Most of the major indexes formed a potential cup and handle pattern from Feb. 22 2011, when the top of the left side of the cup was formed, to April 7 2011 when the top of the right side of the cup was formed. On the DJ Industrials, the left high side of the cup reading was 12,391 and on the right high side of the cup the number was 12,450. The low point of the handle came in at 12,200 on a closing basis. On April 20 The DJI rallied 187 points, after advancing 65 points on April 19.
If the DJI can decisively move, on a closing basis, above today's closing peak of 12,453 with no more than a nominal loss intervening, it will have successfully broken out above the cup and handle pattern and be in technical condition to move significantly higher. According to the Stockcharts.com tutorial on the William O'Neill Co. (Investor's Bus. Daily, Daily Graphs) tool on the subject, the price target would be about 13,350 before another pattern needed to materialize. I haven't read the Investor's Business Daily for a few years, so they might have recently covered the current technical situation with a cup and handle analysis. You can find the StockCharts.com tutorial at this web address:
http://stockcharts.com/help/doku.php?id=chart_school:chart_analysis:chart_patterns:cup_with_handle_cont. You can view the Dow Jones Industrial chart at Stockcharts.com on the Market Summary page.
Volume on April 20 was above its 60-day exponential moving average. I consider this quite positive in view of the fact that this mini-bull has advanced on unimpressive volume since its inception on March 10, 2009. But it does need to break out decisively above the C & H pattern if we are to be spared another indefinite period of uncertainty with its attendant hand-wringing.
Thursday, April 21, 2011
Thursday, April 7, 2011
2000-2009 Secular Bear Market?
Letter to Richard Russell of Dow Theory Letters:
Richard: I think it is clear that both the 2000-2002 and the 2007-2009 declines were primary bear markets. I think the important question is whether the period since 2000 has been a secular bull period or secular bear period. Remember, "secular" refers to whether PE's and valuations in general are increasing or decreasing, not just whether prices of stocks are rising or declining.
You state that you now believe that the 2007-2009 bear market was just an exceptionally severe correction, not a primary bear market. The "mini-bull" market high of 2007 ended up at a lower PE by far than the PE at the bull market high of 2000. The "min-bear" market low of 2009 produced a lower PE than the the bear market low of 2002. Thus, even though the market averages at the 2007 highs topped out above the market highs of 2000, we can still call the 2000-2007 period a secular bear market because these are defined by PE, not price. The rise and fall of valuations is what the classical Dow Theory called a "primary" bull or bear market, but the Dow Theory seemed to assume that valuation highs would correspond to price highs and valuation lows would correspond to price lows. Thus the mechanical signals given by price movements were assumed to have no possible conflict with valuation readings.
But we find at market extremes that there is some divergence between these two measurements, at least in terms of the cycle high and low points of each successive bull and bear market. Thus there is a need to distinguish between "primary" bull and bear price movements, and "secular" trends, which are based on PE ratios.
It appears that future peak of this mini-bull cycle has a chance to exceed the maximum PE of the 2007 market highs. If that happens, it will reveal that the secular bear market ended at the March 2009 lows.
I attempted to post the Case-Shiller S&P 500 PE Chart onto this blog but it would not fit. You can look at it at the following site: http://www.multpl.com/
The Unraveller
Richard: I think it is clear that both the 2000-2002 and the 2007-2009 declines were primary bear markets. I think the important question is whether the period since 2000 has been a secular bull period or secular bear period. Remember, "secular" refers to whether PE's and valuations in general are increasing or decreasing, not just whether prices of stocks are rising or declining.
You state that you now believe that the 2007-2009 bear market was just an exceptionally severe correction, not a primary bear market. The "mini-bull" market high of 2007 ended up at a lower PE by far than the PE at the bull market high of 2000. The "min-bear" market low of 2009 produced a lower PE than the the bear market low of 2002. Thus, even though the market averages at the 2007 highs topped out above the market highs of 2000, we can still call the 2000-2007 period a secular bear market because these are defined by PE, not price. The rise and fall of valuations is what the classical Dow Theory called a "primary" bull or bear market, but the Dow Theory seemed to assume that valuation highs would correspond to price highs and valuation lows would correspond to price lows. Thus the mechanical signals given by price movements were assumed to have no possible conflict with valuation readings.
But we find at market extremes that there is some divergence between these two measurements, at least in terms of the cycle high and low points of each successive bull and bear market. Thus there is a need to distinguish between "primary" bull and bear price movements, and "secular" trends, which are based on PE ratios.
It appears that future peak of this mini-bull cycle has a chance to exceed the maximum PE of the 2007 market highs. If that happens, it will reveal that the secular bear market ended at the March 2009 lows.
I attempted to post the Case-Shiller S&P 500 PE Chart onto this blog but it would not fit. You can look at it at the following site: http://www.multpl.com/
The Unraveller
Wednesday, December 15, 2010
Market Indecision & China Comment
I observe see that the Big Money Breadth Index compiled by Richard Russell of Dow Theory Letters is
showing great strength while the A-D line has been weakening by showing
resistance to making new highs. New highs in the DJ Industrials and S and P 500 confirm that the blue chips are currently the predominant Indexes. Does this indicate that the next rally, assuming
it comes before a major decline, will be one led by the blue chips with the
majority of stocks lagging? In the past, this has been a formula for the
creation of major market tops. One thing I have puzzled about is how the type
of scenario described above comports with the
observation that a major rally in "cats and dogs" also is the harbinger of a
longer-term market peak. Can the "cats and dogs" experience an upside explosion
while the A-D line is weakening?
Of course it is quite possible that the A-D
line, which has led the market up since the March 10, 2009 lows, is simply
undergoing a much-deserved consolidation after which it will resume its strength.
I hope that this is the case for it would portend a longer extension of this
mini-bull market. This uptrend is drawing closer to equaling in length the 1970-1973 mini-bull advance, which has been a sort of longevity benchmark for me.
Simply because it has such a large population,
it is well to remember that China needs to surpass the US in absolute GDP just
to raise its per capita income closer to that of the "developed" nations .
Especially ironic for a "Communist" country, China has huge disparities in the
distribution of wealth.
Saturday, July 24, 2010
Emerging From Correction
The action of the last 3 weeks is exactly what I was hoping for. That is, the market is slowly working its way up toward the June highs in a steady, "consolidating" manner. There will probably be a DJT non-confirmation which will result in a sell-off to relieve the overbought situation by sending the McClellan Oscillator back down towards the 0 area. Then a little sideways action will occur in the area of the short term decline lows. Then I would hope for more strong upside action up to the April 26 highs. Then, some corrective action should transpire which will create a head and shoulders or "saucer bottom" for the major averages. This latter action would be taking place in the late summer/early fall time zone which is a weak seasonal period.
Then in the strong seasonal period I would hope for a powerful rally to take the market in the direction of its 2007 highs. This rise might be the conclusion of the mini-bull, but it is going to be a challenge to correctly identify the final top, which could occur in the late spring or summer of 2011. Interestingly, the S and P 500 is also currently lagging the DJI while the A-D index has already soared well above its June high area. The McClellan Summation Index is showing a classic rising pattern out of the area of its recent lows. So this market is essentially being led primarily by the A-D index and secondarily by the DJI.
The discussion on whether the market reacts to news or is always looking ahead to something else is an interesting one which I may write up on Unraveller's Spool in the future.
Then in the strong seasonal period I would hope for a powerful rally to take the market in the direction of its 2007 highs. This rise might be the conclusion of the mini-bull, but it is going to be a challenge to correctly identify the final top, which could occur in the late spring or summer of 2011. Interestingly, the S and P 500 is also currently lagging the DJI while the A-D index has already soared well above its June high area. The McClellan Summation Index is showing a classic rising pattern out of the area of its recent lows. So this market is essentially being led primarily by the A-D index and secondarily by the DJI.
The discussion on whether the market reacts to news or is always looking ahead to something else is an interesting one which I may write up on Unraveller's Spool in the future.
Thursday, May 13, 2010
A-D Ratio Strength
Some analysts have stated that the A-D has been weaker than the Dow for a couple of months and that this is an evil harbinger for the market, meaning that a rally that has only a relatively few large cap stocks advancing while the majority of issues languish is a vulnerable market. If that were actually the case, it would be a precarious situation. I would describe the market action/price relationship between the A-D line and the Dow like this:
On April 23 the Dow and the A-D line both made new highs. The next trading
day, the 26th, the Dow was unchanged while the A-D was slightly lower. On May 3
the Dow completed the right shoulder of its its 2 1/2 week Head and Shoulders pattern by
closing 50 points lower than its closing peak. On this same day the A-D ratio
made the right peak of a double top. On the rebound from the May 7 low, the A-D
line has performed, from what appears on the charts from Stockcharts.com posted on that site May 13, about equally strongly as the Dow, if not actually a little
more powerfully. It is really the A-D ratio which has been leading the price
indexes up during the entire rally from the March 10, 2009 lows. I really can't
see any basis for saying that the A-D ratio has been lagging the Dow for even
the last few weeks, let alone the last few months.
Having said that, I certainly agree that the
number of distribution days is a matter for deep concern, as is the related
problem of high volume on down days and lower volume on up days that has been in
evidence pretty much during the entire rally from the March 10, 2009 lows. That
is why I have dubbed this the "Paul Dysart Market", a reference to Dysart's
Negative Volume Index which nobody believes in anymore. Dysart believed that the
"big and smart money" preferred to accumulate stocks on quiet days of declining
volume so as not to attract attention and make it more expensive to
accumulate its positions. This resembles the way large gold accumulators are
operating in "the stealth gold bull market", as Richard Russell has described
it. However, the stock market rally had come to attract much more attention and
belief than the gold bull market in the weeks preceeding the recent mini-crash.
I admit that this Negative Volume concept does contradict the supply/demand
logic of the on-balance volume theory and its indicators in their various
incarnations. This paradox raises the question of how stocks can advance when
more shares are sold on declining price trades than on advancing price trades.
But somehow, it does seem to manage to work for particular time
periods.
The A-D derived McClellan Oscillator made a
low on May 9 of 2009, the lowest it has fallen as far back as the Decision Point
Chart shows, which is May of 2009. The Summation Index, which is the cumulative
total of the the daily McClellan Oscillator Readings, is still 450 points above
its Mid-February 2010 lows but steepened its downward direction May 13 with a
wider downside "gap" between plotted points. For the Summation Index to fall
to a deeply low area, the McClellan Oscillator itself must persistently remain in
negative territory for many days. And for the McClellan Oscillator to do
that, there must be frequently recurring strongly negative days of declines over
advances without much of an intervening rally in the A-D line. If the McClellan
Summation Index were destined to fall to the 0 area or below, that would imply
to me a further significant loss in the price Indexes, given what I have seen,
in the context of this particular correction, of most indexes' propensity
to decline sharply in proportion to a given extent of A-D decline.
Sunday, April 25, 2010
Transports, Utilities, & Iran
From April 8 through April 23 2010 the DJ Transports powered up another 351 points. At the point of strongest acceleration the RSI reached a peak of 83.14, a remarkably high reading for a major index. This astounding display of leadership and strength is puzzling to me on a fundamental basis because it is difficult to conceive of the improvement in the volume of physical commerce that this juggernaut of an index seems to be foretelling. I am construing its meaning to be that the economic recovery will be stronger and more persistent than had been expected, though I still can't believe it presages some sort of explosion in the quantity of goods being shipped. I emphasized in my previous letter that the leader ship of the Transports was the key to the durability of this primary bull market. It is hard to believe that the index won't take a rest very soon, but it is not yet acting exhausted. It seemed to be working off the extreme overbought level of its RSI through sideways action of its relative strength versus the S and P 500 during the week of April 19-23.
If the Transports do move into a prolonged correction/ consolidation, I will be scrutinizing the action of the dormant DJ Utilities Average to see if it comes to back life and starts moving upwards towards and beyond its Dec. 14, 2009 high of 406.72 The Utilities are considered a bellweather index for a number of reasons. This fact would make an assault on their old highs if it should occur, a very meaningful event. The exception to the bellweather attribute of the Utilities is that they can be a haven for safety and yield in bear markets and recessions, such as they were in 2001-2004. But they did help lead the first major upsurge of this bull market, along with the Transports, to its mid December 2009 highs. Therefore I would looked upon their renewed strength as a manifestation of their bellweather nature rather than of merely a flight to safety in a environment of crumbling financial assets.
On the question of market sponsership, I still
don't believe that this market is being primarily driven by the public. Such
members of the non-professional public as are participating are mostly doing so
from the long side, but they are not the driving force behind this bull. This
market thus far is more of a quiet, Paul Dysart type market with big money
sponsership accumulating slowly and inconspicuously. We undoubtedly are into
the Dow Theory 2nd psychological phase where the market rises in response to
visible improvement in business (in today's case, more of an improvement in
profits than in business) and the public participates in moderate but increasing numbers. As
Dow Theorist Robert Rhea wrote, the second phase is usually the most deceptive, stretched out, and
difficult to interpret of the 3 primary market phases. Russell's Big Money Breadth
Index tells the tale of what the large interests are doing, and its
story is that they are accumulating, although the week of April 19-23 did reveal a deceleration in the index's rate of increase.
Both the McClellan Oscillator and the McClellan 5% Index declined enough to relieve their overbought condition but not become very oversold. The 5% indicator, in particular, really only declined to a less overbought status. If these two can again move towards the strongly overbought region, it will mean that the breadth of the market is going to surge up noticeably before any appreciable decline from the present price levels. Strong markets can remain neutral to overbought for a long time, but we do like to see an oversold reading once in a while to squeeze out some of the excesses and reduce risk.
The end result for the week of April 19-23 2010 is that the DJ Industrials and Transports, the cumulative A-D line, the S and P 500 and most other indexes and Averages closed at post March 9, 2009 recovery highs. The DJ Utilities did not
even make a serious attempt at new highs, but remain in a trading range currently bounded by 375 on the bottom and just below 390 at the top. Their sensitivity to interest rates may be the major factor in their hesitation. Since many investors buy them for yield, they have some of the trading characteristics of bonds. And bonds at this time are under suspicion of being in the early stages of a bear market. But the Utilities also have the properties of an industrial index as well since they produce products such as energy and water supply. In particular, demand for energy increases in proportion to increased production and transport of goods.
Thus it is also very sensitive to economic expansion. Which of these two attributes is now dominant in determining its price action is hard to say, but it would be a definite harbinger of a continuing bull market if the Utility Index were to reassert its strength and rally to new recovery highs.
The following is my reaction to speculation about Israel possibly attacking Iran's nuclear processing plants without cooperation or participation by the US:
Of course Israel has contingency plans to attack Iran's nuclear facilities, but Obama will not give Israel permission to fly over Iraq, regardless of pressure from McCain. Furthermore, McCain's base among conservatives is rapidly eroding because he is a foreign military adventurist but weak on internal American security (open borders advocate). George W. Bush put us in too a weak financial position and too overextended a military position to carry out major action against Iran. It's true that we now have huge bases in Iraq but the Iraqi Shiites will oppose our use of them against Iran and, where the US is involved, the Iraqi Sunnis don't believe that the enemy of their enemy is their friend . So we would probably be throwing Iraq into violent turmoil if we tried to use our bases in Iraq to attack Iran. The Stratfor article of 2009 clearly outlines why the task is beyond Israel's ability to successfully accomplish on its own, even if it could overfly Iraq. In actuality, because of the dispersal and hardening of the nuclear sites, it would not be an easy task even for US air power.
Both the McClellan Oscillator and the McClellan 5% Index declined enough to relieve their overbought condition but not become very oversold. The 5% indicator, in particular, really only declined to a less overbought status. If these two can again move towards the strongly overbought region, it will mean that the breadth of the market is going to surge up noticeably before any appreciable decline from the present price levels. Strong markets can remain neutral to overbought for a long time, but we do like to see an oversold reading once in a while to squeeze out some of the excesses and reduce risk.
The end result for the week of April 19-23 2010 is that the DJ Industrials and Transports, the cumulative A-D line, the S and P 500 and most other indexes and Averages closed at post March 9, 2009 recovery highs. The DJ Utilities did not
even make a serious attempt at new highs, but remain in a trading range currently bounded by 375 on the bottom and just below 390 at the top. Their sensitivity to interest rates may be the major factor in their hesitation. Since many investors buy them for yield, they have some of the trading characteristics of bonds. And bonds at this time are under suspicion of being in the early stages of a bear market. But the Utilities also have the properties of an industrial index as well since they produce products such as energy and water supply. In particular, demand for energy increases in proportion to increased production and transport of goods.
Thus it is also very sensitive to economic expansion. Which of these two attributes is now dominant in determining its price action is hard to say, but it would be a definite harbinger of a continuing bull market if the Utility Index were to reassert its strength and rally to new recovery highs.
The following is my reaction to speculation about Israel possibly attacking Iran's nuclear processing plants without cooperation or participation by the US:
Of course Israel has contingency plans to attack Iran's nuclear facilities, but Obama will not give Israel permission to fly over Iraq, regardless of pressure from McCain. Furthermore, McCain's base among conservatives is rapidly eroding because he is a foreign military adventurist but weak on internal American security (open borders advocate). George W. Bush put us in too a weak financial position and too overextended a military position to carry out major action against Iran. It's true that we now have huge bases in Iraq but the Iraqi Shiites will oppose our use of them against Iran and, where the US is involved, the Iraqi Sunnis don't believe that the enemy of their enemy is their friend . So we would probably be throwing Iraq into violent turmoil if we tried to use our bases in Iraq to attack Iran. The Stratfor article of 2009 clearly outlines why the task is beyond Israel's ability to successfully accomplish on its own, even if it could overfly Iraq. In actuality, because of the dispersal and hardening of the nuclear sites, it would not be an easy task even for US air power.
Thursday, April 15, 2010
Market Correction
As of the April 1, 2010 the market has been in a correction/consolidation mode for about 3 weeks and in a slow rise mode for a few months. According to my application of the 50% principle of the late renowned Dow Theorist E. George Schaeffer, the Dow Jones Industrials, Transports, as well as the S and P 500, all must stay above their respective 50% levels on any decline to create a
favorable probability that they will challenge or exceed their previous
all-time high. The half way point of the decline from the high of Oct. 9, 2007 to the low of March 9, 2009 is the measure that is my reference. For the DJ Industrials the 50% level would be 10,355.50, for the DJ Transports 3820.74, S and P 500 the 50% level would be1120.84. All the above indices haves done this, but I am using daily closing prices of the high and low points in these Averages to calculate the 50% levels The S and P 500 was not used by Schaeffer but I am extending the principle he used for the Dow Jones Averages to the Standard and Poors 500 Index.
Indeed, as Richard Russell of DowTheoryLetters.com has repeatedly observed the Transports have climbed to new recovery highs while the Industrials have taken their time confirming, so under the Dow Theory we had a belated confirmation. Personally, I feel that because of the weakness in the economy, the Transports are the Index which would tell us the most about whether this recovery can continue to expand. Now that the Industrials have followed the direction of the Transports, we might expect to see Transports take a rest and cool off from their torrid rally. If they can resume their strong leadership after their period of consolidation, that would be a strong bullish omen for the overall market. That is because the activity of the Transportation companies is in direct proportion to the volume of business activity, goods which are being shipped across the nation.
In today's context, I would view the advent of weakness in the DJ Jones Transports as the most worriesome of harbingers. By weakness, I mean not only a severe decline in the DJT, but also a failure by them to rally strongly from whatever level they eventually decline to from here. The overall market cannot sustain a strong advance from whatever point it eventually declines to without strong leadership from the Transports, again, the reason being that the strength and duration of this cyclical business recovery is very tenuous and susceptible to collapse. The Industrials are a somewhat less direct reflection of the quantitative level of commerce in the US, because most of them are multinationals that make sales in areas of the world where business and incomes are more buoyant and because they have become so lean and efficient that they can make profits even in a weak economic environment. However, we definitely do need to see them at least confirm the strength of the Transports for a continuation of the broad market rally to sustain itself. If the Industrials should degenerate from merely lagging the Transports to outright weakness it would be an indication of impending problems in the world economy as a whole.
Even though many technical market letter writers are bullish, and various governmental and private agencies are trying to put the most positive possible spin on statistics that they can (like the National Association of Realtors on changes in home prices or volume of home sales), it still seems to me that this stock market is climbing a wall of every imaginable kind of worry. Poor household balance sheet problems for so many Americans, caused by indebtedness and low incomes are rendering most people unable to invest in financial assets, even if they weren't highly skeptical of the idea that there could be a bull market in stocks taking place. The term "The Great Recession" is a subconscious mockery of the application of the label "recession" to present business and employment conditions. By the standards of business cycle categorization in use before the Great Depression of the 1930's, this is undoubtedly a depression.
It really does defy conventional wisdom and common sense that corporations could make profits in a climate of such weak consumer demand. And if companies can't make money, why should stock prices rise? The Boeckh Investment Letter stresses that nonfinancial corporations have excellent balance sheets. In the 4th quarter of 2009, corporate profits were still 4 times their levels at the profitability nadir of 2002. This is a fair basis of comparison because the last quarter of 2009 will probably prove to be the period of minimum corporate profitability for this downturn. If business and employment conditions worsen significantly from this point, then a new basis of comparison would have to be determined. As many have stated, the obverse side of unemployment is that corporations have become able to increase earnings by becoming more productive with fewer people.
I have echoed the prevailing wisdom that this upswing in the business cycle can"t be sustained without improved income for consumers. However, I think that consumer spending must in the future shrink to a smaller proportion of our GDP. I think Americans have the right idea in increasing their savings, both for their own personal good and the long-term benefit of the American economy as well. This country's economy can not continue to be based on consumption that is unsupported by a strong productive base, with the necessary investment for that coming from increased savings by those presently fortunate enough to have income.
The PE ratio for the S and P 500 is 22.16 (Robert Shiller numbers) as of April 14, 2010, well into overvalued territory, and is 12.9% above its 200-day simple moving average. If earnings are destined to keep rising, the PE number would come down and allow room for prices to rise some more before they became overvalued again. This occurred in the 2002-2007 bull market, but economic fundamentals seem even more challenging now than they were then. Richard Russell feels that there is widespread bullish sentiment among non-professional investors. William Schmidt of Tigersoft.com says that his indicators have thus far shown positive buying by professionals as well as by the public and have done so since the inception of this rally in March of 2010. I must admit that Russell has a contrary view to my own and Schmidt's, in particular, is perplexing because public buying and professional buying usually don't go together, especially in the early stages of a bull market. I don't really follow any specific sentiment indicators but my sense is that the public has been and still is afraid of this market because of the huge employment and income problems of the ordinary people as well as the trauma from the recent bear market. Although there has apparently been some improving GDP data, it has not translated into a very meaningful increase in jobs. As mentioned above this bull market has truly been climbing a wall of macroeconomic and financial worry
The McClellan Oscillator 5% (intermediate trend) Index has not not fallen below -40 since March 9, 2009 and the McClellan Summation Index has not fallen below +150 since that time. These charts are created by DecisionPoint.com but can most easily be found daily on StockCharts.com in the Market Breadth section near the bottom of the Market Summary page. Of course, you must use all lower case letters when typing in the names of the sites on your browser address line.What those numbers tell us is that the stock market has not undergone a significant intermediate term correction for about a year. Since the Jan. 19, 2010 highs we surely have been in an intermediate scale retracement, but it has so far not sold off intensely enough to be considered by me to be severe. The maximum price decline (on a closing basis) during this pullback for the S and P 500 so far is 8.13%. The cumulative advance-decline line has been making new post Mar. 9, 2009 recovery highs since Feb.24 on up days during this moderate retracement. It seems to me that it is an impressive show of strength for for the cumulative A-D line to be making new recovery highs a month and a half into a secondary counter-trend decline. Of course, if the decline accelerates and the S and P 500 falls through the 50% level to its Feb. 23 2010 low at 1094.60, which should provide support, that would still only amount to an 8.35% correction. Although then the Average would have to reprove that it intended to rise and remain above the 50% level. Although the DJ Utilities don't formally play a part in the Dow Theory, they have lagged very significantly in the rally from the Feb.16 minor trend lows.
I have written this post over a period of about 3 weeks, but since I wrote the above paragraphs the DJ Transports are once again leading the market up with strong rallies on April 8th and April 9th pushing them decisively above their March 18 high of 4422.50. On April 14th they exploded upward 108.37 points, or 2.39%.. The A-D ratio and Russell 2K, which had already been stronger than the Industrials or S and P, have zoomed above their March 23 highs convincingly. The S and P 500 has discernibly exceeded its March 23 high of 1174.17 and now stands at 1210.65 on April 14. Schmidt's Tigersoft professional buying index is pointing upwards and Russell's PTI is not only at new highs, but at a perhaps record 73 points above its 89-day moving average, which Russell refers to as "the primary trend line". The sideways to slightly higher price action which went on in most the the major averages for about the last 3 weeks of March turned out to be a high level consolidation rather than a topping pattern.
This market is now even more overbought by many standards than it has been , including the distance of major averages above their 200-day moving averages. The large distance of Russell's PTI above its 89 day moving average is a highly overbought condition. Referring to a Stockcharts.com featured indicator, the RSI for the Transports is 80.03, for the S and P 500 78.29, for the Industrials 75.41, the Russell 2K 79.02,
S and P Midcaps 76.07. A number above 70 is in the overbought range and over 80 is rare for a major index. The DJ Utilities are the major exception with an RSI rating of only 54.94. These are all April 14 figures. Although strong bull market can stay overbought for a long time and merely correct to the neutral range, as this one has done, one would think that a period of correction would appear in the near future to relieve the overbought condition. If this again took the form of a "flat-top" pattern, as William Schmidt likes to call it, otherwise known as a high-level or sideways consolidation, with the McClellan Oscillators only declin- ing to the neutral area, that would be a sign of extraordinary strength. Of course, these kind of "line" formations near the highs of an average must be carefully studied for signs of at least an intermediate level top. I define an intermediate correction which follows an intermediate top as a decline of up to 15% in the S and P 500 lasting a few weeks to 3 months. Of course, a long bottoming period can stretch out the time length considerably and thus provide a solid foundation for the next advance.
Indeed, as Richard Russell of DowTheoryLetters.com has repeatedly observed the Transports have climbed to new recovery highs while the Industrials have taken their time confirming, so under the Dow Theory we had a belated confirmation. Personally, I feel that because of the weakness in the economy, the Transports are the Index which would tell us the most about whether this recovery can continue to expand. Now that the Industrials have followed the direction of the Transports, we might expect to see Transports take a rest and cool off from their torrid rally. If they can resume their strong leadership after their period of consolidation, that would be a strong bullish omen for the overall market. That is because the activity of the Transportation companies is in direct proportion to the volume of business activity, goods which are being shipped across the nation.
In today's context, I would view the advent of weakness in the DJ Jones Transports as the most worriesome of harbingers. By weakness, I mean not only a severe decline in the DJT, but also a failure by them to rally strongly from whatever level they eventually decline to from here. The overall market cannot sustain a strong advance from whatever point it eventually declines to without strong leadership from the Transports, again, the reason being that the strength and duration of this cyclical business recovery is very tenuous and susceptible to collapse. The Industrials are a somewhat less direct reflection of the quantitative level of commerce in the US, because most of them are multinationals that make sales in areas of the world where business and incomes are more buoyant and because they have become so lean and efficient that they can make profits even in a weak economic environment. However, we definitely do need to see them at least confirm the strength of the Transports for a continuation of the broad market rally to sustain itself. If the Industrials should degenerate from merely lagging the Transports to outright weakness it would be an indication of impending problems in the world economy as a whole.
Even though many technical market letter writers are bullish, and various governmental and private agencies are trying to put the most positive possible spin on statistics that they can (like the National Association of Realtors on changes in home prices or volume of home sales), it still seems to me that this stock market is climbing a wall of every imaginable kind of worry. Poor household balance sheet problems for so many Americans, caused by indebtedness and low incomes are rendering most people unable to invest in financial assets, even if they weren't highly skeptical of the idea that there could be a bull market in stocks taking place. The term "The Great Recession" is a subconscious mockery of the application of the label "recession" to present business and employment conditions. By the standards of business cycle categorization in use before the Great Depression of the 1930's, this is undoubtedly a depression.
It really does defy conventional wisdom and common sense that corporations could make profits in a climate of such weak consumer demand. And if companies can't make money, why should stock prices rise? The Boeckh Investment Letter stresses that nonfinancial corporations have excellent balance sheets. In the 4th quarter of 2009, corporate profits were still 4 times their levels at the profitability nadir of 2002. This is a fair basis of comparison because the last quarter of 2009 will probably prove to be the period of minimum corporate profitability for this downturn. If business and employment conditions worsen significantly from this point, then a new basis of comparison would have to be determined. As many have stated, the obverse side of unemployment is that corporations have become able to increase earnings by becoming more productive with fewer people.
I have echoed the prevailing wisdom that this upswing in the business cycle can"t be sustained without improved income for consumers. However, I think that consumer spending must in the future shrink to a smaller proportion of our GDP. I think Americans have the right idea in increasing their savings, both for their own personal good and the long-term benefit of the American economy as well. This country's economy can not continue to be based on consumption that is unsupported by a strong productive base, with the necessary investment for that coming from increased savings by those presently fortunate enough to have income.
The PE ratio for the S and P 500 is 22.16 (Robert Shiller numbers) as of April 14, 2010, well into overvalued territory, and is 12.9% above its 200-day simple moving average. If earnings are destined to keep rising, the PE number would come down and allow room for prices to rise some more before they became overvalued again. This occurred in the 2002-2007 bull market, but economic fundamentals seem even more challenging now than they were then. Richard Russell feels that there is widespread bullish sentiment among non-professional investors. William Schmidt of Tigersoft.com says that his indicators have thus far shown positive buying by professionals as well as by the public and have done so since the inception of this rally in March of 2010. I must admit that Russell has a contrary view to my own and Schmidt's, in particular, is perplexing because public buying and professional buying usually don't go together, especially in the early stages of a bull market. I don't really follow any specific sentiment indicators but my sense is that the public has been and still is afraid of this market because of the huge employment and income problems of the ordinary people as well as the trauma from the recent bear market. Although there has apparently been some improving GDP data, it has not translated into a very meaningful increase in jobs. As mentioned above this bull market has truly been climbing a wall of macroeconomic and financial worry
The McClellan Oscillator 5% (intermediate trend) Index has not not fallen below -40 since March 9, 2009 and the McClellan Summation Index has not fallen below +150 since that time. These charts are created by DecisionPoint.com but can most easily be found daily on StockCharts.com in the Market Breadth section near the bottom of the Market Summary page. Of course, you must use all lower case letters when typing in the names of the sites on your browser address line.What those numbers tell us is that the stock market has not undergone a significant intermediate term correction for about a year. Since the Jan. 19, 2010 highs we surely have been in an intermediate scale retracement, but it has so far not sold off intensely enough to be considered by me to be severe. The maximum price decline (on a closing basis) during this pullback for the S and P 500 so far is 8.13%. The cumulative advance-decline line has been making new post Mar. 9, 2009 recovery highs since Feb.24 on up days during this moderate retracement. It seems to me that it is an impressive show of strength for for the cumulative A-D line to be making new recovery highs a month and a half into a secondary counter-trend decline. Of course, if the decline accelerates and the S and P 500 falls through the 50% level to its Feb. 23 2010 low at 1094.60, which should provide support, that would still only amount to an 8.35% correction. Although then the Average would have to reprove that it intended to rise and remain above the 50% level. Although the DJ Utilities don't formally play a part in the Dow Theory, they have lagged very significantly in the rally from the Feb.16 minor trend lows.
I have written this post over a period of about 3 weeks, but since I wrote the above paragraphs the DJ Transports are once again leading the market up with strong rallies on April 8th and April 9th pushing them decisively above their March 18 high of 4422.50. On April 14th they exploded upward 108.37 points, or 2.39%.. The A-D ratio and Russell 2K, which had already been stronger than the Industrials or S and P, have zoomed above their March 23 highs convincingly. The S and P 500 has discernibly exceeded its March 23 high of 1174.17 and now stands at 1210.65 on April 14. Schmidt's Tigersoft professional buying index is pointing upwards and Russell's PTI is not only at new highs, but at a perhaps record 73 points above its 89-day moving average, which Russell refers to as "the primary trend line". The sideways to slightly higher price action which went on in most the the major averages for about the last 3 weeks of March turned out to be a high level consolidation rather than a topping pattern.
This market is now even more overbought by many standards than it has been , including the distance of major averages above their 200-day moving averages. The large distance of Russell's PTI above its 89 day moving average is a highly overbought condition. Referring to a Stockcharts.com featured indicator, the RSI for the Transports is 80.03, for the S and P 500 78.29, for the Industrials 75.41, the Russell 2K 79.02,
S and P Midcaps 76.07. A number above 70 is in the overbought range and over 80 is rare for a major index. The DJ Utilities are the major exception with an RSI rating of only 54.94. These are all April 14 figures. Although strong bull market can stay overbought for a long time and merely correct to the neutral range, as this one has done, one would think that a period of correction would appear in the near future to relieve the overbought condition. If this again took the form of a "flat-top" pattern, as William Schmidt likes to call it, otherwise known as a high-level or sideways consolidation, with the McClellan Oscillators only declin- ing to the neutral area, that would be a sign of extraordinary strength. Of course, these kind of "line" formations near the highs of an average must be carefully studied for signs of at least an intermediate level top. I define an intermediate correction which follows an intermediate top as a decline of up to 15% in the S and P 500 lasting a few weeks to 3 months. Of course, a long bottoming period can stretch out the time length considerably and thus provide a solid foundation for the next advance.
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