All Systems Say Down

By Duru

May 8, 2004


I have been amazed to date at how ugly a lot of technical indicators continue to get and yet the number of bulls vs bears is not making the dramatic change I would think the numbers warrant. The only thing that seems to be up these days are interest rates and the volatility index. I list here a complete review of the indicators I watch. Hopefully, this is enough to deliver the message: Even if the bull is still lingering around, hiding out somewhere, he has already purchased his ticket to head south for the summer and is packing frantically. Also note that although all systems say we are headed down further and further, the path to stock market purgatory is not likely a straight line. We should have a few more fake rallies ahead of us as the market churns just enough to attract a few more bullish dollars to really get the bonfire big and nasty.

Be careful out there!

Key: DMA means the daily moving average, I used it in reference to price

Nasdaq Composite: cracked below the 50DMA yet again in late April. Has now cracked the 200DMA for the FIRST TIME since its latest bear rally began in March, 2003.

Dow Jones Transportation Average: It has spent most of the year below the 50DMA. After cracking its 200DMA it went on a vigorous rally that gave bulls renewed hope and caught the bears grinning prematurely (those bulls and bears that follow Dow Theory that is). It has now cracked BOTH averages in one day (Friday).

Dow Jones Industrial Average: It has spent most of the past 2 months below the 50DMA. It has yet to crack the 200DMA. If you believe Dow Theory, I think such a test is a near guarantee in the coming weeks.

U.S. Dollar Index: This one has surprised me the most. All technical indicators broadcast a dramatic double-bottom in the dollar earlier this year, and I chose to ignore and even disbelieve it. I paid the price by sticking by gold as a play against the dollar. Lesson learned most painfully. The dollar has now broken back above its 200DMA and actually looks to head higher to continue its convincing rally. US exporters, gold bugs, and holders of foreign bonds watch outů

Philadelphia Bank Index: One of the uglier indices around. It is down about 5% this year. It has spent most of the past 2 months below the 50DMA, and has now convincingly broken below the 200DMA for the first time since its bear rally began in March, 2003.

S&P Smallcap 600 Index: It has gone nowhere as it has neatly bounced up and down this year. The latest break below the 50DMA looks pretty convincing. The 200DMA is only another 2-3% drop away but has never even been touched April, 2003.

Philadelphia Semiconductor Index: Another ugly index. It has been trending down since January this year and looks like it has definitely put in a top for this bear rally. It has spent most of the year below the 50DMA and has lived under the 200DMA for about 2 weeks. The first break in March was the first for this bear rally and sparked a counter-trend rally.

Retail Holders Trust: It seems counter-intuitive that just as jobs are finally becoming plentiful that the retail index begins a clear breakdown. It has not done too badly this year but has experienced a move downward at the beginning of each month (jobs report time) since March. It probably finally gave up the chase with the 50DMA in April and has now convincingly cracked the 200DMA. The retail index has flirted with the 50DMA throughout the past year's rally, but it has not even touched the 200DMA since April of last year. This chart indicates more danger than most because it is not hard to see it filling up all the empty space below in quick fashion. The reason why investors and traders will now shun retail is because a stronger economy means the Fed will have to take away some of the purchasing power consumers have been enjoying the past few years as the Fed desperately tried to pump up the economy. Logic dictates that things probably cannot get much better than we have already seen and will more than likely just get worse for retail. Note, we are not yet talking about recession, we are talking lower margins, slower growth (if any), and tougher profits.

S&P 500 Index: What a trooper. While spending most of the past 2 months below the 50DMA, it has not even put a scare in its 200DMA. Hard to say this support will be broken soon, but it eventually will.

% Stocks Above the 200DMA: This indicator put in a top in January and has not looked back. Since early March, this indicator has been headed almost straight down from around 90% to the current 48% reading. A true collapse yet the market indices are not reflecting the disaster this indicator is broadcasting. The bear rally began with this indicator at 30% and has been as low as 20%. In other words, there is still plenty of room to fall.

% Stocks Above 40DMA: I would prefer a 50DMA indicator, but this short-term indicator is just about as good. Like the 200DMA indicator, it made a clear top in January, but it has sunk even faster. It has had many counter-trend rallies but all well contained within the real trend down. This indicator has collapsed from about 85% to 20% and is BELOW the 25% reading we reached at March, 2003. In the short-term, we should have a swift bounce before all heads down again.

Mcclellan Summation Index: It is hard to know exactly what this bad boy means anymore, but whatever it is saying it is all bad. While it bounced neatly off 0 last summer and at the end of March, this index has now resumed its own collapse to -1000.

10-year Treasury Yield: Monster rally in 10-year treasury yields. China and Japan are seeing their portfolios killed and will likely need to sell equity to shore up accounts. All bad for us. Yields have now broken above last summer's highs and do not look like they are coming back down for a good long time. Stock valuations have had to quickly adjust to the higher price of money. The US Federal government will also have to pay more and more money to serve its ridiculously large deficits. Tax increases are closer than we think.

Utility Index: This group had been a wonderful refuge for the conservative investor, even rallying with the rest of the market for much of the past year or more. However, it made a decisive break below the 50DMA in April and is now looking to take out the 200DMA in the next week or so. Utilities have huge debt loads and are capital intensive - they are hurt by higher rates. Not even the generous yields in many of these stocks will provide enough of a cushion.

CBOE Volatility Index: After consistently getting worked down for the entire length of the bear rally, it broke below a firm "trading" range that had been in place since 1998. This indicator is often called the "fear index" as it measures volatility in the S&P, so we have now seen the ultimate in complacency. However, it seems we have finally put in a bottom. Perhaps we have simply established a new and lower trading range, but it certainly seems that the market will not getting any more complacent than it already has. It has good reason to finally pay attention to risků

Value Line Composite Index: I only look at this one for kicks. It is an old indicator that averages the price change from the previous day's close in each of the index's approximately 1700 stocks. But since all stocks have equal influence, the index has lately been boosted by a surge in more speculative, smaller stocks. While this indicator made all-time highs in 2003, lately, it has looked a lot like the S&P.

Philadelphia Gold/Silver Index: Given the dollar's resurgence it is no surprise to see gold being one of the uglier charts around. It has been below BOTH its 50 and 200DMAs since April and is back at prices last seen last summer. Gold can probably go lower still before mounting a real counter-trend rally. Gold bugs beware - rejigger those models. It is going to take some serious conviction to sit this pain out!

Overall, every indicator points to a down market with nowhere to hide. This is the exact mirror opposite of where we were last year with everything pointing up and money being made almost anywhere you put it. Given that the market has been in bear mode 3 of the last 4, I think the odds still strongly favor the bear. Look out below and be careful out there!


Ó DrDuru, 2004