Sunday, August 19, 2007

Stock Market Update 19 August 2007

Greetings and welcome to the latest update.

What a welcome home. I managed to get my first extended length summer vacation in years and while I'm gone (building a new "casa" in Mexico and therefore without any access to either Internet or T.V. news) all hell breaks loose in the world!

Spoke over the phone to my father just prior to return to DXB and he asked me what my take was on the latest market meltdown.......he was really surprised when my response was......"what market meltdown"? Murphy's Law strikes again.

Anyway, enough of that and time to get to work. For those of you who are wondering what has happened in the past 3-4 weeks, refer to a previous post I made about sub-prime mortgages in the U.S. and the possible fallout. In short, the process has begun. For those who are interested I will try to publish 2 excellent articles I came across which explain what is happening and why. If I can't do it on the blog and if you are interested, I will post my email address and you can send me an email and I'll forward them to you.

The bottom line is this current crisis might pass quickly or it might be a once in a lifetime event. It is a unique event and therefore there is no history to indicate the future direction this might lead. Whether it is isolated and contained or a catastrophe is the trillion dollar question that still needs to be answered.

On to the charts. First the Dow Jones World plotted in various currencies (click charts to enlarge):

The important aspect of this chart is the DJW priced in Euro's has broken it's uptrend line established since 2003; the other currencies have broken secondary uptrend lines but the main uptrend lines are still intact.

Next is the MSCI World Index 5 year weekly chart:

The key point on this chart is the uptrend line has been broken from 2003 and more importantly the 50 week moving average has been violated. This has only happened once since the bull market began (Sept 2004) and only for a very short time. Should this continue it will indicate a bear market has begun.

The additional important indicator on this chart is to look at the 20 vs 50 week moving average. It crossed positive (20 ma above the 50 ma) in late June 2003 and has been positive ever since. A 20 ma cross below the 50 ma would be a confirmation that a bear market has begun.

Next chart is the same index on a monthly basis.

As can be clearly seen, a negative cross of price through the 12 month ma in late July 2000 was the signal that a bear market began. A positive cross of price through the 12 month ma in April 2003 indicated a bull market had began. Now it is clear price has crossed through the 12 month ma once again to the downside.........this is an extremely serious negative event and needs to be watched closely.

The question is whether we have an event like July 2000 (a clear break of the uptrend) or a blip as can be seen in Jul-Sep 1998 (a false break to the downside within an uptrend). In either case, caution is warranted.

Next chart is the Dow Jones World 1 year daily.

As can be seen, the bullish up trending channel has been clearly broken. This chart indicated a sell signal on July 26 based upon the ADX (14) sell pressure breaking above 60 and the MACD crossing below zero.

Next is the same index plotted in a 10 year time frame weekly.

The key point in this chart is the 13 vs 34 week ema (exponential moving average) has yet to cross. If it does it will have confirmed a bear market.

The other indicators are key. The first is the bullish percent chart of the S & P 500 index. It can be seen that since the bull market began during all corrections the level of approx 45 has remained intact. It is now broken through this level; this is a major negative signal.

Next is the bullish percent chart for the Nasdaq composite index. It has not been violated yet but is on the cusp. A break below will be another major negative signal.

Third is the average true range (ATR) of the DJW index. This is a measure of the price movements within the index over a set time period. In bull markets the ATR tends to be quiet; in bear markets it tends to rise. Note the breakout above approx 5.85; this a first since the bull market began and is another bad sign.

Fourth is the 13,34 MACD. Anything above zero is positive; below zero is negative. This chart shows things are still ok but this is somewhat of a lagging indicator. A break below zero would be a confirmation that things are bad.......... I monitor this one but use it as a confirmation signal only.

Next is my favourite chart; the 1 box PNF of the DJW index.

It can be seen on this chart a sell signal was initiated on a break through 300 (occurred 26 July). A confirming sell signal was again issued on a break through 293.

This chart shows a possible target price of 272 (we are currently at 281.09) but this target is only a theoretical mathematically calculated target. Price congestion appears in the 274-278 area with a support level at 271. A price break below this would leave it open to a drop as low as the 240's.

Last chart is the same index (DJW) but in a "traditional" PNF format.

The thing to note on this chart is that it is still bullish. A price break below 272 (a print price of 268) would indicate a true trend change and a bear market. Not there yet but awful close.

Bottom line. Missed the sell signal through 300 (due to being out of country and not able to access the Internet) and not pleased with the charts (but must disclose I cashed out all my investments in my personal investment account that I use instead of a "C" account on 10 July; in hindsight this was a great call). Most charts are telling us this is not just another buying opportunity and might be something more serious.

We had a very good positive price correction upwards on Friday due to the Federal Reserve lowering the discount rate by 50 basis points (1/2%). This is basically the rate they charge the banks to lend them money. They also extended repayment to 30 days.

The markets reaction is the result of a belief the Fed will cut it's Fed Funds rate at its next meeting. This remains to be seen. What is important is the basic reason for this mess (the sub-prime mortgage crisis) has not disappeared or been changed by this move; this is only a preemptive attempt to avoid a run on the banks (extend liquidity) and allow some breathing space. The core problem remains and that is troubling.

As a result of the charts, I will be reducing my exposure to 50% equities/50% cash. The markets have tendency to not have "V" shaped bottoms so I suspect the market will have a short term upward correction followed by a further downward thrust below today's levels. I suspect I will unload to a 100% cash position during that upward correction but will let the charts tell me when. I do not believe we will see a bottom until mid-late fall. After that I suspect the markets will have a good run up into Christmas and will be invested along those lines.

Lastly, I've had a number of email requests asking for individual portfolio advice. Please bear in mind I currently use this blog only as a guide to others to show what I am doing within my own personal provident fund portfolio and why I'm making such decisions. I will not provide specific and individual portfolio management at this time.


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