Monday Dec 20 2010
For complete transcript including the graphs, drop us an e mail at [email protected]
We have consistently told you that the market is still headed up. We read other frustrated blogs and letters of bears that are continually disappointed, and separated from their money by the bull. Yes the internals are weakening but the time to be aggressively short has not arrived, yet. Here is a picture illustrating that point.
This is the daily Advance Decline line for the New York Stock Exchange Index. The weekly takes out some of these squiggles but we found this one fascinating. Note that only the fourth wave correction this past summer even dented the 50 day Moving Average. It seemed to me that the five waves up were more clear on this than on the weekly chart. And this begins from the turnaround day March 9, 2009. One can alternately label this as an A B C but in either case we are at some sort of terminal stage.
Market turns often focus on time determined by the Fibonacci time series. By the way have you tried www.timeanddate.com? We used that to determine that 89 weeks (also 21 months) from March 9, 209 (a Tuesday) fell during Thanksgiving week. Note that the apparent fifth wave top occurred the first week of November, which is within a couple of weeks of the 89th week. By Week 89, the A/D line has retreated. Now the NYSE has made a slight new high in price. This is unconfirmed by the A/D line which is lower. So the number of stocks going up is less while the price is higher.
We noted Thursday that there are knights and pawns in the buy and sell game. The selling by insiders (knights) continues at a frantic pace. This chart confirms that despite what you see on CNBC, the smart money is exiting the market. So, our conclusion is that one should be looking for at least a correction. How much of a correction? Bullish patterns typically find support at the previous fourth wave lows. That would be the lows seen this past summer. There is no guarantee the market will fall to that level. If it does it will be necessary to then determine if that is merely a correction or if it is the start of a new larger downtrend. For now no one knows despite what you read and hear.
The weekly total of the number of stocks on the NYSE that are in bullish formation on point and figure charts is on top. The summation index of how many stocks are advancing versus declining is directly under. See the divergence? Even though the number of stocks in bullish formation is up the internals continue to weaken. We noted this in putting the letter together and thought this was a fascinating look at what is really happening. All the money the FED is sloshing back through the market is not keeping internals where they need to be. The reason has to be that the big players, the insiders, are getting out. The ‘weaker hands’ buying from the insiders do not have the literal dollar power to keep the market as high internally.
Breadth is declining. In the lower panel, MACD is also confirming this fact. The Moving Average Convergence is lower than before.
Remember that insiders are selling big blocks of stocks to the later comers. Statistics on fund flows show that investors are exiting bond and managed stock funds. The money is going into ETFs of foreign and domestic stock funds, why pay a manager when one can simply own the index? Even highly quoted Bill Gross at PIMCO is now embracing the stock market. It is of course ironic that a ‘bond expert’ would embrace stocks after a 21 month stock rally.
This monthly chart connects the 1987 crash low with the post 9/11 low. As one can see the market is now below the long term trend on the logarithmic chart. Everyone thought the 1987 crash was the real deal, not compare that to the last two in 2002 and 2008. Also note that the MACD has been trending down since the 2000 market top.
Reasonable individuals like Mish Shedlock speculate the next market low could be S & P 500 or DOW 5,000. Here is how
it could happen, over a quadrillion ways. Does anyone really believe that a quadrillion dollars of derivatives can be reliably unwound?
Bonds represent an a version to risk, stocks represent the embrace of risk. The red black lines are the TLT a bond fund, the black line is the SPX. This chart demonstrates that the two move opposite of one another. Bonds have made a higher low since April. April was significantly the last big high for stocks. We are at the same place again. My suggestion to buy TLT at 94-95 was early, but it is already back to 93.24. We favor accumulating TLT at these levels.
The transition continues. The stock market is making nominal highs while the internals weaken. Various segments like for profit colleges as well as municipal bonds has already suffered serious setbacks.
The demand for dollars continues. Rating agencies downgraded Ireland to an optimistic A while riots have continued across Europe. Hoping that Germany will bail out the PIGS sets the stage for what will surely be the eventual same story here for CA IL NY. Debt is paid in currency and that currency of the world is still the Dollar.
In a final irony to meet the demand for money the Treasury is the Gang that Can’t Print Straight. Some 1.1 billion $100 bills were quarantined due to printing errors. Apparently the difficulty of producing all the ‘counterfeit fail safe features’ was too much. Leave it to the government that prints money for free, to even get that wrong!
Bernanke has printed money, bought Treasury Bonds from brokers like Goldman Sachs GS, and then GS re-circulates the money into the stock market. The near zero interest rates in the US have encouraged many to borrow cheaply to speculate in ‘developing economies.’ The result has been a near disaster for some of them. EWM is Malaysia in the top panel. Irrational exuberance is such that EWM is now higher than it was at the peak in 2008! Note how quickly it crashed. Speculation has made exports like coffee, sugar, and cotton, shown as DJASO soft index, quite expensive. The cheap dollar policy the US has pursued has made those exports even more expensive. No wonder the President was met with derision at the G 20 meeting in Asia. The bottom panel shows the US Dollar. Now put it all together. Shares or EWM have gone parabolic. Chart wise this is typically the precursor to a crash. Indeed note how much more pronounced the rise in EWM than in 2008. The Dollar moves opposites of EWM and the soft index. The conclusion is that the Dollar is about to embark on a rally, EWM and the Soft Index are, fully priced and probably headed for much lower levels.
At the start of 2008, GDX Market Vectors Gold Shares was bout $55, gold was $1050. Now gold is $1400 and GDX has barely made a new high at $60. Yes gold is being touted as the alternate currency but I have not seen anyone using gold coins yet. The thing to remember is that stocks, gold and commodity prices have all moved together, If one believes that stocks can correct, so can gold. GDX should be $100 if it were tracing gold but it is not. In the bottom panel the MACD looks about to roll over.
On the daily gold chart, the RSI, top panel, peaked in October. Price has struggled since and the PAR just issued another signal, though the weekly has not quite done so yet. Price is way above the 200 day
MA. MACD has been dropping along with RSI, the best momentum is now behind us. Price peaked in November along with stocks, and made on higher high in early December. So we have stocks, commodities, emerging markets, gold, and oil (see next page) topping in our 89 week time frame.
Oil presents much the same picture. It topped in November and made one more high in early December. Energy service companies are also trading at fresh highs. Again note how far oil is above the 200 day MA.
Bottom Line
Markets are once again moving together with stocks, commodities, gold, and oil on one side, all recently making highs.
Bonds and the Dollar are the other side coming off recent lows. We would bet on bonds and the Dollar for the near term.
Comments