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Moving on to the large cap stocks, something interesting of note on the above 30 day Stochastic chart, and the 14 day Stochastic chart that follows is that whenever the Slow measure rises to near 80.00, we invariably see a multi-week, several hundred point decline shortly thereafter. As of Friday, September 1st, the Slow on the 30 day Stochastic is 80.67, and on the 14 day Stochastic it is 79.33. The probability of a decline — often significant — is high whenever the percent of Dow Industrials stocks above their 30 day moving average rises above 80.00 percent. In fact, on page 4, we show every instance this happened over the past two years. There were 8 occasions when this occurred and 11 prior occasions if you include three that got close to 80.00 readings. All but one generated declines of several hundred points shortly thereafter. The one that did not resulted in a smaller decline, yet still a decline, and 60 days later we got a sharp decline. We sit Friday, September 1st, 2006 at 83.33, a twelfth occasion. So, if history is any lesson, we have a 91 percent chance of a sharp decline occurring over the next several weeks. Further, if we consider the percent above 10 day measure, the probability of a decline — often significant — is high whenever the percent of Dow Industrials stocks above their 10 day moving average rises above 80.00 percent. On page 5, we show every instance this happened over the past two years. There were 19 occasions when this occurred, and 21 prior occasions if you include two that got close to 80.00 readings. All but three generated declines of several hundred points shortly thereafter. The three that did not resulted in either a smaller decline, or a sideways move, and within 60 days later we got sharp declines. We sit Friday, September 1st, 2006 at 90.00, a twenty-second occasion. So, if history is any lesson, we have an 86 percent chance of a sharp decline occurring over the next several weeks.
For some long-term perspective on why we sometimes sound so dour on the markets, the above chart makes the point. The S&P 500 is still below its 1999 price level — and that is on a nominal basis, shown with the royal blue line above. If you adjust prices for inflation, the S&P 500 is light years below its 1999 level. That is 7 years ago. Seven. Seven years ago. No gains in seven years. A loss after seven years, both in nominal and real dollars. Interestingly, we sit at a major resistance point right now. The S&P 500 hit the long term downward sloping trend-line from back in 2000 this week. That trend-line has four touches, and this week was the fourth. Another point to make from the above chart is the anatomy of a Bull Market. The green lines show how the slope flattens as a Bull Market matures. At the beginning of a Bull market, the slope is more vertical. At the end of a Bull market, the slope flattens. The purple lines show that the slope of the Bull market from 2003 has flattened to a similar level seen at the end of the 1990’s Bull market. Still another Bearish point to make here is that the MACD, the Moving Average Convergence/Divergence Line has formed another Bearish divergence with S&P 500 prices, very similar to the topping process back from 1998 to 2000. It takes being a cock-eyed optimist, or having full faith in government intervention, to see a long-term Bull market rally continuing from where we stand today. That said, there is an important election coming in November, and M-3 is hidden, so mischief can reign for an hour. “And
the beast, which was and is not, is himself also
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INFORMATION The opinions of FSU contributors do not necessarily reflect those of Financial Sense. |
