Monday, September 04, 2006

Market Update 04 September 2006

Once again this update has been quite infrequent for the same reason as previous; namely that the markets are stuck in a range and basically do not know where to go.

First chart is the DJW PNF 1 box:

As can be seen, a buy signal was produced Aug 04 when the daily price closed through 248. However, other charts I monitor show the price break was on very weak volume and momentum and thus is somewhat suspect. Not to say that this price break will not hold but I feel this is a "dead cat bounce" and the markets are heading lower from here.

So where are we in the "big picture" and why am I still so defensive? Here is why:

This is the chart I use to give me the big picture about the markets and our provident fund:

This is the "ultimate" chart I use to define whether we are in a bull or bear market. As can be seen, we entered a bear market in Jul/2000 and did not recover until Apr/2003. We have been in a bull market since then.

We are still in a bull market as we are still above the 12 MA. Any monthly close below the current 12 MA would be an indication we have entered a bear market. That price is currently at 1742.17 (as can be seen on the right side of the chart).

So now we go to the weekly chart of the same index:

Note we have broken the uptrend line that has been in place since early 2003. Also note the level we fell to on the recent decline (1704.57). As this price is below the 12 MA on the monthly chart above, had the markets not recovered from this level it would have initiated a new bear market. In otherwords, we sidestepped a bullet this time. So far so good but this price action is not indicative of a healthy and strong market. It is one that indicates a topping process and normally precludes at least a major correction or possibly a trend change into a bear market.

So what happens now? It is the end of summer and the major players will be returning to the markets from their vacations. They will be assessing where the market is and will be considering the following:

-the months of Sept and Oct are historically the worst 2 months of the year,
-the bottom of the 2nd year of the 4 year presidential cycle (Nov, 2006) is usually the bottom of the market,
-corporate profits have had 17 consecutive quarters of double digit returns; how much longer can that last given the US economy is slowing, and
-we are near record highs in both the S&P 500 and Dow indexes.

I will touch on these in a later blog but for now these considerations have me sitting on the sidelines in cash. There are way to many negatives building for me to confidently move back into this market at this time. The only thing that would change my mind and make me go back into these markets is either:

1) a closing price above the last highs we saw in April, or
2) a date beyond the dangers of Sept-Nov, 2006.

Until either occurs I will continue to sit on the sidelines in cash and protect my profits.


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