Sunday Jan 31, 2011
The Correction Gets a Foothold
We titled last weekend’s update ‘Correction Under Way.’ We showed that five waves appeared to be complete from our buy signal at the July lows. We also showed that the Summation Index for the New York Stock Exchange was decidedly lower indicating reduced market participation in the advance. We suggest readers review January 22, 2011 before reading further, the events unfolded Friday just as the indicators predicted they soon would.
Our purpose of The Market Perspective is to provide a ‘big picture road map.’ This no nonsense ‘cut through the clutter of television news’ approach is based in what the internals of the market are telling us. Now let’s look at the Big Picture.
The Weekly Advance Decline line is in the center chart. The actual index for the NYSE is at top, this is the price you will hear or see on CNBC multiple times per day. At bottom we have the Slope or Rate of Change of the Advance Decline Line. Sadly most math courses bore students so badly that they drop out of school entirely. Math teachers fail to make a connection to a use of math. But here we have practical math on display. Let’s use an analogy to make the point.
When I was a kid in 1954 Canada and the US agreed to construct the
Distant Early Warning Line DEW. The idea was that a line of radar stations in far North Canada would provide an early warning of an over the North Pole missile attack from the Russians. It is regrettable that both sides were not spending that kind of money building washing machine factories or similar modern devices for the Russian people who were shut out of modern society for decades but that is another story.
Our point here is that the Slope in the bottom panel is SORT of DEW line for the weekly Advance Decline line, Which is a DEW line for the stock market. We marked the turn down in 2007 to make the point. We labeled the up downs in green for up and red for down. SLOPE topped in early 2007. Six months later the weekly A/D line NYAD, big panel in center, topped in July 2007. The actually market index at top, the NYSE, topped in price in October, 2007. After that the fate of the market was sealed. The smart money exited, option writing funds were selling at a discount.
The same reliability is evident at the bottom. SLOPE bottomed around November, 2008 at the extreme reversal in number of issues. Look above and the A/D line bottomed in November and again in early 2009. The actual NYSE bottomed in early March, then the bounce back began.
Now what do the indicators tell us? At bottom, SLOPE, the rate of change has been slowing all last year but has not gone negative. Negative means SLOPE drops below the zero line. This has yet to occur. In the center panel the distance between the MAs has widened indicating the top is nearing for the A/D line. Now let’s move our DEW line a bit closer to more recent action on a daily chart.
This daily chart of the same indicators confirms our Summation Index NYSI warning we showed last weekend. The rate of change or advance is slowing in the bottom panel This corresponds to our NYSI at a lower level in the Jan 22 update. In our January 15 letter on page 2 we showed that New Highs had broken down out of a triangle, again an early warning indicator. In our January 8 letter we noted that bond yields were rising while stock dividend rates were falling just as they did in 1987. We warned that eventually this disparity would be corrected in an unpleasant way. This will probably not happen in a big way until later this year but Friday did see a move to safety in bonds and a move out of stocks with the 166 point drop. In the DOW.
So we expect a series of up and down waves between now and some sort of final top probably by June, 2011 ( this could occur sooner). This morning we read that protestors in Cairo are riding on the tanks of the military, a better idea than shooting the demonstrators but certainly no solution. One of my clients returned from Russia about 1990 and predicted that country was finished in 18 months. The Russians had gained a view of the rest of the world with satellite dishes and VCRs and were not going to put up with it. His hobby was constructing custom made fishing rods. He noted that the fishing equipment he saw in Russia in 1990 would not have been competitive in the US in the 1950s. That same consumer dissatisfaction is on display in Egypt, Yemen, Tunisia, and other sub par Arab countries. (no washing machines, lots of tanks.) Negative mood is our earliest DEW indicator confirmed by the technical deterioration we show earlier.
Bonds
Here is the SLOPE indicator on TLT, a fund of long-term government bonds. Despite all the negatives one hears from Bill Gross and other experts, accumulation in TLT is taking place at a third higher low marked by the horizontal blue lines. Our weekly SAR PAR (blue dots) shown in the blue dots has not given a buy signal but note that when bonds broke out the last two times it was a rocket launch event. TLT pays a monthly divided with an annualized yield of over 4%.
Gold
We show the GLD ETF so that we can put the Chakin Money Flow Indicator in the middle panel. Recall that November was 89 weeks and 21 months from the March 2009 low. That clearly marked a top in money flow, which has been going down since. The news event Friday was the riots in Egypt but the tech indicators have been headed down since November. GLD was oversold and ready for a bounce.
Again we highlighted this deterioration on page 9 of our January 15 weekend update using the HUI gold bug index. So alert readers had notice of the change in trend.
Oil
We used USO the oil ETF for the same reason. Oil jumped Friday on the jitters in the med East. There are no oil fields in Egypt. However one would do well to review the Suez Crisis of 1956-7. Today the Center of Islamic Revolution is Tehran, then it was Cairo. Abdul Nasser was then the ruler (President?) of Egypt. He nationalized the Suez Canal. Then Britain, France, and Israel invaded to seize control of the Canal. Faced with defeat, Nasser sunk ships in the Suez to prevent its use. This potential interruption of oil shipments is the reason for US interest rather than the sad state of the Egyptian people. Again, the US has supported dictators with billions of dollars that never made a difference in the lives of oppressed people. Interestingly this got Onassis off to a start in the shipping business in a big way. He had the ships necessary to then haul oil around the Cape of Africa to Europe and America.
Socionomics
We are half way through an 18 year period of economic stagnation. The mood turned negative in 2000. Mood has alternated but basically stayed negative since. The revolving door of politicians around the world as well as ere is testament to wide spread dissatisfaction. Republicans out, Obama in, Democrats out, all in two years.
The Arab World is horribly imbalanced with the rich countries like Saudi Arabia, across the Gulf from Egypt, showing little interest in assisting their poor neighbors in Tunisia and Egypt. The same pattern from 1989 at the Berlin Wall is now playing out in the mid East. Recall that Romania’s Ceausescu and his wife were executed by firing squad in 1989, a scene that no doubt plays vividly in the minds of all Arab state ‘presidents.’
Interested readers might view
Under Fire, a realistic view of the last days of the Somoza regime in Nicaragua for a view of what modern revolution looks like up close and personal.
At any rate, negative mood has emerged again as observers in Western countries no doubt feel isolated from such change. But US long term unemployment, crushing taxes, exodus from high tax states to lower tax states, a dramatic turn in political representation, no change at the White House, evidence of mass wrong doing by the Financial Crisis Inquiry Commission, low to no bids on municipal bonds, all these will be cited as ‘well as anyone could have seen factors’ once the weekly A/D line turns down. See our daily posts on recent events at www.themarketperspective.com.
The Bottom Line
Expect violent ups and downs in the stock market for the next few months. But the momentum is clearly waning and a top lies ahead.
TLT appears to be finding buyers, and for good reason The US Dollar remains a safe haven in times of crisis. Our government continues to attempt to drive it down in the mistaken belief that will stimulate exports. This has disguised the slow advance of the dollar the last three years.
The injection of massive money into markets is now showing up in higher commodity prices driving residents of developing economies to revolt. And this is just the start of the massive inflation that money will eventually generate.
