well still holding shorts & HXD in RRSP. We still have a long way to go down...
Our chart this week is that of the daily closes of the Dow Jones industrials plotted above the daily closes of the Dow Jones transportation average. What we are looking for here is any failure to hold at important support levels or any type of divergence.
At this time, the industrials must hold at 13,200 and the transports must hold at 5,000, because a weekly close by both under these key support levels could introduce a new bear market. (edit the DOW 30 closed @ 13,181
Aug 03, 2007 04:30 AM
Bill Carrigan
Whenever we get a nasty correction, bullish investors rush in and scoop up oversold stocks, viewing the event as a buying opportunity. These corrections are normally associated with the intermediate cycle that peaks about twice a year. The corrective wave usually spans about eight weeks and gives the average stock a haircut of 8 per cent to 12 per cent.
The current rush-to-buy mentality is supported by a rosy outlook for corporate earnings and continued global growth. The rush-to-buy mentality has in turn shortened the last few corrections in terms of time and magnitude with the early January and late February 2007 corrections spanning only one week.
The current correction is now into week two and the bulls would have us believe sideline money will once again rush in and drive the markets to new highs.
The bears would argue against new highs because of the accelerating collapse of the subprime loans market and a poor housing market in the United States and rising crude prices.
From a technical view, the all-time high of 14,000 for the Dow Jones industrial average on July 19 appears to be a classic "bull trap," in which prices break above a significant level and generate a buy signal, but suddenly reverse course, trapping the bulls who bought on the signal with losses.
These intermediate corrections always present a nagging problem for investors to solve; is this a buying opportunity or is it the beginning of a nasty bear market?
The problem is best solved when we examine the structure of past bull markets and then examine the current bull market in most global stock markets. I have identified two important components of the current bull market that set it apart from all prior bull markets.
The first component is that of extreme high correlation in all of the major global stock indices. This condition of monkey-see, monkey-do translates into one wherein all global equity markets advance and decline at the same time. That means we can't diversity market risk away. Foreign content won't save our portfolios if we get into a global bear market.
The other component is the duration of the current bull – almost 60 months, which is extreme when compared to past bulls. The current bull, when timed from origin in mid-2002, should have peaked in late 2005, so we must regard the 2006 and 2007 advance to be an extension of a current bull.
So why do we have the correlation and why the extension? I blame globalization.
In the early 1960s, Canada had a massive auto-trade deficit with the United States and this led to one of the first modern trade agreements, the Canada-United States Auto Pact of 1965. It became the model for managed trade, setting a precedent for broader free trade between Canada and the United States.
By 1996, discussions had begun about tariffs on vehicles imported by non-Auto Pact members that viewed these tariffs as creating a two-tiered policy. As a result, a complaint was launched with the World Trade Organization by the European Union and Japan.
They won. The Auto Pact was abolished and globalization was official. All countries large or small, emerging or mature, wanted what North Americans have – and they want it now.
The global stock market boom was also born.
That also means that we now only need to study the larger world indices for trend and momentum. Don't forget, monkey-see, monkey-do.
Our chart this week is that of the daily closes of the Dow Jones industrials plotted above the daily closes of the Dow Jones transportation average. What we are looking for here is any failure to hold at important support levels or any type of divergence.
At this time, the industrials must hold at 13,200 and the transports must hold at 5,000, because a weekly close by both under these key support levels could introduce a new bear market.
Bill Carrigan is a stock-market analyst whose column appears Friday. He can be reached at www.gettingtechnical.com. |
