Broad Market Update
Seduced, corralled, awaiting
(...in cold, cold
20 December, 2004
I have been watching the continued advance of the broad stockmarket
since the US elections with a kind of morbid fascination. Despite
the horrific fundamentals, the market has continued higher, yet,
as I already dramatically demonstrated a couple of weeks ago
by means of a Dow chart in Euros, this rally is nothing more
than a "damp squib" in real money terms. The complacency
in this market is truly incredible, given the drop in yields
to a pitifully low level, and the fact that the market has risen
into an area of truly massive overhead supply that would make
even an 8-year old budding chart analyst nervous.
More ominous still is the fact
that insiders have been unloading stock onto retail buyers at
an ever-expanding rate that has risen to extreme levels in recent
weeks. Ordinary investors have been corralled into the pen once
again, seduced by slick marketing campaigns and glossy long-winded
brochures, and are now helplessly awaiting their fate, which
is, of course, to be fleeced.
We will now examine the charts
for the broad US stock markets, focusing mainly on the Dow Jones
Industrials, because there was a potentially very significant
volume development on Friday. I would rather look mostly at the
S&P500, which is more representative of the market as a whole,
but there is no volume data available for this broader index.
A two-year time period has
been selected for our 1st chart, in order to show the run-up
from the March 03 low in its entirety and also the toppy action
all this year. On this chart we can see that the index broke
out from the gentle downtrend channel in force all year, upon
the Republican party securing, apparently with the aid of more
than a little tweaking of the latest vote counting technology,
a clear, if marginal victory in the election in early November.
This breakout, however, is regarded as a sucker rally, as it
is driving into massive overhead resistance and is accompanied
by frenetic insider selling.
Thus it is most interesting
to observe that the market fell on Friday on huge volume - the
heaviest for well over 3 years, the heaviest in fact since the
fall 01 selling climax, from critical resistance bang on the
highs of February of this year and March 2002. So it looks like
Santa's going on strike this year, as least as far as stockmarket
investors are concerned. Christmas is a time when people's normal
judgement is suspended, frequently resulting in a rally based
on hope not substance, and facilitated by the low volumes that
prevail over the holiday period. Friday's move signifies that,
at the very least, a short-term top is in all probability in.
The long-term chart going back
10 years is horrific. It shows the market stalled beneath a massive
wall of supply from the 1999 - 2001 highs. Given the magnitude
of this resistance, the fact that the market has risen as far
as it has is impressive indeed - until, that is, you stop to
think what's happened to the currency over the last several years.
Factor that in and you realize that its performance has in reality
The S&P500 chart is also
a grim picture showing the index now into a zone of heavy supply
from the top area.
The long-term Dow chart in
Euros should bring home to US investors how meager the latest
rally in US indices has been in terms of real gains.
The trigger for a plunge in
the general stockmarket is expected to be the fairly sudden realization
that interest rates are set to rise substantially. As the stockmarket
normally discounts developments 6 to 9 months ahead of their
actual occurrence, rates might not actually begin their steep
ascent for many months after the market falls. The probable cause
of the rising rates is likely to be the continued depreciation
of the currency necessitating higher interest rates to maintain
The increasing risk of a big
sell-off in the broad market, coupled with the fact that the
gold stock indices have marked out a potential double-top, gives
grounds for caution at this time, as precious metal stocks could
get caught up in the melee and taken down temporarily - which
is why, in general, we will be careful about re-entering the
market following our general stop in the HUI being triggered
about 10 days ago.
Maund is an English technical analyst, holding a diploma from
the Society of Technical Analysts, Cambridge and living
in southern Bavaria, Germany.
Visit his subscription website at clivemaund.com.[You can subscribe
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as a consequence of trading on the basis of this analysis.
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