Charting Stocks

Charting Stocks Update
August 19, 2007

“The US government is on a ‘burning platform’ of unsustainable policies and practices with fiscal deficits, chronic healthcare underfunding, immigration and overseas military commitments threatening a crisis if action is not taken soon.
..These include “dramatic” tax rises, slashed government services and the large-scale dumping by foreign governments of holdings of US debt.”
-David Walker, Comptroller General of the United States, 2007

My readers know that I began the year calling for a crash of the stock market in 2007. You can read my piece I wrote on January 1, 2007 by clicking here. At the time, the market seemed invincible and my view came across as radical and was extremely unpopular.

During the past few weeks the Dow Jones lost about 1200 pts in a selloff that was fast and violent. The optimistically bias media seemed to be in a state of shock as the markets rolled over and called the movement a “pullback” and “buying opportunity.” IT IS ANYTHING BUT! Sure, the market is oversold and we should see a near term rally which may carry the Dow close to the old high of 14,000 (Though I think 13,500 or so is more likely). I think that smart money will be using the rally to lighten up on equity before the next major decline which should last several years.

“Keep your eyes off of the news and on the charts!”
-John Murphy

Should you believe the “Experts?” Below are two quotes I found from well respected economists in September 2005 calling for a continuation in higher home prices. (At the same time that the DJ US Home Construction Index broke an uptrend and registered a sell signal).

September 27, 2005
David A. Lereah, chief economist for the Realtors association, said that with a growing U.S. population and tight housing inventory, “we’ll continue to see above-normal home price appreciation for the foreseeable future.” September 27, 2005.

September 25, 2005
“I don’t use the word ‘bubble’ because I don’t think there is one,” said Raphael Bostic, an economist and director of USC’s master of real-estate development program. “Bubble is a word that you use to characterize markets that are irrational, that don’t have underlying economic fundamentals to explain what’s going on. I don’t think that’s what’s really going on in today’s housing market.”

I’ve written previously about the importance of the Broker stocks in the overall market. “Where the broker/dealers go, so goes the market.” Here we can clearly see a sell signal has finally been given. More importantly, the relative strength of the index to the S&P500 has finally broken support which is an indicator of a new bear market for stocks.

The next two charts were some of the worst hit in the index–Bear Stearns and Lehman Brothers. Both have broken support levels on extremely high volume. I’d expect a short term rally in the days/weeks to come in the broker stocks before the next major move down.

The Volatility Index (VIX) is also a good indicator of market bottoms and tops. Volatility tends to spike at both extremes as we can the in the chart below. The VIX spiked at the beginning of this current bull market and has declined as the market moved higher. The recent spike in the VIX reinforces my argument of a new bear market.

Next, we can see the relationship between US stocks and the Japanese Yen. Japan has been a global source for cheap money and has fueled much of the worlds borrowed expansion. As Japans economy improves, inflationary pressures emerge, rates move higher and the Yen strengthens, which can suck liquidity out of the markets. So it’s no suprise that as the Yen moves higher, stocks decline. The chart below illustrates that.

The Dow Jones is an Index made of of 30 Blue Chip stocks. They are considered to be some of the safest US equity investments. When the Dow is under performing the rest of the market, it is actually a good sign. A sign that investors are more confident and willing to take on more risk as the buy non-dow 30 stocks. The chart below is the Dow relative to the market. When the line is moving down, the dow is under performing the market, and this tends to happen in bull markets. We can clearly see the line bottom in early 2000, which was the beginning of a bear market. It also gave a good signal when in broke the uptrend in 2002 and signaled a bull market. The line declined all through the recent bull market, but has recently broken out. This indicator gives pretty accurate readings, and it reaffirms by bear case.

Short term T-bill rates signal a bear market in the making. Below you can see the recent downward move in T-bill rates and compare it to the last time this has happened. Still Bullish??

Are Republicans bad for the US Dollar? I came across and interesting chart and thought I’d add it. This isn’t a political statement of any sort, though the evidence seems to strongly point to the conclusion that Republican Presidents are not good for the Dollar. (Could be all of the tax cuts?)

Bottom Line- In my view, the stock market should experience a short term rally over the next couple of weeks. Then, I believe that a major downturn will occur and should last for several years.This should be the worst bear market that this country has experienced since the Great Depression. The similarities are striking. An economic expansion led by borrowed money. In the 20s, the US experienced a major real estate expansion. Florida led the move higher before collapsing in 1927 (As it started doing in 2005). The rest of the country sooned followed, as did the stock market in 1929.
The United States is on the verge of bankruptcy and this house of cards is coming down. And soon.

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