significantly, which is interesting this time.”

If we are entering a new structural bull market for the dollar, shouldn’t we expect to see continued pressure on commodities, especially gold, going forward?

“That’s true. I think $1200 on gold is very important. We think that the gold bull market is over for the foreseeable future. That doesn’t mean it can’t get rallies back towards $1300, but I think that we’re at a very critical level here, not only because it’s been the support for almost two years at $1200, but also because it’s the intersect with the 2005 uptrend. I think that is very critical because a break of that would really suggest this long ten year trend is over.”

To listen to the remainder of this podcast interview with Louise Yamada on our site or in iTunes, please see the following links below:

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