Stock Market Update 27 September 2008

Welcome to the latest ECAM market update for the week ending Friday, 26 Sept 2008.

I know there are a lot of new subscribers who are now monitoring the site. Welcome to you all.

I started this blog several years ago in an attempt to provide some guidance and education to the pilots at Emirates. It has been well received and hopefully it will be of use to you going forward as we traverse these "interesting" times.

On a personal note, there has been a large volume increase in the number of phone calls I have received over the past several weeks asking for specific individual investment advice.

As I have pointed out previous, I am not currently licensed to act as an Investment Advisor in the UAE (please refer to the disclaimer at the bottom of each blog post) nor do I accept any remuneration for the information I provide on this blog. As such, I will not give specific individual investment advice at this time. Perhaps in the future that might change (given the responses I have received to date) but I do not expect to offer such a service at the present time.

Having said that, if you have a question of a more general nature to do with the markets or investments, please feel free to email me and I will do my best to get back to you.

My email address is:

dwaynemalone1@gmail.com


Now on to the markets.

It has been another incredible week in the markets with a proposed 700 billion dollar bailout plan of Wall Street banks being debated in the U.S. congress. In addition, the single largest bank failure in American history occurred with the collapse of Washington Mutual late this week (as I predicted in a previous blog) and a subsequent takeover by J.P. Morgan Chase.

I suspect the next to come will be Wachovia and it will be interesting to see if anyone steps in to buy up the remains (as J.P. Morgan did with Washington Mutual) or if is taken over by the FDIC (Federal Deposit Insurance Corporation). Should there be a takeover by the FDIC, it will severely strain their balance sheet and a further cash injection by the U.S. government will be necessary. This is in addition to the bailout currently under discussion.

As I said in my last blog, it is times like this where there is very little you can do if you have already not positioned your accounts safely out of equities.

As per the blog, I positioned my accounts as follows:

-July, 2007: 75% equities/25% cash,
-19 Aug, 2007: 50% equities/50% cash,
-09 Jan, 2008: 25% equities/25% bond/50% cash
-16 Jan, 2008: 0% equites/50% bond/50% cash

We will know in the next week or two where this might all end up. Should a strong and effective bailout package be agreed to, you might see a rather substantial stock market rally. If this occurs, I plan on moving into a partial equity position to attempt to capture that move (should it occur). This would be a short term position trade as long term I think we ultimately end up much lower from here (see charts for details).

Should there be no bailout (or a weak, watered down package), you will see a market crash. Should this occur I will remain in cash/bonds and wait for the bottom to buy back into equities.

At this time, it is impossible to predict which will occur but next week should be a pivotal week for both the markets and the U.S. economy.

Now on to the Stock Market.

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: +4.73%

Fidelity Euro Fund: +2.55%

Fidelity International Bond Fund: -4.73%


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

BlackRock/MLIM Equity: -22.86%

Fidelity International Fund: -23.40%

Russell Global 90 Fund: -22.00%


Representative Charting Index:

Dow Jones World Index: -22.04%


With respect to the charts, here are the latest charts from the long term view down to the short term view (click on all charts to enlarge):


Dow Jones World 6 Year monthly chart:



This chart represents the long term view of the markets. It turned bullish at the close of May, 2003 when the monthly closing price closed above the 12 month moving average (MA12, the blue line). It turned bearish at the end of Jan, 2008 when the monthly closing price closed below the MA12 line signaling a new bear market had begun.

Price has declined to a previous support level of 231.26. Next support below that is at 197.20.

This chart remains BEARISH.


Dow Jones World 10 Year weekly chart:



This is the second long term chart I use in combination with the previous chart to identify long term bull and bear markets.

This chart turned bullish back in Mar, 2003 when the 13 week exponential moving average (EMA 13, the blue line) crossed above the 34 week exponential moving average (EMA 34, the red line) combined with a cross of the MACD above the zero line.

The chart turned bearish the first week of January, 2008 when the reverse occurred (13 EMA crossed below the 34 EMA and the MACD crossed below the zero line) and allowed me to move the last of my equity positions into cash. It has remained in a downtrend ever since.

This chart continues to be BEARISH.


Dow Jones World 4 Year weekly chart:



This chart is essentially a zoomed-in view of the previous chart. I have included it for a specific reason.

While most times Technical Analysis is used to identify trend reversals, there are also specific chart patterns which at times point to future price targets. One of the more reliable patterns is known as a "Head and Shoulders" pattern.

Using this type of pattern, you measure the distance from the top of the head to the neckline. You then take that amount and subtract it from the point where price breaks the neckline to give you a price target.

I have noted on the chart the position of the left shoulder, the head, the right shoulder and 2 possible necklines. As can be seen, the first neckline was broken back in late June, 2008 and is currently in play.

Using the rules of this pattern, the "best case" scenario shows a target price of 201 on the DJW index. That is currently 14% below current levels.

Under the "worst case" scenario, price could rebound from present levels to form an additional right shoulder. Should this occur and a subsequent break of the neckline take place, the target would be 142. This would be a decline of 40% BELOW the neckline and would take us back to the market bottoms of late 2002/early 2003.

This scenario is entirely possible.


Dow Jones World Traditional Point and Figure chart:



This chart provides less "noise" and is more of a medium to long term chart.

It turned bearish in Jan, 2008 when price broke below 292. It reversed to bullish in May, 2008 when price broke above 288. This turned out to be a false signal and the chart turned bearish again when price broke 260.

Based on the structure of the pattern, it is projecting a price target of 156. While these targets should not be used as specific targets, it does tell us that based upon the structure of the chart there is still considerable downside potential to these markets over the medium to long term.

This chart remains BEARISH.


Dow Jones World 1-Box Point and Figure chart:



This point and figure chart is more useful for the short to medium term.

This chart turned bearish in early June, 2008 when price broke 287. It projects a price target of 254 (which we have already exceeded to the downside). This tells us there is a possibility we may have found somewhat of a bottom at these levels.

Along with the daily line chart (next chart), this is one chart I will use to position into a short term long equity position should the market begin to turn back up. This has not happened to date.

This chart remains BEARISH.


Dow Jones World 1 Year daily chart:



The current bearish signal on this chart was triggered based upon the following:

1) price crossing below the 50 day moving average (MA 50), and
2) the -DI line (red line) crosses above 60, and
3) the MACD crossed below the zero line.

The last high was at 241.70. This price is now acting as a resistance level (ceiling). The current 50 day moving average is at 248.99 (and descending rapidly).

It is very possible that if we have a market advance this will occur with a simultaneous price break upwards of the 50 day moving average and the current price resistance. This would probably trigger a reaction in the other indicators and indicate a short term bullish trend. I will be watching for this and, if it occurs, will probably enter a short term long equity position.

As of today this chart remains BEARISH.


As I mentioned previous, there are Head and Shoulder chart patterns not only on the DJW chart but also on some of the more common index charts. I have included them here for your viewing pleasure (click all charts to enlarge):

Dow Jones Industrial Average Index:



S&P 500 Index:



New York Stock Exchange (NYSE) Index:



The point is that there are multiple indexes that show this type of pattern (others as well that I have not included). We appear to be only part way through this mess and the downside potential is huge.


Bottom Line:

-There is no chart that indicates a trend change has occurred in any way, shape or form. We are in the midst of a severe bear market that will probably last at least another year (or perhaps even longer).

-Within this bear market there will be counter-trend rallies. I still expect one going into year end. I will be moving into equities when the short term charts indicate it is safe to do so. I WILL BE DOING THIS ONLY WITH THE INTENTION OF SCALPING A SHORT TERM POSITION TRADE. For those who are still in equities, you might be wise to use those counter-trend rallies to move out of equities and into cash.

-Once we find a real bottom, I feel there is a very real chance we could see YEARS of little-to-no movement in the stock markets. There is previous history of the markets not moving beyond a small trading range following a severe bear market for up to 10 years. I think we may enter such a period.

During such a time, only market timing will allow you to make any sort of capital gains in your Provident Fund account. Buy and hold type investing will not work during such a period.


As of today, my positions remain 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 several % from that posted (refer to current % holdings as disclosed at the start of the blog).


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