Stockmarket update 26 Oct 2006

YTD returns in USD:

DJW index: +11.7%
Emirates MLIM Equity fund: +9.1%
Emirates Fidelity International fund: +15.5%
Emirates Russell 90 fund: +12.7%

It has been a few weeks since my last update. Once again (for those who have been wondering), I track these markets daily and should anything of any significance occur I will post an immediate warning. However, since my last post very little has changed in the intermediate picture.

Today we will take a "top-down" view starting with the big picture and then narrowing our focus to the shorter term.

First chart is the MSCI World monthly line chart over the past 10 years (click on all charts to enlarge):

As can be seen, the bull market that began in 2003 is still intact. The scare we had on this chart in August (when the price briefly dipped below the 12 MA) reversed itself by the end of August (hence it does not show as a crossover on this chart). Currently the price is sitting comfortably above the 12 month moving average.

This chart is extremely important to give the "big picture" and as of today it is still bullish.

Next chart is the DJW weekly index:

As can be seen, the price decline in Aug looks very similar to the previous correction (as I noted on the chart).

The key is the 13 week moving average did not cross below the 34 week moving average and has not since the bull market began in 2003. Any negative crossover would be bearish but for now it all looks just fine on this chart.

Next chart is the DJW weekly index over the past 4 years:

As can be seen, a well developed uptrending channel is in place and has been since 2004. The market is currently at the top of the channel and should "history repeat" we could expect a correction to the bottom of the channel around the 280 level. This would still be acceptable as the uptrending bull channel would remain intact. A break below the channel would be bearish.

Next chart is the DJW 1 year daily chart:

As can be seen, in the short term the market is undergoing a minor correction. It is still bullish but with the MACD rolling over this indicates short term momentum is falling. This is normal in a rising market when price becomes overbought (as was indicated by the RSI 14> 70) but needs to be watched closely as a "correction" can turn into a "crash" very quickly. However, as of now it looks ok.

Expected support lines are shown as well as a Fibonacci retracement levels from the last up move. For more info on Fibonacci numbers, see:

http://http//www.investopedia.com/articles/technical/04/033104.asp

A 61.8% correction (292.83) would not be out of the question and would still keep the uptrend bullish. Below that I would become concerned.

Next chart is the Point and Figure chart (traditional calculation):

This chart is still bullish and continues to point to a long term price objective of 430.

Next is the same index in a Point and Figure 1 box chart (1 box reversal calculated):

Once again, as of today things are ok. My concern with this chart (as I mentioned in a previous blog entry) is when the new target price was calculated following the last correction it projected a relatively weak target of 316. Note that target has been hit and now the chart is in a correction mode.

It is still technically bullish as long as price does not violate 307. Any drop below this level would be a bearish signal on this short term chart.

The last chart is the returns based upon currency. As of today, here are the year to date rates of return on the DJW when compared to the USD, Euro, Aussie dollar and British pound.

As can be seen, it is not pretty if you are planning your future around converting your funds into Aussie dollars. You would be better off having your money in cash this entire year to date as opposed to the provident fund equity funds (which are priced in dollars).

However, not show is the worst of all; the Canadian dollar. Canadians have lost 7.8% year to date by having their money in international equity funds priced in U.S. dollars (based upon the DJW index).

Bottom Line:

So as of today the markets look fine from a price action point of view. HOWEVER, in addition to price charts I follow a significant number of market breadth charts (advances vs decliners, up volume vs down volume, % of stocks above their 50 day moving average, VIX, CBOE put/call ratio, etc). In every single case, the breadth charts look terrible.

What this basically means is there is not broad market participation and most of the moves over the past month have been done by day traders, hedge funds and government intervention. This is not the signs of a healthy market; on the contrary it is the sign of a dangerous market.

For this reason, I will continue to hold my conservative 50% equity/25% Euro/25% USD position for the time being.

Short term I expect a further pull back in the markets; medium term I expect a rally into the new year and early 2008 followed by a very poor summer 2008.

Irrespective I will continue to follow the charts and for now they are indicating up. Any changes I will publish as soon as they become evident.