Stocks to Sell Off in Weeks Ahead
Sunday, September 16, 2007 3:39Charting Stocks
September 16, 2007
In recent of posts, I’ve mentioned that 13,450 was an important level of resistance for the Dow Jones Industrial Average. On August 19th I noted that 13,458 was a key Fibonacci resistance level and thought that this would be a reasonable spot for the market to stall. I used last weeks post to illustrate how well this worked out (99.98% accurate).
This weeks price movement challenged 13,458 and failed– again. (see the chart below).
It’’s still important to watch the resistance line. Given the diverging momentum (blue circle above), and the failed attempts to break out, I’d say that next week should be the start of the next major move down. Of course, a major move is anticipated next week because the fed is expected to cut rates and the major brokers are reporting earnings. Keep your eyes on these two events. If the fed decides not to bail out Wall Street, or the brokers lower their future earnings guidance, the market will sell off.
For those of you who anticipate the Federal Reserve to begin cutting rates again, I’ll point your attention to the next chart. While it’s true, that lower rates give less incentive to save, more incentive to spend, and eventually drive up the prices of asset classes, it also can have very detrimental effects. As more money is borrowed, due to lower rates, and pumped into the system, the value of that money is diminished thus causing inflation (The devaluing of the dollar). See chart below.
The following chart is a better illustration of the relationship between interest rates and the dollar. The first thing which you should notice is the high correlation between the two. They tend to move in the same direction. The second, and more important, observation should be the level of the dollar during the last rate cut campaign. It was much stronger. Greenspan had room to work with. Bernanke does not. The dollar is already fragile, and inflation is already rampant (I am not referring to the fictitious “core inflation” measure).
Below is a chart which measures inflation. It is the consumer price index of all goods. Notice the massive move up which started in the early 1970s. It’s no surprise that this is when former president Nixon took us off of the gold standard system.
The producer price index, of all commodity prices, shows a similar picture in the chart below.
Years of borrowing and spending has has led to mind boggling deficits and federal debt. The United States Federal Government owes $9 trillion. That’s $9,000,000,000,000! It is the federal governments debt but it’s the people who will ultimately pay for it.
The people pay their taxes and elect leaders to manage the countries finances in a prudent manner. They have not. Why should the wealthiest nation in history be in such poor financial shape?
In 2001 George Bush became president and was handed a budget surplus of $263 billion and a federal deficit of $5.7 trillion (which was decreasing). Just think, it took 200 years as a nation to accumulate almost $6 billion dollars in debt and 5 years to accumulate $3 billion more.
A weak dollar is good for commodities which should explain the jump in Gold and Oil prices this week.
Gold is thought to be a hedge against inflation. After all, it is real money!
Oil just made a new all time high. Again helped by the dollar’s downward move because oil is paid for in US dollar.
Are rate cuts good for the stock market? Take a look at the following chart. How did the stock market and economy do after rates began to come down in 2000? Did people forget the bear market and recession which followed the onset of the last rate cut campaign?
Dollar still looking vulnerable.
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