 |
Major Turning Points August 2006 Is the apocalypse now, Master? Patience is in order, my son.
These four year charts may be seen in a larger format at http://www.edwards-magee.com/nf06/mtp06charts.pdf.
9 YEAR DOW
Recently the number of respected (by us and everyone else) and important analysts forecasting a bear market has risen to a crescendo. As you will remember not too long ago like an alcoholic swearing off drink, we swore off being a bear (or a bull, or a mule or anything else with a point of view). We also swore off making forecasts --beyond the immediately forecastable. And we amused our graduate students by refusing to stand behind any forecasts we might make while drinking. Well, what is going on when Richard Russell, and a number of other analysts are saying the bull is dead and the bear is about to eat his lunch? As can be seen here in the Dow the bull market is alive and well. Or is it? It may be alive, but whether it is well or not is
|
 |
another question. On closer examination the long term trend line from 2003 is seen to be broken. The subsequent trendline from 2004 is being tested now. Of course the three month trend line is broken also. But at worst it would appear that we have a mule, or sideways, market and that with rising higher lows spaced months apart. In fact you could even say that in the broader context the present downtrend is a natural and to be expected downwave.
9 YEAR S&P
|
 |
9 YEAR NDX
The picture is degraded by the obvious weakness in the NDX, which has issued a clear sell signal. We should emphasize that this is for the Qs and that buy or sell decisions for an individual stock should be made on the basis of that stock's chart. But the sector is the weak sister of the market and will drag down all or most all its members eventually. Nevertheless the weakness in this major sector is not a good sign for the market in general, in fact might be the harbinger of things to come.
|
|
|
10 YEAR S&P
What our colleagues are seeing in their number driven analyses is undoubtedly a deteriorating inner state of the market. And these charts are not at variance with that interpretation. The broken trendlines and violated lows are completely consistent with a turning market, measure it how you will. But their timing might be off. Barring a major disruptive event (World War III?) like 9/11 or some such we are inclined to think, looking at the charts, that the top formation is going to continue for awhile. We do think that a major long term top is being put in place here. We understand that Russell thinks that everything since 2002 has been a rally in a bear market, and that interpretation would not be unpersuasive in the case of the NDX and the SPX. Look at the 10 year chart of the S&P and observe that the markets since 2002 could easily be construed as a bear market rally. Of course one man's bear market rally is another man's bull market. And vice versa, as Yogi Berra noted. Again, note the bulge of volume during the tulipomania and the volume fall off afterwards, the capitulation volume of 02 and the relatively elevated volume recently as the market grinds sideways. All of the volume indicators say top formation to us.
|
 |
8 YEAR DOW
The Dow never took the hit the other indices suffered, in spite of its brief bear market. We say brief because it seems to us that after an 18 year bull market (82-00) more time for consolidation and reaction would be necessary. We have often evoked the 65-82 sidewinder as a potential precursor or predictor of what current markets might be expected to do. Here price is seen bumping its head against the massive resistance of the tulipomania top. We also pointed out the numerous attempts of the 65-82 markets to break the 1000 mark, and the few attempts so far to break 12000. We would only count three attempts here: The original 99-00 top, the 04 top and the present 6 month market.
|
 |
DOW 9 MONTHS
When we look close up at the Dow we can see clearly the establishment of a bottom line (perhaps a neckline) of a top or trading range. To us at this point it looks like the formation of a complex top whose formation was forecast by the diamond formation that ended in February. Viewed at this level we expect some symmetry to develop. Interestingly enough that puts the crucial time for the market right around the November elections.
|
Capitalists, free marketeers, Ralph Reed, Abramoff, Tom Delay, manipulative lobbists, greed crazed CEOs, billionaire families (see the estate tax conspiracy) as well as us registered Mugwumps and traders and investors have pretty much had free rein since 2000 and the new morning in America signaled by Bush's selection (by the Supreme Court). The loss of the election by the Republicans (which looks likely at this point) would be a sign that the pendulum has swung about as far as it would go and the piper (and the national debit card collector) will have to be paid. That depressing prospect would well lead to a severe hangover. Our timing could be off a little. It could be that if the handwriting is writ large on the wall that October could be the month of reckoning. October? October? Omigod. The 19th?
The Democrats, of course, don't have any idea what they would do if by some accident (or the public recognition of Washington's Augean Stables) they should be restored to power. (Remember, it was Will Rogers who said, "I'm not a member of any organized political party. I'm a Democrat.") But they might just hire back some of the 127 enforcement IRS lawyers in the estate tax division as well as bringing some corrupt politicians, lobbyists, and corporate criminals to justice. (Keep holding your breath. They might even take a look at hedge funds and off shore monkey business (where is Gary Hart when we need him?).) For the satirical economist and acid tongued commentator it looks like more fun and material than anytime since granma fell in the well and the animals took over the farm. But the market won't like it.
Our esteemed colleagues who predict fire death and brimstone and equivalent Dow and gold prices are probably right in the medium run. The convergence of deleterious economic trends has to have some effect: rising interest rates, rising budget deficit, rising current accounts deficit, rising national debt, rising cultural war costs, rising Iraqi war costs, rising health care costs, rising real estate -- say, is there anything in this country that isn't rising? -- When all these balloons hit the ceiling and the hot air runs out there's going to be a lot of bubbles popping (sic). But those balloons will continue to be pumped for some time. You can't pump $10 B a month of excess money (a perhaps inaccurate figure of war spending) without blowing up a lot of balloons.
So, for the present expect more of the same and get ready for the matanza.
|
|
|
