Charting Stocks

Charting Stocks Update

March 17, 2007
Merrill Lynch urges the Fed to cut rates:
Merrill Analyst — “If the inflation-fighting Federal Reserve were to keep rates unchanged to contain price growth — instead of cutting by 1 percentage point in the second half of 2007 as Merrill expects — then this would put the probability of an outright recession in the second half at “very close to 100 percent….But if we do end up seeing a recession, then it’s game over: the historical record shows that the average decline in the S&P 500 is 34 percent and the average duration is 37 weeks – more than double the magnitude and triple the duration of classic non-recessionary correction.”–March 15, 2007 Reuters

While I do agree with Merrill that a major decline is on the horizon, I don’t believe that the fed has the power to prevent it. Its true that lowering interest rates encourage borrowing and spending which gives rise to the economy but it is also true that the U.S. is dependent upon foreign countries buying our treasuries and financing our overconsumption and debt. The already weakened dollar would not be able to bear another declining rate environment at current levels. Lowering interest rates puts downward pressure on the dollar and discourages foreigners from buying our treasuries as it erodes their returns.

Below is a long term chart of the US Dollar Index. Notice the level in 2001, when the fed began an aggressive rate cut campaign. The US dollar lost roughly 33% of its value in only 4 years. We are now only a 3 points away from a historic, all time low (Not much wiggle room). Should the fed begin to lower rates, the dollar would almost certainly break below 80, which would not only be unprecedented, but suggest a complete break down of the dollar to much lower levels. This too, would be game over. Imagine the ramifications if global investors diversified $1 trillion (roughly 10% of our external debt) out of US Dollar? It would be Peso Time for the dollar!

The Market
Financial stocks continue to slide indicating trouble ahead. In my February 26th post, I mentioned that the Broker-Dealer stocks had broken down and “This Bull Market is on Borrowed Time.” The following week experienced a 500 point decline on the Dow Jones Industrial Average and the beginning of a great bear market which I fore casted on my January 1st, 2007 posting .

Brokerage, Bank, & Financial stocks are good leading indicators of the stock market and overall economic backdrop. The following charts all tell a similar story. We see major breakdowns on heavy volume, dead crosses between the 20 day and 50 day moving averages (Bearish sell signal given when the blue line crosses under the red line), and each trading below both moving averages. These 8 stocks represent the health of our financial system. The recent price movement suggests a trouble ahead.

American Express

Bank of America

Morgan Stanley

Bear Stearns

Citigroup

JP Morgan

Merrill Lynch

Wells Fargo

The broker-dealer index still sliding and has taken out the 200 day moving average.

Below is a chart of the Dow Jones Industrial Average. MACD and RSI indicators suggest more downside. Any short term rally should be met by sellers at the 12,361 level. Next downside price target lies at 11,850.

S&P500 looks similar. Short term rallies should fade at 1408. Next downside price target is 1373 which coincides with a 50% retracement.

Resistance for the NASDAQ lies at 2400 with 2277 as the next downside price target.

Next two charts are the advance-decline lines of the NYSE (Chart A) and the Nasdaq (Chart B). This is simply a measure of the number of up stocks minus the number of down stocks. It can be a very useful gauge of the market.

Chart A
Here we see a major uptrend, which began at the start of the summer rally, violated.

Chart B
The NASDAQ shows a sideways movement over the past few months, but has recently taken out a key support level.

Two weeks ago I pointed out 2 stocks which looked particularly vulnerable–Exxon Mobile and Microsoft. While it has only been two weeks, it’s worth pointing out that Microsoft has lost $2 in value, while Exxon Mobile has remained at about the same price(But deteriorating further).

MSFT may rally back to $28 or so before heading lower. Price target 1 lies at $25.40

Exxon looks like it’s about to fall sharply. Though prices have remained the same since my post or 2 weeks ago, the RSI dropped below 50 last week while momentum continues to roll over. WATCH OUT!

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Related posts:

1. Oversold US Dollar threatens stock, commodity, bond prices
2. Inflating a Bull Market
3. Spring Rally Has Reached Completion
4. Stocks: Oversold Rally Will Soon be Tested
5. Dow/Gold Ratio Hits 7; Multi Decade Low