Breakout? Top? Wait & See?

We continue to discuss the technical aspects of the Dow action in the office. There is a divergence of informed opinions, ranging from "Breakout over 1500 SPX was bullish" to "Let’s wait and see" to "a major top is forming."

E.S. Browning’s description of yesterday’s trading reflects this range of opinions:

"In the first minutes of trading, the Dow Jones
Industrial Average surged as much as 271.75 points. The blue chips
seemed on course to erase a 294.26-point decline Tuesday that resulted
from disappointment with the Fed’s quarter-point rate cut.

Instead, the industrials began sinking, finishing ahead just 41.13 points, or 0.31%, at 13473.90.

Before a late-day rebound, the Dow was down as much as 111.13 points, meaning a swing of more than 382 points during the day."

The strong opening gap yesterday, followed by a near 400 point reversal, only to close marginally higher is, in my opinion, simply awful technical action.

I’ll spare you the rest of the details of the discussion, and rather, show you this one single chart:
>

Monthly Dow, 25 Year ChartMonthly_dow

Chart courtesy of Richard Russell, Stockcharts.com

>
Note that the RSI peak and reversal (top pane) is hardly a flawless tool, nor is it a  precise timing mechanism (note the 1997-98 signal).

However, it is a serious warning that weaker returns are likely in the ensuing years. Call it a high probability mean reversion measure.

More later today . . .

>

Sources:
Dow’s 382-Point Swing From High to Low Speaks Volumes on Sentiment
E.S. BROWNING
WSJ, December 13, 2007; Page C1
http://online.wsj.com/article/SB119751232146025643.html

Print Friendly, PDF & Email

What's been said:

Discussions found on the web:
  1. justino commented on Dec 13

    I say we go higher only because all Longs have stolen Barry Bond’s steroids and been injecting heavily.

  2. bucky katt commented on Dec 13

    Does anyone think the FED may lose control of this mess?

  3. boomdotbust commented on Dec 13

    Bucky – The Fed lost control when they created this mess. Taxpayers will mop it up.

  4. R. Timm commented on Dec 13

    Now if you adjust that chart for inflation the last decade wouldn’t look so good. I’m not big on technical analysis but do the chartists always use nominal numbers for their trends? For short term nominal data is fine but for a 25 year period I’d think you would get a lot more information with a real data set.

  5. rob commented on Dec 13

    Even the ex-inflation number is ugly this morning.

  6. Dave commented on Dec 13

    inflation? what inflation?! (sarcasm)

  7. Philippe commented on Dec 13

    R Timm
    “Now if you adjust that chart for inflation the last decade wouldn’t look so good.”

    The gentleman next door « Iron man » ( Although he denies to be in the data mining..) has all the answers you may seek.

    khttp://politicalcalculations.blogspot.com/2006/05/mapping-sp-500-performance-since-1871.

    htmlhttp://politicalcalculations.blogspot.com/2006/05/sp-500-best-average-and-worst-returns.html

  8. halbhh commented on Dec 13

    Follow Up on Retail Sales:

    ” U.S. retail sales surged during November, making a surprisingly strong, broad-based climb that suggests the economy might not be as weak as feared.”

    WSJ just now.

  9. OldVet commented on Dec 13

    Retail sales were strong, profit margins were weak, and shoppers were giddy in the knowledge they could buy junk, then throw up their hands and walk away from the debt. Who’s going to notice in times like these? WSJ is part of the cheering section.

  10. Mort Glickman commented on Dec 13

    It wasn’t the Fed’s fault. It was the fall of communism in Europe. It wasn’t Lindsay’s coke. Barry Bonds didn’t know that he was taking steroids. etc……

  11. SINGER commented on Dec 13

    now THAT looks toppy….

  12. Vermont Trader.. commented on Dec 13

    Buying the TIP this morning. Hit the offer in premarket and bought 500 @ 104.74 and would buy more below 104.5.

  13. michael schumacher commented on Dec 13

    >>The strong opening gap yesterday, followed by a near 400 point reversal, only to close marginally higher is, in my opinion, simply awful technical action.>>

    My thoughts exactly. Check out this regarding what valuation the Fed is placing on all that exchangable paper:

    http://www.dealbreaker.com/2007/12/fed_using_very_old_valuations.php#more

    It is speculation because it assumes that the valuations from last year are still being used……..Sounds like the Fed is just like all the stupid homeowners that bought the top.

    Ciao
    MS

  14. scorpio commented on Dec 13

    can we have same graph S&P 500, pls?

  15. Eric Davis commented on Dec 13

    That is a good looking Elliot Wave, But I wouldn’t be surprised to see one more push higher… After a correction. (based on My EW chart-astrology(which I put little stock in)

    The Second wave is a bit of a head scratch er(the 87 correction), but I’d be curious to see it on a 40 year range. there may be a clearer 2nd wave in the context of the 74 recession.

    The 5th wave(this bull cycle), does break a few rules in the context of it’s own Elliott wave(no clear 2nd wave), within this 5 year bull impulse wave)

    But…

    The possibility of a double top with Aug-Sep. In a smaller context, a blow off top in august(The massive denial, irrational Blow off).

    If you look at sentiment as reflected in the charts. Clear Bullishness this year, being progressively overtaken by Bearish moves… Well that calls the action. That is a Clear Top, to me.

    EW says we have started the second down leg of this correction Which I say ends on the 21st… we get a little Santa Clause rally through Jan 7… Then we see how the holiday sales are.

    Outliers:
    if the dollar holds, maybe the Europeans come in and bid up the market in Q1.

    When q4 earnings, show Lackluster, and not Dickensian… Maybe the market bids itself up.

    In Feb and march, if the job numbers aren’t holding… That is when this gets ugly, as we forecast out for 2008 q4 Christmas.

    If jobs do hold.. Maybe we see a final spring run to new highs, as the bears get pushed into hibernation.

    Barry is right when he says “The economy isn’t as bad as the street thinks it is.” But you also have to remember, we tend to project out 6-8 months in advance, beyond that every-one’s crystal ball gets very Cloudy.

    I haven’t heard as much bearishness as I’ve heard in the past 2 days… What does the contrarian say.. Can you profit off of working counter to the Bearishness?

    My crystal ball says 4 year super-cycle Recession. I pity whoever wins the presidency in 08.

    I say we are taking the stairs down… I don’t’ know how steep they are, maybe we catch a bounce at 13200 or 13000 or a double bottom at 12800…

    I say we need bad jobs to break 12800..

    Wouldn’t be the first time I’ve been wrong.

  16. michael schumacher commented on Dec 13

    Repo. information today:

    http://www.newyorkfed.org/markets/omo/dmm/temp.cfm

    3 operations total (I guess someone was a bit anticipatory today-LOL)

    total of $20.75 billion

    Add that to the amount of yesterday and you get:

    $48.5 Billion or $28.5 billion MORE THAN THE AUCTION AMOUNT OF NEXT WEEK. They’ve already exceeded that amount that caused that gap and crap yesterday.

    But remember retail sales will save us……they tried that this morning too.

    It’s just so funny watching the banks scramble trying to get out of this year wiht a major blow-up…..they “might” make it but I would’nt bet money on it as the desperation will get worse the closer the YE comes.

    Ciao
    MS

  17. lewis commented on Dec 13

    Sure seems to be taking Barry a long time to post on why the retail numbers aren’t as strong as they look………

    I think they are up because the consumers are expecting the rate freeze on credit card bills with teaser rates. Yep, let’s bail out all the irresponsible people, it is an election year…..

    and yar, them’s some mighty big inflation numbers for all you who were bitching and moaning that the quarter point rate cut wasn’t enough…..(as in wasn’t enough to bring back Jimmy Carter style inflation).

    Ben be nimble, Ben be quick, Ben jump over the recession/inflation stick……OUUUCCCCHHHH!

    Lewis

  18. Eric Davis commented on Dec 13

    The 70’s inflation started in 73 with the Oil crisis… Carter was elected when?

  19. Guy M. Lerner commented on Dec 13

    What a bunch of technical nonsense…Russell is good for big picture stuff but his technical outlook -including the Dow Theory voodoo–is unsubstantiated.

    So having “dissed” a person who has written on the markets for over 50 years, let me give you my own assessment. As I have been saying since February, 2007 the markets are in the process of making a top of significance, and it is this process of marginal lows (Feb,Aug, Nov, 2007) followed by marginal highs (June, October, and likely January, 2008) that will lead to a market top.

    With sentiment so bearish and the Xmas holiday right around the corner, it doesn’t seem likely that the market will fall apart completely. The action doesn’t look good, but I think we bounce into year end.

  20. james commented on Dec 13

    One way to lower the energy bill (which is causing the inflation) is … to have a stronger dollar of course.

    Europe has been enjoying for years lower inflation just because the euro is rising against the dollar. Were the trend reverse itself, the US would see less inflation and Europe a higher one…

    As things are going, we see that the Fed’s worst enemy is the rising energy prices, and the only solution against it is a stronger dollar.

    If the US dollar rises, so will the US economy.

  21. R. Timm commented on Dec 13

    Philippe- thanks for the links. We are still 20% off our Y2k highs for the S&P when adjusted for inflation. S&P up only 25% over the last 10 years.

    I don’t think we’ll see a new inflation adjusted record high for a long time maybe 2015?

  22. Eric Davis commented on Dec 13

    MS,
    My understanding is this… and I’m not a fed guy Or economeister.
    at the regular fed window you can get money for Treasuries.. or other AAA High quality non-Real estate Assets.

    At the discount window/and auction, you can trade AAA Derivative/Real Estate assets.

    The banks who need liquidity, are trading their T-bills mostly, for cash from the fed, But they need more, especially with all the pending ARM resets.

    So, they are doing the auction to get the banks some liquidity, from some of the best Real-Estate assets that they have. Without begging at the window…

    I do think(for whatever that is worth) that they should lower the discount, and get them to beg at the discount window directly. If they aren’t willing to beg, they shouldn’t be given the cash….

    maybe look at it this way… The danger of looking desperate, outweighs the benefit of marginal profits from refinancing the ARMs. So the move is to give the banks some cover to get enough liquidity to do some refinancing.

    As an auction, it puts Say; Regional financial, or Colonial bank … On par to score the extra cash, with Citi, Wamu, and all the assholes that created this mess..

    Most the regional banks have been begging for money at 5-6% through CD’s for months now. More to make loans, than to cover their Reserve ratios.
    If they can score Fed Money at the discount rate, they will be happy to take it, especially in a longer Term.

    Dodging the moral hazard of providing liquidity and free cash for the big banks(Burned by the Depreciating CDOs to dump into equities speculation, which then reduces bond investment/savings.

    Else, some of the money is going to European banks through the swaps(I guess this creates a Carry trade where they can Borrow at the Fed, and loan at libor and make money, and the fed can effectively loan at 3 month libor), who feel burned by this Fiasco, and providing them with liquidity. Goes further toward loosening LIBOR, and since we have been paying them off at .80 on the dollar to what they loaned us the money at…Cutting the Fed rate only goes to making that .75 cents on the dollar, which only lessens their willingness to loan us money to Refinance the Mortgages, and decreases the likelihood of them bidding up Equities with their Euro’s and further Reduce Bond investment and savings.

    That is my econo 101 understanding… Quickly Banged out like a typing monkey… But I’m still trying to understand it… and would be better off making some phone calls about it, or searching the web for an economist that I can understand with my 4th grade economics background.

    So yes, not going to bail out Citi, but going to get some money to the Mortgages, and bring down the ARM rate. And not going to give cash to bid up Equities, and bring down the Dollar…

    But it will get the money to the right place, instead of to the wrong places.

    My overall Thesis over the next years will be that we come to terms with inflation, start Saving instead of spending. And stop using the market as a hedge against inflation.
    Markets have a tendency to work against the crowded trade, and for 30 years equities and Real estate have been the crowded trade, and My bet is we get a super-cycle reversal.

  23. Brian B. commented on Dec 13

    Eric davis,

    good posts, (a bit long, but good info). I take the bet with you… 4 years down… I agree with the prior poster also… I pity the next president. No matter who wins..

  24. Eric Davis commented on Dec 15

    LOL, I do go on, a bit….

    Every once in a while, the coffee gets to me and I just get typing.

    and as I re-read it.. I realize the numerous… Errors.

    But thank you.

Read this next.

Posted Under