On the FUNDAMENTAL side unemployment numbers continue to increase and 'help wanted' numbers decline (to lowest level in 30 years) while capacity utilization remains mired at about 75% all indicating a squeeze by
companies as they grapple with their profitability. That profitability is
affected by overseas and domestic competition in a world of declining
demand. That drop in demand is the result of relative strain on the
world's economies brought about by debt burden domestically (consumers
retrenching by trying to pay down debt and/or save for future needs esp
given the aftermath of 10 trillion dollars in lost wealth from the stock
market bubble) and unemployment itself which limits total disposable
income. Now that we have put aside the usual bearish fundamentals let's
review the technical and sentiment indicators as the market will trade the
way it wants regardless of the fundamentals at any particular time.
SENTIMENT indicators tend to be overlybullish for market
participants and advisors though last week saw an interesting pullback
in bullish advisors despite the price rally from prior survey. AAII
survey turned unabashingly overlybullish at about 60% bulls which is
contrarian bearish.
The COT numbers show some move back toward neutral readings by
commercial traders on the large SPX contracts while eminis are more
short and presumably the hedge funds.
VIX and VXN are both at extremes. One must look at their
stochastics rather than absolute levels and these stochastics indicate
readings commensurate with market tops. I thought it interesting that
VXN (for Nasdaq 100 shares) actually declined during the pullback today
suggesting complacency.
TECHNICALS are diverging and weakening though the internals as viewed by breadth and price action have been pretty bullish lately. Notably
moneyflow most of the past two weeks has been negative on the SPX and NDX (with a couple of exceptional days) suggesting distribution and this is
particularly striking during the most recent steep five day rally where
moneyflow was not positive. The moneyflow oscillators are virtually level
despite that rally on NDX and only one real pop up occurred late this week
on SPX.
The intermediate and shortterm stochastics as well as daily and weekly RSI levels are overbought:
RSI overbought daily and weekly charts
<http://www.schaeffersresearch.com/sentiment/observations.asp?ID=7571 >
There are several E wave assignments which may be applicable as usual
but the predominate pattern appears to be 3 wave 'corrective' rallies in a
bear market moving within a broad trading range for 9 months and that
range appearing to slightly contract with higher lows and lower highs
remniscent of a contracting triangle pattern. This pattern typically
contains 5 waves (ABCDE) and it appears we are in or finishing the final
E or 5th wave of that large triangle dating back to the July lows at
least for SPX. The top of that triangle is SPX 920-940 depending upon how
one assigns the tops. The natural occurrence would be to see this E wave
lead into a thrust decline to prior lows or lower to set the stage for a
very bullish move.
Various indices are behaving somewhat differently as the small caps
surge while the blue chips lanquish as should happen given the still
out-of-whack valuations on SPX (currently PE 32 based upon GAAP). The
SPX next resistance after 920 and 940 is about 960 which is the neckline
of the longterm 'Head and Shoulders' pattern which targets SPX 350
ultimately. Oddly that also places valuation of SPX to just under 15
which is historical fair value. Some believe low interest rates influence
whether a higher PE can be sustained but many believe current rates are an anomaly and question how one can equate riskfree returns in bonds with risky already expensive stocks esp when we are in a low to no-growth environment with major imbalances which currently see no resolution ahead. Support for SPX is 863 then about 800.
For DOW the target to best is 8521 (recent resistance) and ultimately
9047 which is major resistance of the 9 month channel and the DEC high.
For Nasdaq the resistance targets are shortterm 1467 then 1525 which
represents the low of the Sept 01 decline and the 'Head and Shoulders'
neckline or top after the July and December rallies. Supports appear
likely strong at 1350 but the Nasdaq made a lower low in October and
subsequently has failed to best the Dec high. Compared to the SPX it
appears stronger as it has conquered its 10 month, 50 week and 160 month moving averages (though this also occurred about one year ago). Of interest is the Nasdaq 100 exceeded the 3/21 and 4/07 rally peaks while DOW merely tagged both.
Volume has been OK but not great but never have we seen a true thrust in
the rally off the March low, which to me appears was an aborted 5th and
final wave decline by the Bank of Japan intervention to support the Dollar.
The very interesting observation now is the resumption in decline of the
USD with a target of 97 (closed at 98.34 Friday) and then 95.40 which is
the 61.8% retracement of the rally from 1992 to the triple top peak.
Complete retracement of that rally would be to 80 USD. Gold is not
acting as strong as before and has some bearish character. It needs to
best 337 to reconquer its declining MA. One or the other must
give---either the USD must rally and gold fall or vice versa. Both
should not continue down. The equity market generally follows the
direction of the USD. My bias is bearish for the USD and bullish for
gold. This is bearish for stocks especially as we enter negative
seasonality which is always funtional between end of April and beginning
of October for every year with two exceptions as I recall in several
decades.
Finally note the very bearish ascending wedge pattern on SPX and its
major finanical sector BKX which ordinarily portends a break to the
bottom of the wedge at about 800 for SPX. That coincides with trading
channel support.
Please see the attached daily charts for SPX and Nasdaq AND the
weekly charts which well demonstrate the larger picture of the 'Head and
shoulders' pattern and downtrend channels we are still within since the
March 2000 top. Those daily charts show the 50 and 200 day MAs above
which both SPX and Nasdaq are tracking currently which also happened
this time last year before the huge breakdown. Perhaps this is a good
time to check out this link from Schaeffer's site on the topic of
longterm investing and risk.
I think it makes a few excellent points. The most important takehome
message I believe is that no one knew exactly when the market top in
2000 would occur or the magnitude of correction with most money pouring in prior to the top; likewise no one can know when the bear market bottom will occur. My personal opinion from a 'numbers don't lie' standpoint is that it will likely not occur until valuations on the blue chips
ultimately return to some fair value or less as has always occurred during
secular bear markets. Meanwhile the market may track in deep cycles
sideways for years which will be of no benefit to long term holding of
blue chip index shares. I am convinced that money will be made by those
who can trade the trends especially in the small and midcap stocks which
are closer to fair value and some of which still have good fundamentals.
Conclusion: The major averages have had quite a run from the March low
to the top of the various trading channels but remain in a bear market
til the major trend changes. A higher high compared with the December
highs will NOT confirm that as wave patterns for corrective rallies in
bearmarkets allow for such a move. So caution is paramount here. There is no hurry to be invested and no reason to not take profits from recent
entries. The accompanying charts esp the weekly charts well demonstrate
the larger picture.
Avery B. Brinkley JR MD.
Acknowledgements (feel free to visit these sites!)
SPX daily chart from Raptorgroupresearch.com
Nasdaq daily and SPX and Nasdaq weekly charts from
Investronica.com/market/
"The point at which a competitor is pursuing the best possible strategy, given the strategies of the other participants" - John F. Nash
market review week ending April 25--weakening top in--NEXT?
Matraquilho
61
27-04-2003 16:14
Disclaimer:
O Clubeinvest.com informa que nenhuma da informação
aqui facultada deverá ser entendida como conselho ou recomendação
de qualquer tipo de transacção ou investimento.
