Friday, September 12, 2008

Stock Market Update 12 September 2008

Welcome to the latest issue of ECAM.

First I must apologize for not blogging sooner but I was out of the country on holiday the past 3 weeks with no internet access. As such, I was able to do only limited monitoring of the markets and unable to blog.

Since my last post, nothing has changed with respect to the direction of the worlds stock markets. The U.S. is facing a deflationary asset collapse of a magnitude the world has never seen (more on this in my currency update this weekend).

In fact, I recently read that Alan Greenspan commented that he thought this would be a "once or twice in a century" type of market realignment due to the ongoing credit collapse and asset deflation. You have to worry when the guy who set up this whole mess in the first place now ponders whether the consequences might be on par or even worse than the 1930's Great Depression. I think it is something each one of us has to ponder; I hate to use these magic words (as those that have used them in the past 80 years have been proven wrong time and time again) but maybe this time it really is "different".

While there has been tremendous volatility in the equity markets, the direction remains down. Along with this, there have been huge moves in the currency markets as well and I hope to provide some thoughts on that this weekend. Along with that will come a change I will be making in my provident fund holdings.

For those that are new to the blog, I use the Dow Jones World Index as my proxy charting index for trading our provident fund equity funds in the A & B accounts as I have found that it closely mirrors the performance of those international equity funds we are able to hold within the provident fund.

To start with, here are the year-to-date returns (01 Jan 2008 to present) for the funds I hold within the Provident Fund A and B accounts:


Core Holdings (currently approx 91% of portfolio):

Fidelity Australian Dollar Fund: +4.48%

Fidelity Euro Fund: +2.40%

Fidelity International Bond Fund: -4.5%


Ongoing Equity Purchases (currently approx 9% of portfolio):

BlackRock/MLIM Equity: -21.06%

Fidelity International Fund: -23.45%

Russell Global 90 Fund: -19.86%


Representative Charting Index:

Dow Jones World Index: -20.9%


The first chart is the Dow Jones World (DJW) 1 Year Daily Chart (click on all charts to enlarge):



This short term chart switched to bearish in early June when:

-price broke below the 50 day simple moving average, and
-the ADX(14) DI- line (red line) crossed above 60, and
-the MACD confirmed the move by crossing below zero.

To date nothing has changed and this chart is still BEARISH.


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




This short term PNF chart turned bearish on a price break below 288 in early June. It projected a price target of 254 (which has been exceeded to the downside) but is still BEARISH.


Next chart is the DJW PNF Traditional Chart:



This is a more medium term chart. As can be seen, the chart last turned bearish in early July on a price break below 264 and currently projects a price target of 180.

This chart remains BEARISH.


Next chart is the DJW 4 year weekly chart:



While I do not use this chart in my buy/sell decisions, I include it to note the descending price channel that has been broken to the downside (very bearish sign).

Price support @ 264.50 has been broken and the next level of support is at 231.26.

This chart remains BEARISH.


Next chart is the DJW 10 Year weekly chart:



Just to refresh everyone's memory (and bring those new to the blog up to speed), this is one of the primary charts I use to monitor the medium to long term view of the markets (in addition to the next chart).

This chart went bearish in late December, 2007 when the 13 week moving exponential moving average (EMA) crossed below the 34 week EMA combined with an MACD cross below zero. This indicated a true bear market had begun.

There has been no change since then and the medium term is still BEARISH.


The last chart is the DJW 6 year monthly chart:



Along with the weekly chart above, this is the second great "long term" indicator I like to use.

This chart went bearish when price closed below the 12 month simple moving average on a monthly closing basis.

Price attempted to move above the 12 MA in May (as shown by the "pin" on the candlestick) but by the close of the month price had again retreated below the MA.

There has been no attempt to regain the 12 MA since and this chart remains BEARISH.


Bottom Line:

There has been no change in any of the charts (including the short term daily and PNF charts).

This continues to be a bear market and the summer rally I was expecting turned out to be so feeble as to not even change the direction of the short term charts. That is a huge sign of weakness.

I continue to expect (hope?) we will see some sort of tradable bottom in the fall with a strong rally into year end. HOWEVER, as much as I would like to see it, there is no way I will be switching into equities until the short term charts indicate it is safe to do so. At this time they do not.

Longer term I must again reiterate that this bear market has the potential to be a show stopper and potentially one of "generational" proportion. I cannot stress how important it is to NOT be in the equity markets at this time as there is the very real possibility we could see an additional 20%+ decline from these levels before all this is sorted out.

Any switch I make into equities in the fall will be with the intent to capture only a short term in-and-out trade. I expect this bear market to continue well into 2009 and significantly lower prices below current levels before all is said and done.

A reminder that return OF capital is key in a bear market, not return ON capital. You want to be in the fight when the odds are on your side and on the sidelines with your money safely in cash in your account when they are not. Right now the odds definately are not in your favor.

As noted earlier, I will be making a change in my provident fund this weekend due to the dramatic shift in the U.S. dollar over the past month (swiching Euro and Aussie dollar into USD). I will post that this weekend.


As of today my positions remain unchanged:

-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.


Legal Disclaimer: The content on this site is provided without any warranty, express or implied. All opinions expressed on this site are those of the author and may contain errors or omissions. NO MATERIAL HERE CONSTITUTES "INVESTMENT ADVICE" NOR IS IT A RECOMMENDATION TO BUY OR SELL ANY FINANICAL INSTRUMENT, INCLUDING BUT NOT LIMITED TO STOCKS, OPTIONS, BONDS OR FUTURES. The author will reveal his current market positions and holdings but actions you undertake as a consequence of any analysis, opinion or advertisement on this site are your sole responsibility.

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