Summary of Index Daily Closings for Week Ending June 4, 2004
|Date||DJIA||Transports||S&P||NASDAQ||Jun 30 Yr Treas |
|May 31||M A R K E T S C L O S E D M E M O R I A L D A Y|
|SHORT TERM FORECAST |
(Next Two Weeks)
|Market Rise||Medium||Very High||80%|
|Very Low Under||20%|
|INTERMEDIATE TERM FORECAST |
(Next 12 Weeks)
|TREND||PROBABILITY||Substantial||800 points+ (DJIA)|
|Substantial Rise||Low||Market Move||200 to 800 points (DJIA)|
|Market Rise||Medium||Sideways||Up or Down 200 (DJIA)|
|Substantial Decline||Very High|
The Dow Jones Industrial Average rose 54.37 this week, essentially a sideways move, closing at 10,242.82. The NADAQ Composite was down slightly, down 8.12 for the week. Last week's Short-term TII reading was negative (3.50), essentially flat as well. The rally since May 17th has been uninspiring, and since volume precedes price, the very low volumes we've seen the past two weeks are consistent with our belief that a major decline is in the offing. Today's volume on the NYSE was the second lowest this year, resembling last Friday's pre-holiday doldrums. Since May 17th's rally began, volume on the NYSE has averaged 1.27 billion per day if you exclude the Friday before Memorial Day. During the April 6th to May 17th decline, volume was averaging 1.49 billion per day. This tells us there is not the broad-based buying enthusiasm necessary to push prices significantly higher, and that prices must fall - perhaps significantly - to rekindle demand.
Many short-term indicators are now showing overbought conditions, and since we remain 500 points below the highs for the year, a turn down now would establish a third successive declining peak - Bearish action. Bear market rallies serve the useful purpose of creating overbought conditions that refuel the next leg of a continuous decline - in this case, what we believe is the beginning of a multi-week stock market crash that may have started on April 6th, 2004.
|Equities Markets Technical Indicator Index (TII) ™|
|Week Ended||Short Term Index||Intermediate Term Index|
|Jan 30, 2004||2.81||(25.98)||Scale|
|Feb 6, 2004||11.75||(20.19)|
|Feb 13, 2004||(68.25)||(22.19)||(100) to +100|
|Feb 20, 2004||(30.00)||(22.36)|
|Feb 27, 2004||(31.00)||(20.17)||(Negative) Bearish|
|Mar 5, 2004||16.00||(17.17)||Positive Bullish|
|Mar 12, 2004||( 9.00)||(14.70)|
|Mar 19, 2004||(12.00)||(27.60)|
|Mar 26, 2004||73.00||(38.35)|
|Apr 2, 2004||(3.00)||(35.61)|
|Apr 16, 2004||(43.00)||(29.90)|
|Apr 23, 2004||94.00||(22.69)|
|Apr 30, 2004||(33.25)||(34.88)|
|May 7, 2004||(28.75)||(47.75)|
|May 14, 2004||(25.75)||(66.45)|
|May 21, 2004||22.00||(67.23)|
|May 28, 2004||( 3.50)||(48.48)|
|June 4, 2004||(55.75)||(34.07)|
Bearish technical patterns can be found all over the place. Bearish Rounded Tops are evident in the NASDAQ Composite ($COMPQ), the NASDAQ 100 ($NDX), the AMEX Composite ($XAX), and the Dow Industrials ($INDU). Head & Shoulders Tops show up in the philadelphia Semiconductor Index ($SOX) and the philadelphia Gold and Silver Index ($XAU). Double Tops appear in the Mining Stocks ($HUI), and the S&P 500 ($SPX). Quadruple Tops exist in the Russell 2000 ($IUX) and the Wilshire 5000 ($TMW).
This week the Short-term Technical Indicator Index comes in at negative (55.75), indicating a market decline is probable. This indicator is a useful predictor of equity market moves over the next two weeks, both as to direction and to a lesser extent strength of move. For example, readings near zero indicate narrow sideways moves are probable. Readings closer to +/-100 indicate with a higher degree of confidence that an impulsive move up or down is likely over the short run. Market conditions can change on a dime, so it may be unwise to trade off this weekly measured indicator. Massive increases in M-3 have reduced negativity in this indicator. It appears the Intermediate reading and the Short-term are in harmony at this time.
The Intermediate-term Technical Indicator Index is useful for monitoring what's over the horizon - over the next twelve weeks. It serves as an early warning system for unforeseen trend changes of considerable magnitude. This week the Intermediate-term TII comes in at negative (34.07), warning that a significant decline is probable. Massive infusions of M-3 are respected by this indicator, and reduce the severity of this reading. Since this indicator has a time horizon of 3 months, it may be starting to pick up signs of the rebound that will follow the expected precipitous decline, a rebound that will be aided by the recent increase in money supply.
The above chart compares the Month-end Dow Jones Industrial Average closing prices with the University of Michigan's Consumer Sentiment Index monthly reading. What we find here is that there is nearly perfect one-to-one correlation between these two indices. What is particularly interesting is that sometimes the two move contemporaneously, while at other times one index leads the other. It is a gift when the University of Michigan Index moves out ahead of the DJIA, giving us - in effect - an early warning of coming stock market moves. This was the case in 2001 when the Sentiment Index got out 3 to 4 months ahead of the Dow Industrials. It correctly forecast a crash. We were not so lucky in 2002 when the two moved simultaneously.
We now are experiencing one of those wonderful times again where the University of Michigan Consumer Sentiment Index is out ahead of the Dow Industrials, by about two to three months. This time it is predicting a decline. In examining this chart, what is unique about these two indices is we don't get false breakouts. I don't see one instance when the Sentiment Index fell and the DJIA did not. Same on the upside. They eventually catch each other, like mating Canadian geese flying across the skies. As far as timing, this is just one more indicator pointing toward a June/July precipitous decline in the DJIA.
The above chart takes a look at the first seven years of the past two secular bear markets, 1929 through 1936 and 1968 through 1975, and compares the current (2000 through 2004 so far) Bear Market's price action with the average of the past two. The correlation is pretty strong, at times almost tick for tick. The timing of ups and downs is very close, only the extent of moves differing a bit. But for the most part, when the past's prices fell, the current's prices declined and when the past rallied, the current's prices kicked higher. Turning points are remarkably similar. If this analog holds up, the crash predicted for the summer by so many other technical indicators is predicted here as well. Analogs are a lot of fun to consider, but sooner or later they all break apart. Still, based upon other technical indicators, we believe this one is going to be accurate for a while longer.
The next chart originally appeared in issue no. 40 ( available in the Current Issue archives at www.technicalindicatorindex.com). I want to keep it in front of my fellow market junkies because of the importance of June 15th, 2004, now only seven trading days away. For those of you who haven't seen this before, every single market top or bottom has occurred a Fibonacci ratio number of days away from the start of the Bear, 1/14/00, and another top or bottom. Underneath the chart is a schedule of what I term phi mates, where one top or bottom is .382 and the other is .618 of the total number of days from 1/14/00. The fascinating aspect of June 15th is that its phi mate is the key bottom in the entire Bear market to date - October 9, 2002. So if June 15th ends up being a top that is the kickoff to a crash, that would make perfect Fibonacci sense. There are 1111 total trading days from 1/14/00 to 6/15/00. From 1/14/00 to 10/9/02 is 687 days (.618) and from 10/9/02 to 6/15/02 is 424 days (.382).
|* 3/7/2000's low is 38.0% of the total # of trading days from 1/14/2000's High to 5/26/2000's Low|
|* 5/26/2000's Low is 38.0% of the total # of trading days from 1/14/00's High to 12/20/00's Low|
|* 9/6/2000's High is 38.3% of the total # of trading days from 1/14/00's High to 9/21/01's Low|
|* 10/18/2000's Low is 38.8% of the total # of trading days from 1/14/00's High to 1/4/02's High|
|* 11/6/2000's High is 37.6% of the total # of trading days from 1/14/00's High to 3/19/02's High|
|* 11/22/2000's Low is 37.9% of the total # of trading days from 1/14/00's High to 4/29/02's Low|
|* 12/5/2000's High is 38.7% of the total # of trading days from 1/14/00's High to 5/14/02's High|
|* 1/3/2001's High is 37.6% of the total # of trading days from 1/14/00's High to 8/22/02's High|
|* 3/22/2001's High is 37.9% of the total # of trading days from 1/14/00's High to 3/11/03's Low|
|* 5/21/2001's High is 62.6% of the total # of trading days from 1/14/00's High to 3/19/02's High|
|* 9/21/2001's Low is 61.6% of the total # of trading days from 1/14/00's High to 10/9/02's Low|
|* 1/4/2002's High is 61.5% of the total # of trading days from 1/14/00's High to 3/31/03's Low|
|* 3/19/2002's High is 63.4% of the total # of trading days from 1/14/00's High to 6/17/03's High|
|* 7/23/2002's Low is 61.7% of the total # of trading days from 1/14/00's High to 2/11/04's High|
|* 8/22/2002's High is 62.1% of the total # of trading days from 1/14/00's High to 3/24/04's Low|
A quick thumbnail explanation of Fibonacci numbers: Leonardo Fibonacci was a 12th century mathematician who noticed that certain numbers and ratios were evident throughout nature on a repetitive basis. Those numbers create a sequence where the prior two add up to equal the next. They are 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, etc. The ratio of the two prior numbers is always .382 and .618 of the next number in sequence. For example, 13 is .382 of 34 and 21 is .618 of 34 and 13 plus 21 equal 34. Architects and artists have found that structures built in these phi ratios are the most pleasing to the eye. The human body is loaded with Fibonacci numbers and ratios. Five fingers, five projectiles (two hands, two legs, and 1 head), two ears and eyes, etc. The height of most people is in a .382 to .618 ratio divided by the navel. For a fascinating discourse on all this, I recommend Robert Prechter's book, The Wave Principle of Human Social Behavior and the New Science of Socioeconomics, available at www.elliottwave.com. The point is, this unique phi ratio is also apparent in time and price movements of the market. Why? Because markets are governed by people's emotions, whose moods swing predictably according to the natural order of phi ratios as designed by God.
As I mentioned in last week's newsletter, it does not have to be exactly a June 15th top or bottom. It could be within a few days or even weeks of June 15th for the time ratios to approximate .382 and .618 due to the extraordinary length of time June 15th occurs from 1/14/00 and 10/9/02. For example, let's say the top comes in on June 8th instead of June 15th. The ratios would be .378 and .621 - still statistically close to the golden ratio.
Interestingly, June 18th happens to be a Fibonacci 89 trading days from the February 11, 2004 top in the Dow Jones Industrial Average.
The next two charts analyze the pattern of the Transportation average versus the Dow Industrials back in 2002 - just before the 2000 point crash - and now.
In 2002, just prior to the crash, the Dow Industrials completed a series of lower lows from March through June. The Transports followed until late May/early June, refusing to confirm the DJIA's lower low. This non-confirmation raised a possible bullish flag - not a buy signal - but raised some doubt about the Bearish probabilities for June and July. After a brief rally in both indexes the second week of June, the Trannies quickly got down to business, confirmed the DJIA's lower low and then all damnation broke loose, a 2000 point Crash that ran through July 23rd.
Sound familiar? Dow Theory requires trends in the price action of one average - either the Dow Industrials or the Transports - to be confirmed by the other. Divergences are considered early warning signs of upcoming trend reversals. On May 17th, the Dow Industrials hit a lower low for the move down from February 11th, 2004, closing at 9906.91 which was lower than the prior closing low on March 24th of 10,048.20. The Trannies hit a low on March 22nd - confirmed by the Industrials two days later - of 2750.80. However, since then, the Trannies have failed to confirm another lower low, the Industrial's May 17th new low. While this non-confirmation may be a sign of a trend reversal to the upside, based upon 2002's price action (an analog with 2004's price action was shown in issue no. 54, available in the Current Issue archives at www.technicalindicatorindex.com), not only may lower lows and a confirmation be coming in the Trannies, but that confirmation could occur within a near-vertical panic-selling phase of a stock market Crash. The point is, we still operate under a Dow Theory "sell signal" and the latest non-confirmation may mean nothing for the bullish case.
The Institute for Supply Management (ISM) reported US Manufacturing Activity rose in May to an index reading of 62.8 from 61.4 in April. And the Labor Department reported that Nonfarm Business Productivity increased at a 3.8% annual rate during the first quarter. This statistic can also be viewed as an employment pressure measure - productivity is up due to job cuts or adding more work to an existing labor pool. Technology fits in here, but again, it can be seen as replacing the need for workers. My point is, this is not necessarily a "hip hip hooray" objective, not with deflationary risks nearby.
We learned this week that Retail Sales fell in May. Chicago-based Shoppertrack reported that sales in May fell 6.6 percent according to an article Tuesday on www.cnnmoney.com. Consumer Confidence also took a hit as the ABC News/Money magazine Consumer Comfort Index fell to -18 on a scale of -100 to +100. It was -3 in January 2004.
The Labor Department reported that the economy created 248,000 Non-farm Jobs in May, compared with a revised 346,000 for April. The number is good but not so good that it forces the Fed's hand to raise short-term interest rates later in the month. The last time we were given three-month jobs growth figures like we just had March-to-May was in 2000, just as the Bear market was getting underway. The Head of the CIA handed in his resignation for "personal" reasons. The top headline in Thursdays' Philadelphia Inquirer read, "Army May Force Longer Service." In other words, they are essentially drafting our "volunteer" soldiers into extended active duty. And this from James W. Crawley of the San Diego Union Tribune, June 3, 2004: "Seven aircraft carriers - more than half the nation's flattops . . . will be at sea starting this week . . . virtually every aircraft carrier that can sail. It's the first time since Operation Iraqi Freedom in March 2003 that so many of the Navy's carriers have been at sea at once." Could any of this tie in to the massive amounts of liquidity being pumped into the financial system these days? Could there be another war in our future? Or, is it all coincidence?
Money Supply, the Dollar, and Gold:
M-3 growth took a breather this past week, the Fed reporting a decline of $25.2 billion for the week ended May 24th. Since March 22nd, M-3 is up 180.5 billion. The bulk of the increase has really occurred in only four weeks, March 29th - $43.3 billion, April 26th - $47.0 billion, May 3rd - $57.9 billion, and May 17th - $46.8 billion. The other five weeks M-3 growth has been flat. So it seems the plan is to kick it up about $50.0 billion every third week or so. Again, why? We've never seen this sort of short-term growth without some sort of crisis - and never before the crisis, only after. I combed through the past 17 years and identified several crises - or perceived threats - that justified a similar degree of liquidity infusion the Fed is employing now.
1. On October 19, 1987, the stock market wrapped up its multi-week Crash with one final selling crescendo, dropping 508 points. The Fed responded by increasing M-3 $26.0 billion, or 0.7 percent, over the next two months.
2. On October 13, 1989 the stock market (DJIA) plunged 190 points after a Junk Bond market plunge in September after the RTC was formed in August 1989 to bail out bankrupt S&Ls. The Fed responded after these events by raising M-3 $48.1 billion, or 1.1%, through December 11th 1989.
3. In August of 1990, Iraq invaded Kuwait and two months later oil surged above $40 per barrel. The Fed responded by raising M-3 $10 billion, or 0.2%.
4. In December 1996, Greenspan was so concerned about the dangers of a spiraling stock market that he made his famous "irrational exuberance" speech. He followed that up by increasing M-3 $61.0 billion, or 1.2%, over the next two months.
5. In October 1997, Asian markets collapsed. The Fed responded by raising M-3 $84.8 billion, or 1.6%, over the next two months.
6. In August 1998, Russia defaulted on its domestic debts as the rubble collapsed. The DJIA fell 512 points on 8/31/98. Then in September, 1998 Long Term Capital Management Hedge Fund was bailed out by the Fed. These events apparently wigged out the Fed as they loaded up on liquidity, raising M-3 $195 billion, or a higher-than-usual crisis response increase of 3.36 % over the next two months.
7. On September 11, 2001, terrorists attacked U.S. soil. A Month later on October 11, 2001, Anthrax attacks hit the U.S. The Fed responded most apropos by raising M-3 $278 billion through mid December, 2001, a 3.6 % increase.
8. On March 20, 2003 the U.S. attacked Iraq. The Fed responded by raising M-3 $73.0 billion, a 0.8 % increase.
Now we see the Fed increasing M-3 $223.4 billion (2.48%) since March 1st, or $180 billion (2.0%)over the past two months, or $128.6 billion (1.4%) over the past month. Based upon historical responses to crises or perceived threats, the Fed's recent action is extraordinary for two reasons: First, it is an historically high amount in a similar time period, and secondly, it is coming before a crisis event has been communicated to the public, rather than after. If there is no crisis event to liquefy markets against, then this sort of M-3 infusion by the Fed is plain and simply irresponsible, a direct abdication of its charter to ensure a stable currency. I have too much respect for the Fed to believe they are not acting prudently. Whatever is up, I'm sure we'll know about it soon enough. The Bearish technical charts are telling us that.
With all this fiat currency entering the market, the U.S. Dollar will be hard-pressed to rise above 90. In fact, a look at the chart shows it has broken below its rising trend-channel, portending more downside. How much further it goes depends upon the continued rate of growth in M-3, and the policies of other nations. Should competitive devaluations occur where other nations also pump up their money supply, the trade weighted value of the dollar could hold up - however, too much paper everywhere will drive interest rates up and make Gold look quite attractive.
Let's look at Gold. The next chart (courtesy of www.stockcharts.com) shows Gold remaining in its rising trend-channel, even after its recent correction. There is a Double Top pattern showing up that is a bit bothersome to the Bullish case, however in examining the entirety of the technical and fundamental landscape we believe Gold remains bullish - especially long-term.
On the other hand, the Mining stocks technical patterns look horrid. Very ugly. Don't like them even a little bit. Simultaneous Bearish Double Top, Rounded Top, and Bearish Head & Shoulders in the AMEX Gold Bugs Index ($HUI). The Relative Strength Indicator is falling with plenty of room to go before it hits oversold. The index just hit the top of its 2% Bollinger Band, a place where significant declines are born. Usually it will bounce all the way down to its lower band, which would take it at least below 175, probably into the 160s as the Bollinger Band's bottom becomes an elusive falling bottom to catch. The minimum downside target indicated by the Head & Shoulders pattern is to below 150 - ouch. And the Moving Average Convergence Divergence looks like it is ready to fall. Why? I believe these stocks will get caught in the general equity market downdraft about to commence.
Bonds & Interest Rates:
Speaking of ugly, there is an ominous Bearish Head & Shoulders pattern in the 30 Year U.S. Treasury Bond that will be complete and confirmed with a drop in price to 99.00. If we get there, this chart suggests a minimum price target of 84.00. Not necessarily overnight as this is a 3 year chart, but the trend will be down - big-time. The Fed should raise short-term rates in June, but I wouldn't be surprised if they don't. If they aren't bashful about raising M-3 at crisis levels, they likely won't be bashful about leaving interest rates at historic lows no matter what the CPI is.
Equity markets are primed and ready, gas tank filled, for a long journey south. Analogs with past crashes remain valid, Fibonacci time patterns point to an imminent decline, interest rates should rise, and money supply is being injected into the economy as if a crisis is about to occur. The stage is set for the next stock market collapse. Defensive strategies are warranted.
'"Behold He is coming with the clouds, and every eye
will see Him, even those who pierced Him; and all the tribes
of the earth will mourn over Him. Even so. Amen.
" I am the Alpha and the Omega," says the Lord God, who is and who
was and who is to come, the Almighty.
Behold, I stand at the door and knock; if anyone hears
my voice and opens the door, I will come in to him,
and will dine with him, and he with Me."'
Revelation 2:7,8 and 3:20
Special Note: Be sure to register under the subscribers' section at www.technicalindicatorindex.com for e-mail notifications of our new mid-week market analysis, usually available on either Tuesdays or Wednesdays. These midweek updates will only be available via e-mail and in the future will not be posted on the web.
|Key Economic Statistics|
|Date||VIX||Mar. U.S. $||Euro||CRB||Gold||Silver||Crude Oil||1 Week Avg. M-3|
Note: Very little change from the prior week. Oil down a bit.