J.T., after looking at all the technical as well as fundamental data, i have come to the conclusion that a very nasty downturn could be imminent. up until recently i was of the opinion that a final blow-off may still lie ahead; i feel now that i may have to revise that opinion.
let me first comment on the charts:
DJIA: two closes below an important trendline from the october low have occurred-they are also below the 50-day EMA. recent reaction lows have not yet been broken though.
COMPX & NDX: these two look still as if they could resolve to the upside - the action of the last few days could be interpreted as consolidation.
DJUA: has dropped back to it's 50-day EMA - a possible area of support. note that weakness in the utilities is *not* necessarily an alarming sign, as they are often a hiding place for 'scared' money.
DJTA: this index truly has me concerned. it sits now close to it's 200-day EMA, the last line of defense. the descending 50-day EMA has already served as resistance on rally attempts;support trend lines have been broken.
indices like the DOT, BKX & XBD have also broken through their respective 50-dma's and encountered resistance there on rally attempts. the DRG has even broken through it's 200-dma and was unable to rally back above it when it attempted to do so. there are on the other hand more bullish sub-indices like the SOX and the XCI, which is why the COMPX has held up so well.
so the charts paint actually a mixed picture; while it can be argued that many former leading stocks have broken down, other leaders have emerged, and the formations on most major indices *could* still resolve to the upside. the low volume shows the uncertainty plaguing the market, and when the market finally breaks out of it's trading range, the move will likely be violent.
there are several things underneath the chart picture that worry me greatly. first of all, the seemingly bullish COMPX has the biggest a/d line divergence of any index in recorded history. take a look at
decisionpoint.com
- it also shows the dismal state of the summation index.
then there is the 1%EMA of a/d, which never made it back above the zero line since the debacle of last summer/fall. see
decisionpoint.com
accordingly, new highs vs. new lows never went back to bull market status, in spite of the rousing rally of the indices.
decisionpoint.com
my main problem though is the extraordinary complacency evident in the face of a bear market in bonds and the deteriorating technical underpinnings of the market. both the VIX and the put/call ratios are testament to this, as is the fact that the ratio of bullish to bearish advisors is near 12-year highs.
decisionpoint.com
last but not least, there is the simple fact that the stock market has never before been as overvalued as it is now according to the
Fed's 'fair value' model. the current gap is simply amazing:
formstar.nis.za
and for a 30-year view:
formstar.nis.za
all in all, it becomes ever more difficult to argue for yet another rally. au contraire, this market could conceivably implode.
let me add that a severe downturn would not necessarily mean an end to the bull market - it is even possible that the market continues to stay in a rotational trading range and that the sentiment excesses get worked out during that time, as has happened during the jan.-march consolidation period. but the recent drop-off in volume means that there is a lot of tension in the market that begs to be released. a sell-off could very well stop at lower support levels from where a new rally could start. this will be difficult if we get a panic instead of an orderly correction though. so the question is: is a panic possible from here? unfortunately the answer is yes.
regards,
hb |
