I have been watching the continued advance of the broad stockmarket since the US elections with a kind of morbid fascination. Despite the horrific fundamentals, the market has continued higher, yet, as I already dramatically demonstrated a couple of weeks ago by means of a Dow chart in Euros, this rally is nothing more than a "damp squib" in real money terms. The complacency in this market is truly incredible, given the drop in yields to a pitifully low level, and the fact that the market has risen into an area of truly massive overhead supply that would make even an 8-year old budding chart analyst nervous.
More ominous still is the fact that insiders have been unloading stock onto retail buyers at an ever-expanding rate that has risen to extreme levels in recent weeks. Ordinary investors have been corralled into the pen once again, seduced by slick marketing campaigns and glossy long-winded brochures, and are now helplessly awaiting their fate, which is, of course, to be fleeced.
We will now examine the charts for the broad US stock markets, focusing mainly on the Dow Jones Industrials, because there was a potentially very significant volume development on Friday. I would rather look mostly at the S&P500, which is more representative of the market as a whole, but there is no volume data available for this broader index.
A two-year time period has been selected for our 1st chart, in order to show the run-up from the March 03 low in its entirety and also the toppy action all this year. On this chart we can see that the index broke out from the gentle downtrend channel in force all year, upon the Republican party securing, apparently with the aid of more than a little tweaking of the latest vote counting technology, a clear, if marginal victory in the election in early November. This breakout, however, is regarded as a sucker rally, as it is driving into massive overhead resistance and is accompanied by frenetic insider selling.
Thus it is most interesting to observe that the market fell on Friday on huge volume - the heaviest for well over 3 years, the heaviest in fact since the fall 01 selling climax, from critical resistance bang on the highs of February of this year and March 2002. So it looks like Santa's going on strike this year, as least as far as stockmarket investors are concerned. Christmas is a time when people's normal judgement is suspended, frequently resulting in a rally based on hope not substance, and facilitated by the low volumes that prevail over the holiday period. Friday's move signifies that, at the very least, a short-term top is in all probability in.
The long-term chart going back 10 years is horrific. It shows the market stalled beneath a massive wall of supply from the 1999 - 2001 highs. Given the magnitude of this resistance, the fact that the market has risen as far as it has is impressive indeed - until, that is, you stop to think what's happened to the currency over the last several years. Factor that in and you realize that its performance has in reality been anaemic.
The S&P500 chart is also a grim picture showing the index now into a zone of heavy supply from the top area.
The long-term Dow chart in Euros should bring home to US investors how meager the latest rally in US indices has been in terms of real gains.
The trigger for a plunge in the general stockmarket is expected to be the fairly sudden realization that interest rates are set to rise substantially. As the stockmarket normally discounts developments 6 to 9 months ahead of their actual occurrence, rates might not actually begin their steep ascent for many months after the market falls. The probable cause of the rising rates is likely to be the continued depreciation of the currency necessitating higher interest rates to maintain capital inflows.
The increasing risk of a big sell-off in the broad market, coupled with the fact that the gold stock indices have marked out a potential double-top, gives grounds for caution at this time, as precious metal stocks could get caught up in the melee and taken down temporarily - which is why, in general, we will be careful about re-entering the market following our general stop in the HUI being triggered about 10 days ago.