The year 2004 may yet go down as one of the least volatile in memory. After nearly 7 months the Dow Jones Industrials (DJI) is down 4.7%, the S&P 500 is off 1.6%, the NASDAQ has plunged 6.4% and the TSX Composite the star of the show is up 2.0%. The range, which is a better measurement of the lack of volatility, saw the DJI with a 757 point move or around 7%, the S&P 500 ranged about 73 points or 6.6%, the NASDAQ showed its volatility with a range of 271 points or around 14%, and finally the TSX composite ranged 775 points or roughly 9%.
To put this in some perspective the Dow Jones Industrials range in 2000 was 1950, 2001 - 3510, 2002 - 3550 and 2003 - 3397. In other words the range this year is only roughly 24% of the average range over the past 4 years. The lack of volatility is killing both brokers and traders alike. Of course after the volatility of the past few years maybe the respite is welcome. All would naturally prefer volatility to the upside like 2003.
When we look at a whole host of indicators it paints a real mixed picture. Sentiment indicators like the VIX volatility indicator remain at very bearish levels. Other sentiment indicators of bull/bears suggests that the market remains very tilted to the bull side but then as soon as the market starts to fall the bearish indicators quickly kick in suggesting that the market is oversold and should be bought. Short interest on stocks has been rising, however, and that is a sure sign that the pros are preparing for a market fall.
Cycles are mixed as well. Our favourite 1934 cycle has a low on July 26 suggesting that there might be some turns around this time frame and then another upside attempt before plunging again into September. The 1984 cycle (a Presidential election year) also had an important low on July 25 (the low for the year). So there clearly is some chance that we could be plunging into a low at this time then make another rally attempt up before plunging into the very dangerous September period.
Certainly the recent breakdown has been of the classic variety. First we appear to be continuing the classic bear market pattern of a series of lower highs and lower lows. The NASDAQ has fulfilled that to a T thus far as the close on July 23 was both a new low close and a new low since its top in January. The other major indices (DJI, S&P and TSX) have not as yet hit new lows or new low closes. Indeed the TSX, being the best performer to date, has not as yet broken down under its key moving averages of the 50, 100 and 200 day as both the DJI and the S&P have. But that could be short lived.
We are showing the charts of the DJI and the TSX. As noted the DJI has clearly broken down. The downside of the bear channel is in the 9700 to 9750 zone. It may not be a straight down as we note above the possibility of lows surrounding the July 25 date based on past cycles. A rebound would at least carry us back to the 200 day MA near 10200. The TSX is sitting on the cusp of breaking down out of a symmetrical triangle-topping pattern. Targets here would be down to 7200. The markets are breaking down from still too high valuations and from disappointing earnings numbers. As well the economic numbers are mixed and recent ones have shown some unexpected weakness. All in all not a positive note for the markets. The NASDAQ (not shown) has bear channel support near 1800 but more likely if the DJI were to fall to the 9700 area, 1600 is more likely. The S&P 500 still has possible targets down to 1040/1060.
But the broader markets were not the only ones to fall. Gold and gold stocks also broke this week. What appears to have triggered this is the usual waffling and pontificating of Fed Chairman Alan Greenspan. Greenspan supported his rising interest rate scenario with a possible 25 bp rise each FOMC meeting, piffled the huge trade deficit (now over 5% of GDP) that it was threat to global financial stability and to the value of the US$ and says that the slowdown in economic growth was not a problem nor was a possible threat of a slowdown in spending by the consumer. After all coming from the man that has his hands on the monetary spigot it suggests that the monetary largesse will continue to keep the game going.
Anyway it worked as the US$ reversed its downward course and gold broke losing $18 on the week. The rise on the US$ was so strong, even if it was on short covering, that it is on the cusp of negating the head and shoulders pattern that had formed over the past several weeks. It has also failed to come near its targets of what appeared as a bearish ascending wedge pattern. Both of these patterns suggested minimum US$ targets of down to 83/84. Instead here we are back at 200 day MA and the major down trend line. A break through now could well take us to 94/95. First though there is stiff resistance at 91/92 and if that holds then the breakthrough may not occur.
Gold broke down under its 200 day MA and from a possible triangle-topping pattern. We would hate to think that this pattern is correct as it could spell gold falling to $350. Well-known gold guru Jim Sinclair of www.jsmineset.com has confidently predicated that gold will hit $480 in August so there is clearly quite a battle going on here to see who is right. Gold has significant support at $390, $380 and $370. The US$ rise is temporary and as we note short covering. Oil is also rising again and threatening to break to new highs. As well other commodities such as copper remain strong.
While this drop in gold is certainly potentially scary and another attempt at a shakedown, we do not see it collapsing to the extent suggested. Nor does the US$ have the wherewithal to sustain a move much above 90. Statistics have shown that both the Japanese and the Chinese, the two primary purchasers of US bonds, have both slowed lately. Bond prices fell on the week after hitting major resistance zones the previous week. Still one should keep in mind of the outside possibilities for both gold and the US$ in the event that worst does happen.
The next month is shaping up to be quite interesting. First there is the Democratic Convention July 26 to 29, then the Olympics August 13 to 29 and finally the Republican Convention August 30 to September 2. What may be memorable though is not so much who the winners are (the conventions are quite predictable of course) but the massive security that shrouds all of the events and the accompanying massive cost. Boston, Athens and New York City would seem to be the last place anyone would want to be during the above dates. They will in essence be massive armed camps. Under such a palling and stifling atmosphere it is difficult to imagine markets making any headway of significance especially if there is no significant improvement in economic numbers.
What will be of interest going into the Republican Convention is the possible fate of Dick Cheney. Calls continue for a change on the VP ticket. Cheney has been seen as being largely behind invading Iraq and as a consequence is taking heat along with Donald Rumsfield for its shortcomings. More intriguingly though are the investigations into Halliburton over bribery charges and for possible illegal work with Iran all while Cheney was CEO of Halliburton. A US grand jury has issued a subpoena to Halliburton requesting documents relating to its Cayman unit's work in Iran. A Senate Committee is examining Cheney's role.
Things continue to be in flux in Iraq as well. The Philippines pulled out their small contingent of troops to save the life of a countryman and others such as South Korea issued heavy criticism and submitted a joint resolution to the National Assembly and the US Embassy calling for Washington to apologize for asking Korea to send troops to Iraq based on the false intelligence of WMD. The turnover to the Iraqis has not stopped the killing although there has been a sharp drop in the number of US casualties. An interesting story appeared in the Sydney Morning Herald (http://www.smh.com.au/articles/2004/07/16/1089694568757.html?oneclick=true) outlining eyewitness accounts of Prime Minister Ilyad Allawi personally executed at least 6 insurgents with shots to the head. Given that the stories surrounding torture and even murder in Abu Ghraib and Afghanistan have continued to surface things like that should not be too surprising. After the fall of Saddam only the ones pulling the trigger and doing the torture have changed.
Setting aside all of the rhetoric surrounding the World Court condemnation of the Israeli wall and the subsequent UN condemnation of the same, the real trouble in the Mid-East may be with Iran (one of the original Axis of Evil). Here the 9/11 commission has documented possible ties between Al Qaeda and Iran even as they offer that there is no evidence that Iran knew about 9/11. Still this has allowed the rhetoric to rise and raise the possibility of further intervention in Iran. As well Israel is raising the ante with ongoing accusations of the Iranian and Syrian ties to Hezbollah in Southern Lebanon. Israeli war planes have buzzed through Lebanon recently.
It's summer and the living is supposed to be easy. But things are just beginning to heat up. The markets are falling when many were calling for a rally. Gold has also joined the markets in a downward swing but it is merely following the US$. The Political Conventions are about to begin and the mud slinging will soon be rising to a fever pitch. The Olympics will glue everyone to their TV for two weeks not so much for who might win but for the stifling security and the possibility that something could happen. But the real heat may be coming in the Mid-East with the centre on Iran and immediately in the background Israel. Trouble is, as they say, brewing.
