Stock Market Update 29 June 2008

Another brutal week in the markets for those that are long equities. For those (like myself) that are still in a combination of non-U.S. cash and international bonds, it was entertaining to watch.

Here are the year-to-date returns for the funds I hold:


Core Holdings (currently approx 95% of portfolio)

Fidelity Australian Dollar Fund: +3.05%
Fidelity Euro Fund: +1.63%
Fidelity International Bond Fund: +2.89%

Ongoing Equity Purchases (currently approx 5% of portfolio)

BlackRock/MLIM Equity: -11.45%
Fidelity International Fund: -10.91%
Russell Global 90 Fund: -9.21%

Representative Charting Index:

Dow Jones World Index: -10.5%


The big news of the week was the U.S. Federal Reserve meeting and the decision to leave the U.S. Fed funds rate steady at 2.0%. While this news was not a surprise to anyone in the markets, what did spook investors is the wording of the statement that accompanied the rate announcement.

In short, Ben Bernanke over the past 2-3 weeks has been "talking tough" in the media about the possibility of raising short term rates in the near future to combat rising price inflation in the U.S.(and also in an attempt to talk up the U.S. dollar). The markets took the talk at face value and had started to price in the chance of interest rate increases towards the end of the summer/fall. This in turn provided a short term boost to the US dollar over the past few weeks (which I mentioned in a previous blog) and a rise in bond yields/decline in bond prices.

Following the wording of the official announcement (which was much more "wishy-washy" than Bernanke's talk in the media), the markets essentially viewed Bernanke and his "tough talk" over the past few weeks as pure B.S. and in turn sold off the dollar and tanked the stock markets. Bonds did very well over the week.

The bottom line is the U.S. Fed is in a quandary. If the Fed raises short term rates to fight price inflation (which would reduce consumer demand for goods as well as support the dollar), they would end up tanking what remains of the U.S. housing market and with it the U.S. consumer (due to outstanding mortgage and credit card debt). As approx 70% of U.S. GDP is consumer based, that in turn would put the U.S. into a steep recession/depression.

On the other hand, if he lowers short term rates (to reduce mortgages to support the economy via the housing market and consumer), he tanks the dollar and sends commodity prices to the moon. That leads to the possibility of out-of-control price inflation/hyperinflation.

It really is a "damned if you do/damned if you don’t" type of situation.

It appears what they will do is "fence sit" on interest rates for now; talk tough in the media and hope over time other countries will be forced to reduce their respective interest rates to combat their own upcoming slowdowns/recessions. In turn, the reduced interest rate differential will strengthen the USD, which will reduce commodity inflation, which will reduce US price inflation. With this plan, inflation gradually falls without the Fed having to move up U.S. rates.......they hope.

The trillion dollar question is whether this plan will work. Should it not, I do not see the Fed raising rates; instead they will cut if they have to. If so, they will allow inflation to skyrocket in order to save the economy and deal with the inflation question at a "later date". If this happens, it will have a profound impact on all our investments as it could lead to a hyperinflationary depression.

This is without a doubt the most serious financial crisis to face the world since the 1930's; it is that bad. In this light, I have been asked by others where I have positioned my own "C" account excess savings (I only use Wyatt Watson for my mandated A and B account holdings and do not hold any excess savings in the Provident fund). I will touch on that at a later time but for now I will say I do not use the provident fund offerings as they do not offer the diversification necessary to make it though such a scenario as I fear may unfold. For now; if you are looking into investments think "stuff" that holds value in an inflationary environment (such as gold/silver, commodities, commodity producing countries and companies, commercial real estate, etc).

That is enough doom and gloom for now. On to the charts (click all charts to enlarge).


First chart is the Dow Jones World Index (DJW) daily line chart:



This chart went bearish in early June and has not recovered to date. All technical indicators are bearish and it looks to be attempting to retest the bottom near 261.

It must be noted there is a positive divergence in place on the MACD histogram indicating we may be near the trading bottom I have been looking for. The sign a short term bottom has been made will be a higher high/higher low in price along with a turn of the faster moving indicators (SlowSTO break above 20).

This market is oversold and I am looking to move back in for a swing trade long.


Next chart is the DJW 1-box Point and Figure chart (PNF):



This chart went bearish on a price break below 288 and currently projects a price target of 254. A clear line of support can be seen at the 262-263 price level; a turn around above that would be positive, a break below would be very negative for the markets.


Next chart is the DJW Traditional PNF chart:



This is the only chart that is still bullish. Because of this, I am still of the opinion that a good intermediate price rise is coming soon. Should this "medium term" chart turn negative it would change my mind. So far it has not.

It shows strong support at 264 and projects a price target of 364.


Next chart is the 4 year candlestick chart:

No changes here. Still bearish with a descending downtrend line in place. Price could easily drop down to 245 to tag the bottom of this channel.


Next chart is the 10 year weekly chart:

Once again still bearish. The 13 week moving average is still below the 34 week and appears to be diverging downwards. Important support can be seen at the 258-261 level. A break below here would leave open the room to run considerably further down.

Just to reiterate; while I am expecting a bear market rally anytime soon, this in no way changes my view that the long term direction is down. As such, my move into the market (when I do) will be done ONLY WITH THE INTENTION OF A SHORT TERM AGGRESSIVE SWING TRADE.

Those who are risk averse should not attempt to go long the market until the 13 week moving average has crossed above the 34 week moving average.

Last chart is the DJW monthly chart:

No changes here; June will pass and price will not have closed the month above the 12month moving average (currently at 291.61). This is still bearish.


Bottom Line:

I am still awaiting a short term bottom to move into equities. I continue to believe that bounce is coming soon and should continue into the late summer/fall. Then I expect a fallback into Dec with a Christmas rally.

I do not expect this upcoming bounce is the end of the bear market. I expect much further downside over the next 1-2 years. Until my long term charts are all in alignment, I will be very protective with preservation of capital.


I remain invested as follows:

50% Fidelity International Bond Fund*
25% Fidelity Australian Dollar Fund*
25% Fidelity Euro Fund*


*percentages are as per how funds were originally allotted. Due to market fluctuations and ongoing equity monthly purchases these amounts vary 1-2% from that posted.



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