Monday, June 25, 2007

Stock Update 25 June 2007

The markets have continued to advance in a steady manner since the last update. The world-wide liquidity bubble continues and as long as it does all that money floating around will find it's way into the world's stock markets.

When will it long is a piece of string? No one really knows but one hint will come when the Yen vs USD and Yen vs Euro begins to appreciate (thereby ending the Yen carry trade). This has not occured yet so until then we'll enjoy the ride.

First chart is the MS World index 10 year monthly chart (click on charts to enlarge):

As can be seen, we've been in a bull market since the spring of 2003. As you can see, it was remarkably accurate in forcasting the bear market of 2000-2002 and the bull market that begain in 2003. Until this chart reverses to close on a monthy basis below the 12 month moving average the bull run continues.

As of the market close on Friday, the MS World is 200 points above the 12 MA so in the event of a summer market correction the market could lose as much as 9% and still be in a long term bull market. Any correction back to that level would be a low risk entry for additional capital for those not fully invested.

The next chart is the same index in a weekly view:

As can be seen, the market has been in a nice sustained uptrend since 2003. The trendline is curently sitting almost exactly at the same location as the 20 week moving average (the blue moving average line at 2163.36). This point should act as a first level of support in case of any market pullback and would allow a 3.3% decline from present levels.

Should that fail, I would be somewhat concerned. It has been common for the market to violate the 20 WMA numerous times since the bull market began in 2003 but the next support at the 50 week MA (currently at 2019.87) has been violated only once since the bull market began (a 1 week drop in late Sept 2004). This point would be a very good "line in the sand". A drop to this level from present would be 9.7% which coincides fairly closely with the 12 month MA I mentioned above. Any close below that would indicate a bear market typically lasting 12-18 months.

The next chart is the Dow Jones World Index daily chart:

The index has been in a nice sustained uptrending channel since the market correction bottom of July 2006. As of the close on Friday, it was still bullish and just below all time highs.

Any summer consolidation/correction could bring it down to the bottom of the channel (which coincides fairly close with the 289.27 support line indicated). A drop to this level would be a 4.3% correction and perfectly acceptable in a continuing bull market.

Last chart is the 1 box PNF chart I use:

As can be seen, any correction below 298 would be a very short term sell signal on this chart (also if you look on the previous chart you'll see a line of support at 297.70). Should that occur I would probably pair back my equity exposure to 50% to guard against any sudden downward thrust. At the other end, any break above 307 would be a bullish breakout and I would probably commit my last 25% I am currently holding in cash.

In summary, the markets are doing fine. We have entered the period of time when the markets in general do not do quite as well (May-Oct) so a pullback/correction cannot be ruled out. As such, I continue to hold a 75% equity/25% cash position. A break below 298 on the DJW and I'll go to a 50% cash/50% equity position; a break above 307 and I'll go to a 100% equity position.


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