Saturday, September 22, 2007

Stock Market Update 22 Sept 2007


Dow Jones World Index: + 9.469%

EK Blackrock/MLIM Equity Fund: + 7.57%

EK Fidelity International Fund: + 11.67%

It has been a very interesting week on the markets with most of the averages gaining and the US dollar getting hammered.

The huge news of the week was the decision by the US Federal Open Market Committee to lower both the Discount Rate and the Fed Funds rate by 50 basis points each (1/2%). This took the market by surprise as most had predicted a 25 basis point cut in the Fed Funds and Discount rates (1/4%). In fact, in the futures market the 50 + 50 cut was given less odds than holding the rates steady (market had priced in only an 11% chance of a 50 + 50 cut).

The result was a significant market rally on Tuesday and into Wednesday (as I mentioned would occur with a 50 bp cut in my last blog) with a small pullback on Thursday and some further gains on Friday. Net for the week the Dow Jones index gained 3.858%.

Here are the charts as of today (click on each chart to enlarge):

First is the daily DJW line chart:

Significant points are the price rising through the 50 day moving average (though the average itself is still in decline), the ADX (14) crossing above 60 and the MACD crossing above 0. This indicates a short term bullish situation but until the 50 day moving average is again rising you must continue to view the market as being in a decline.

Next is the 1 box PNF:

This chart is looking bullish. A buy signal was generated on a price push through the 292 level on August 31 and a second buy signal through the price level of 297. However, note the calculated price objective of this move is 316 which would be just beyond the top of the past rally (313.81). Not a particularly strong price projection so this leaves me wondering somewhat whether this price move is some kind of a "head fake" and we head lower from here. Cautiously optimistic on this chart.

Next chart is the Traditional PNF:

No change on this chart; long term still bullish with a price objective of 430.

Next is the long term weekly line chart:

This chart also looks fine and to this point it looks similar to the correction in the spring/early summer of 2006.

As long as the 13 week moving average is above the 34 week moving average we are still in a long term bull market. Any cross of these averages would be a major bearish indication. So far so good.

Next chart is a monthly candlestick to give you more of a "simple" view:

The nice thing about a monthly candlestick chart is it cuts the noise down considerably.

Key to note here is the market is currently in a trading range between the 2 blue lines. You can see that the "tails" extend above and below this range but the monthly opening and closing prices have stayed very close to this fairly tight range for the past 5 months.

August was interesting as the price was slightly below the range indicated but the opening and closing prices were very close together (shown by the very small size of the candle body). This chart pattern is called a "doji" and indicates market indecision. Since then the following month (Sept) has so far been positive so it appears the market has "decided" the direction is to the upside.

Also note the 12 month moving average is currently at 288.28 and continues to rise. It should act as support on any pullbacks but as long as the monthly closing price is above this moving average the market remains bullish. A monthly closing price above the current range would of course also be bullish and lead to a good price rise into the end of the year.

A price close below the lower blue line at approx 295 would be bearish; below the 12 month moving average would be an outright sell signal.

Next chart is one I monitor daily but have not shown before. It is a ratio of the DJW index to the Japanese yen:

As we all know, the carry trade has inflated the worlds stock markets. In trying to analyze how to use this information to our advantage, I devised this chart.

As can be seen, over the past 3 years there has been a strong correlation between the yen carry trade and the DJW index. Essentially, a weak yen is good for world stock markets and a strong yen is bad news.

DJW buy signals occur when the ratio falls below the 50 day moving average (blue line) and a sell signal is generated when it rises above. Also note every bottom in the market was foretold by the RSI (14) being at or above 70. This happened with the latest correction and the ratio has fallen through the 50 day moving average. This is bullish for the stock markets.

Last chart is more sobering if your home currency is denominated (or linked) to other than the USD. Here are the rates of return year to date for the DJW priced in US dollars, Euros, Australian dollars and British pounds:

The latest currency problems have hurt the Aussies the most. Year to date the DJW has gone absolutely nowhere when priced in Aussie dollars.

Bottom line:

Holding 50% equities/ 25% Euros/ 25% USD

The markets have responded well to the Fed decision. Short term indications are bullish, medium somewhat neutral, long term bullish.

With the recent price action I am leaning towards shifting into a 75% equity/25% cash position. I will hold off until the beginning of next week to see how the markets respond early in the week (Friday was options expiry so there is a good chance there might be some market weakness next week).

As I've said before, I've got 2 balls and neither one of them is crystal. Having said that, if I were to make an educated guess I'd suggest the market may want to give back some of it's recent gains into the 1st week or 2 of Oct but after that I expect a pretty good finish to the end of the year. In any case, I'll let the charts tell me where to go and for now they are saying we are looking ok.


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