Summary of Index Daily Closings for Week Ending July 23, 2004
|Date||DJIA||Transports||S&P||NASDAQ||Jun 30 Yr Treas |
|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)|
This week the Dow Jones Industrial Average closed down 177.56, in line with last week's Shortterm TII reading of negative (33.75). Volatility picked up with a 190 point intraday decline on Wednesday that continued into another 100 point decline Thursday morning. Together that is a 290 point impulsive downside move, something we haven't seen in months. The fact that it happened without panic new lows or panic breadth statistics indicates the selling is not likely over. Bottoms usually occur with panic selling. The 290 point correction-free move also indicates more large moves could be on the way.
The big news this week was the close of most major equity averages decisively below their 200 Day moving averages. Many computerized trading programs kick out sell signals when this happens.
For the first time in a while, the Small Cap indexes got hammered. Small Caps have been the battle cry for the Bulls since the Big Caps peaked earlier in the year. Bulls argued, somewhat impressively, that we were simply experiencing rotation out of Blue Chips into mom and pops. Well, this week the Russell 2000 ($IUX) joined the Big Boys with a whopping 4.4 percent decline. Bearish patterns are popping up everywhere it seems, including an Head & Shoulders Top in the Russell 2000.
|Equities Markets Technical Indicator Index (TII) ™|
|Week Ended||Short Term Index||Intermediate Term Index|
|Mar 19, 2004||(12.00)||(27.60)||Scale|
|Mar 26, 2004||73.00||(38.35)|
|Apr 2, 2004||(3.00)||(35.61)||(100) to +100|
|Apr 16, 2004||(43.00)||(29.90)|
|Apr 23, 2004||94.00||(22.69)||(Negative) Bearish|
|Apr 30, 2004||(33.25)||(34.88)||Positive Bullish|
|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)|
|June 11, 2004||(77.75)||(25.92)|
|June 18, 2004||(40.25)||(31.17)|
|June 25, 2004||(34.00)||(26.10)|
|July 2, 2004||(41.50)||(27.64)|
|July 9, 2004||(32.50)||(30.21)|
|July 16, 2004||(33.75)||(41.99)|
|July 23, 2004||(59.00)||(49.98)|
This week the Short-term Technical Indicator Index comes in at negative (59.00), indicating a market decline, possibly severe, 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, or the Plunge Protection Team can come in and temporarily stop market slides, so it may be unwise to trade off this weekly measured indicator.
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 (49.98).
The next two charts point out the significance of this week's DJIA crossover below its 200 Day moving average. Whenever prices break through their 200 Day MA decisively, by more than 2 percent, prices tend to continue impulsively in a significant move, 400 to 500 points or more. These occurrences are rare and many investors find them tradable events. Insignificant breakthroughs or touches do not portend major moves across the moving average. The crossover must be decisive. It is not uncommon to see prices test the 200 Day MA a couple of times - perhaps crossover only to retest, then crossover again - before a decisive break.
This week we saw the Dow Industrials break down as much as 264 points (2.58 percent) below its 200 day MA on an intraday basis Thursday, 254 points (2.49 percent) on a closing basis on Friday. That is on the teetering edge of "decisive." To play it safe, I would not put high probability on an immediate impulsive continuation lower until the DJIA closed around 9800ish. That would seem consistent with other decisive moves over the past ten years.
The Dow Jones Industrial Average is oversold BUT, but there are several factors that lead us to believe this average should decline further before a sustained countertrend rally can begin. First is the downward sloping trend-channel from back in February. We've seen a series of lower highs and lower lows that kiss the boundaries and it is quite likely the current decline will touch the bottom boundary line before turning back up. That would target the 9750 area for a near-term bottom. Second, volume is higher on declining days than rising days. Third, the McClellan Oscillator just turned negative a few days ago and it is not uncommon for this indicator to remain in negative territory for at least a few weeks. Momentum still appears downward and the weekly RSI reading is not yet oversold. New lows are increasing, however have not reached anywhere the levels seen at the past two bottoms in March and May 2004.
Should the DJIA fall another 200 points to 9750 over the next week, that would place prices at a very dangerous crossroad. Should prices break below that 9750 lower trend-channel boundary before rebounding, we could see panic selling. Call it a mini-crash where over 90 percent of volume is to the downside and new lows exceed 300. Whatever near-term bottom the market decides to reach will be a minor wave 1 down of an intermediate degree wave 1 down of a primary degree wave 3 down in Elliott Wave parlance. Minor wave 2 up should not exceed the June 2004 highs. After shaking out the shorts, a major decline should then emerge, perhaps set off by some trigger-event. The overriding factor is the decisive close below the 200 Day moving average. It portends substantially lower prices.
The Transportation Average's Higher High of 3,212.45 on July 1st was not confirmed by the Dow Industrials, which recorded a truncated Lower High on June 23rd for its wave 5 of C of Primary Degree 2 up. Thus we remain with a Dow Theory Bearish Upside Non-confirmation following a Dow Theory Sell Signal back on March 10, 2004.
The Trannies' 5th wave up was a Parabolic Spike, identified in issue no. 63 on July 2nd, 2004 (available in the archives at www.technicalindicatorindex.com). We pointed out this vertical pattern represents speculative excess, a final blow-off peak, that does not lend itself to a moderate decline or soft landing. This spike pattern leads to vertical declines. Since July 2nd, this pattern has reversed with a significant sell-off, falling over 6 percent through Thursday. The Elliott Wave count looks like a micro degree (i) down and (ii) up have completed and (iii) down of a larger degree 1 down is underway.
The Relative Strength Indicator is in neutral territory with plenty of room for further decline. The MACD is breaking down hard. Trannies should continue to decline sharply.
The Philadelphia Semiconductor Index ($SOX) continues to deteriorate, hitting another new low Friday, 404.54 for this slow-motion Crash since January 2004. The bludgeoning has already wiped out 27.7 percent from the Chips index. Since chips are used in just about everything mechanical and electronic these days, this does not bode well for the economy or the major stock indices. As bad as the decline since January has been, according to the above chart, it is nowhere near over. The SOX have formed a Bearish Head & Shoulders Top and prices have recently broken decisively below the neckline. Prices have also fallen decisively below their 200 Day and 50 Day moving averages. And the 50 Day MA has broken decisively below the 200 Day MA. Ordinarily the bottom boundary of the downward sloping trend-channel should provide support, and the MACD reading shows an oversold condition. The RSI is also nearing oversold territory. However, should prices break below this bottom boundary of the downward sloping trend-channel, it would suggest potential for a swift panic-selling period that could occur as a short-term crash inside the intermediate-term crash.
The SOX is a major component of the NASDAQ Composite and the parallels are striking - except the NASDAQ hasn't seen the percentage price decline the SOX has - yet. NASDAQ sports a similar Bearish Head & Shoulders Top pattern and a Rounded Top pattern that is sitting at 2:00 o'clock (picture a clock). Once prices hit 3:00 o'clock, look for a precipitous drop. The Head & Shoulders pattern is indicating a minimum downside target for the Composite in the 1500s. NASDAQ also is approaching oversold territory, however should prices drop decisively below the lower boundary of the declining trend-channel, panic-selling could occur despite being oversold.
Dow Component and NASDAQ Component Microsoft Corporation (MSFT) took the unusual step of announcing the return of a ton of cash to its shareholders this week. $75 billion! Why? Initially the market got excited by the news but upon further review, Microsoft sold off hard. The happy folks at CNBC and other big-corporate-controlled media outlets explained the sell-off as disappointment in MSFT's earnings and revenue. Yeah, MSFT only reported an 80 percent increase in its earnings. Pretty poor performance, wouldn't ya say? Sell the sucker. Huh?
I have a slightly different take on what's going on here. Perhaps it was my former Chief Financial Officer instincts kickin' in again, but the second I heard they were returning that kind of cash to shareholders I realized even the Goliath of growth companies sees trouble ahead. In essence, they have determined that shareholders are more likely to find a greater return on this cash, this capital, than Microsoft can. Microsoft, the darling of growth companies, is saying "no thanks" to free capital. Astonishing. MSFT is saying they really can't grow the company profitably enough to justify this capital. They have reached the point of diminishing returns.
Take a look at the above chart (courtesy of www.stockcharts.com). I had to dig a little bit to find this baby, but if you pull up the two year weekly chart for MSFT, and consider primarily closing prices, a Head & Shoulders Topping pattern with a downside minimum price target of 18 jumps out at you. This pattern will be confirmed with a price break below 25. The pattern preceded the news.
The Federal Reserve indicated that they are ready to raise short-term interest rates again in August in speeches by both Chairman Alan Greenspan and Chicago Fed President Michael Moskow. Their view of the economy is that it is "solid." What's not important is their view of the economy. What is important is they plan on raising short-term interest rates. The technical picture shows an economy that will not be able to sustain rising interest rates.
Leading Indicators fell 0.2 percent in June, the first drop in 3 months, according to the Conference Board, a private research firm. Of the ten components, five rose, and one of the components that rose - stock prices - will not be helping the July number.
Jobless Claims were reported to be 339,000 for the week ended July 16th according to the Labor Department - far too many for a so-called "solid" economy, unless of course you are gainfully employed at the Fed, or happily collecting your paycheck each week at the Labor Department as you compute the numbers.
The Real Estate Bubble: New Applications for U.S. Mortgages declined for the week ended July 16th by 4 percent, according to the Mortgage Bankers Association. Home Builder Optimism fell in July for the second month in a row, according to the National Association of Home Builders. U.S. Housing Starts plunged in June to the lowest level in 17 months according to the Commerce Department. Permits fell 8.2 percent. Builders are getting smart. According to an article by Ilaina Jonas, Reuters, on Wednesday, "there is a surge in the number of homes for sale." Unemployment, underemployment, and rising interest rates chasing variable-rate mortgages will do that.
I mentioned two weeks ago that nearly 25 percent of the 54 million square feet of office space is vacant in the Philadelphia suburbs according to Cushman & Wakefield Inc., the national real estate firm, as noted in an article in Monday, July 6th, 2004's Philadelphia Inquirer by Henry J. Holcomb. Add in the above, plus a strong prognosis for rising interest rates and it is easy to see that the real estate bubble is at great risk of bursting - soon. Deflation in real estate will follow because in the coming environment, in order to sell a property, prices must drop.
The logical extension of the real estate bubble pop will be an increase in real estate loan problems at both financial institutions and the buyers of most of the mortgage paper, Fannie Mae and Freddie Mac. Real Estate has been financed to the max with equity loans built atop first mortgages based upon collateral values that rose 35 percent over the past two years. Typical loan-to-collateral ratios are 80 percent to 125 percent. Most of these loans are asset-dependent for repayment. In other words, don't expect these properties to be held 30 years and the loans paid back from debtor income. No, these loans will be paid back from the proceeds of the sale of the underlying collateral properties. As property values drop, loans cannot be repaid in full. As examiners visit banks and see falling property values, they will downgrade these loans and force banks to boost their reserves - a severe drain on bank earnings. The long and the short of it is that bank earnings will be pressured and bank stocks are at risk. The next page shows two charts. One of the renowned mega-builder Toll Brothers (TOL) and the other of the Philadelphia Bank Index ($USB). Both show Bearish Topping patterns.
Money Supply, the Dollar, & Gold:
M-3 is down $9.4 billion since May 17th, 2004. That is a two month period where M-3 is flat to down which meets our criteria for forecasting an equity market decline. Our research shows that whenever M-3 is up for more than a month, equities rise within one to three months thereafter. Conversely, whenever M-3 plateaus or declines over a two month or longer period, equities subsequently decline. Should equities continue to drop, look for the Fed to step up its liquidity pumping, as it did in April and May.
The US Dollar Index is nearing the top of its long-term declining trend-channel, formidable resistance, and has formed a Bearish Head & Shoulders Top pattern at the top of the trend-channel. A decisive break above 91 would signal a potential reversal up from the downward trend. A break below 87 would confirm the Bearish Head & Shoulders pattern and signal the Dollar was headed for the low 80's area, and perhaps into the 70s. Right now the Fed is jawboning its anti-inflation rhetoric, has stopped the M-3 spigot, and such a tightening is bullish for the Dollar. However, with this tightening we see declining equities which should force the Fed to reverse course - especially in an election year. The bearish case is calling for more liquidity pumping. I lean that way as this "recovery" is not solid, is fragile at best, and will soon turn south, perhaps aided by the Fed's tightening.
Gold is struggling against what is looking more and more like a losing battle. Gold is real money, but I'm rooting for it to blast higher because if Gold is rising, then deflation is not in control of our economy, rather inflation is. Believe me, inflation is the far lesser of those two evils. Deflation will lead to economic Depression, al la the 1930s, especially in the Debt-Bubble infested USA of 2004. This chart is flat-out forecasting deflation to come upon the scene - and soon. Oh, we may not get the economic numbers that reveal deflation - that would be too fearful an admission - but what we will get that won't hide the truth is declining markets, falling prices in real estate, stocks, and bonds.
The chart. Gold is drifting toward the lower boundary of its long-term rising trend-channel (green). It remains inside the channel - that's good. However, there are two Bearish price patterns in play, one fully developed, the Double Top, and one that will complete with a break below the lower boundary of the long-term trend-channel, a Head & Shoulders Top (orange). Gold moved sharply lower this week, hitting the lower boundary of a smaller upward sloping trend-channel (magenta) on Thursday. A break below 394 is Bearish. A break below 387 is very Bearish. The 50 Day moving average remains 6.25 points below its 200 day moving average, and has converged with the lower boundary of the magenta short-term upward trend-channel. The RSI Indicator is neutral with plenty of room to fall. The MACD is breaking down hard. Momentum is down. If you are keeping the Elliott Wave count at home, we have seen a wave 1 down from the April 433 top to the May 370 low, then a wave 2 up that closed at 411 in early July. It looks like wave 3 down may be underway. Gold sees Deflation.
Bonds and Interest Rates:
The Fed Chairman came out this week and testified that he would continue to raise interest rates as the economy is in good shape. Thus we can expect another 25 basis points at the next meeting.
The above chart shows a peculiar but Bearish pattern in the 30 Year U.S. Treasury Bond. Over the past two years prices have formed a massive Bearish Head & Shoulders pattern (orange) that has completed, just waiting for prices to bust below the neckline to begin a significant decline to a minimum price target of 85ish. The Right Shoulder of this Bearish Topping pattern is another Bearish Head & Shoulders pattern (green) nearing completion. All that remains for this pattern to complete is a decline to the larger pattern's neckline, around 101.00. The minimum downside target, a shorter term timeframe target, would be 90ish. Any way you cut it, the language of the markets is telling us long-term interest rates are headed sharply higher over both the intermediate and long-term horizons. This is bad for real estate and stocks. The catalyst could be more liquidity pumping by the Fed to bail out a leaking equity market, driving the Dollar down and Bonds along with it.
The Relative Strength Indicator is coming off an overbought reading, so it is in good shape to facilitate a sharp decline from here. The MACD is also nearing overbought territory, a place where declines begin. And prices have recently bounced off their upper 2 percent Bollinger Band, again, a place where declines are born. We are bearish Bonds.
Bottom Line: The SPX to VIX ratio comes in at 65 on Friday, very near the Crash indicator level of 68. As selling intensifies we will expect this ratio to fall. Once below 35, we will look to move Bullish. Intermediate-term indicators are deteriorating as we come upon short-term oversold conditions. It could go either way here. We could see the recent decline reach a minor bottom over the next week and then rally to the 200 day moving average, or we could see panic selling occur at any time. We continue to see a plethora of charts and a confluence of indicators telling us a stock market Crash, be it sudden or in slow motion, should hit the major averages before the election. Caution is warranted.
"Seventy weeks have been decreed for your people
and your holy city, to finish the transgression, to make an end of sin,
to make atonement for iniquity, to bring in everlasting righteousness,
to seal up vision and prophecy, and to anoint the most holy place.
So you are to know and discern that from the issuing of a decree
to restore and rebuild Jerusalem until Messiah
the Prince there will be seven weeks and sixty-two weeks;
it will be built again, with plaza and moat, even in times of distress.
Then after the sixty-two weeks the Messiah will be cut off
and have nothing, and the people of the prince
who is to come will destroy the city and the sanctuary.
And its end will come with a flood;
even to the end there will be war;
desolations are determined.
And he will make a firm covenant with the many for one week,
but in the middle of the week he will put a stop to sacrifice
and grain offering; and on the wing of abominations
will come one who makes desolate,
even until a complete destruction, one that is decreed,
is poured out on the one who makes desolate."
Daniel 9: 24-27
"Let no one in any way deceive you, for it will not come unless
the apostasy comes first, and the man of lawlessness is revealed,
the son of destruction, who opposes and exalts himself above
every so-called god or object of worship, so that he takes his
seat in the temple of God, displaying himself as being God."
2 Thessalonians 2: 3,4
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|Key Economic Statistics|
|Date||VIX||Mar. U.S. $||Euro||CRB||Gold||Silver||Crude Oil||1 Week Avg. M-3|
Note: VIX gets worried, Dollar and Oil up, Metals down.