The Almighty 200-day Moving Average
The Almighty 200-day Moving Average (200MA) has been a faithful secondary trend reversal indicator for ages.
Below are the link to the basic technical analysis setup for six major indices that I track daily.
DJIA,
DJTA,
SP500,
NASDAQ,
Russell2000,
Value Line
I am not going to explain why these indices are being used, because that is not the point of this blog.
What I want to point out is that all indices are in the process of major technical breakdown, as they are all below the almighty 200MA, except Trans. By first glance, it looks as if we are at the same negative momentum as the previous low set in May. But if you look closer, the differences between now and May low are (1) DJIA moved below 200MA with increasing volume, (2) SP500 is now below the 200MA line for the first time, (3) NASDAQ is so far below the 200MA that it needs a miracle to bring it above it, (4) the small cap Russell is now convincingly below 200MA, and (5) Value Line is now below the 200MA line for the first time. In short, we have 2 first times, and 2 lower than May low.
Since the trend ebbs and flows in cycles, we might be near a short-term low. But considered the extreme weakness in all most all indices, the coming upturn may be on a short leash and quickly out of breath.
While I see high probability next week will end on slightly positive note, the current setup is very bearish for intermediate term.
Better than Average
We all want to be a better investor. John Mauldin, the sole editor of his free newsletter Investers Insight, dispense a few of his own based on his must read book Bull's Eye Investing. [
read]
The Averages are Not Done Free-Falling
I read the market like it tells me. Although I sincerely believe we are going for a real free-fall this time around, the market may call me wrong, which it does quite often. And I am not afraid of admitting that. As long as we trade in the mind of cash preservation and cut loses quickly, we are in a decent shape no matter what the major trend of the market is. So here is what I am seeing.
DJIA: For Dow Theory to hold true, Industrials may dig below 9800 on this newfound downward trend before regaining its composure. Although, it is likely that the Industrials will creep up for a few days before dipping further. I’d use that opportunity to pick up some cheap puts.
DJTA: While DJIA did a quick, small head fake today, Transports drops below its 3055 support to close at 3051.63. It is clear the Industrials is leading the decline, trying to correct the imbalances between the two Averages, or so called the none-confirmation from Dow Theory. We should see DJTA going down at least 200 pts before this is all over.
VIX: With noticeable correction of all Averages since July 1st,
VIX is only slightly above its all time low. This means market professionals are still positive on the market.
SP500: The financial laden SP500 is very close to its previous low of 1079. The breakdown from the big brokerages and WAMU will push it down to a year low.
NASDAQ: While it registered a year low on intraday trading, the tech NASDAQ finished slightly up. It maybe close to bottoming out, but I see it dropping further down as we enter the 2nd week of the earning report. Inventory problem and lower-than-expected guidance will be the theme of this earning report.
The return of the king, CASH is what I suggest to all to weather this storm. Here is another way to look at holding cash. While stock prices drop, your cash is actually appreciating in terms of stock purchasing power, as it will now buy more shares of the stocks. How’s that for beating the market. Remember, beating the market in relative term still means losing money when the markets are down. We don’t want to be in that business. We want to beat the market in actual term.
Couldn't have say it better. [
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Consumers Are Spent
The 2003-4 spike in revenues are due to consumers spending cheap money obtained from refi, credit cards, 0% financing, rebates… and government spending on defense and technology. The economy could keep going as the FED only rise short-term rate by 25 basis points--still considered cheap money since at 1.25%, financial institutions can still borrow money from the government better than FREE as the inflation is north of 3% Y-O-Y in June.
Now comes the bad news,
June retail sales fall short of expectation, and
consumer spending slowed in May. Consumers have pretty much spent all the credits they could obtain. The only thing left is waiting for the next elected office to approve more tax refunds, or hoping the real estate keep going higher, then use the home ATM. There is no hope in waiting for salary increase. I don’t see that coming anytime soon. The only people enjoying nice raises and sweet bonus are those who control the compensation committee: CEO, CFO, etc.
Is it time to say adios to the BULL?
If everyone in the universe already knows if the market goes down, it is going to be after the election, or historically election year brings slightly positive markets, then a contrarian would see this extreme one sided action as a chance to hedge against the market. Since everyone is already on one side of the boat, there is a higher probability that the next move is to the other side. Believe it or not, the best speculation in the markets is based on market psychology, not fundamentals or technicals.
I recommand reading the links on the
Sir Templeton blog again.
Sorry, my bad
The new theme for the 2nd half of the year is -- you guessed it –- restatements.
Here is a short list to lead the pack.
Nortel,
Red Hat,
Omnivision
This is only a glimpse of what is to come in 2005 as we will see more and more companies file for earning restatements, especially in the tech sectors.
Four restatements that should have happened but never will
1. Bush restates the war in Iraq to it was a mistake and we’d should've spent 40 billions of tax payers’ dollars on health cares and address other internal affairs.
2. Greenspan restates his previous inflation reading and concludes that high inflation will negatively affect corporate profit and consumer lifestyle, hence to extend our standards of living, he will accelerate the normalization of short rate to 3%.
3. Cramer restates his 2004 five MUST owned stocks, BERQY (Broadcom, eBay, Research In Motion, Qualcomm and Yahoo), to five MUST short.
4. CNBC restates its purpose on the tube from stock pushing propagandist to no-frill stock news reporter.
And there you have it. The world is full of things you want to restate, but they will never happened as it is part of life.
CHEERS!
Sir Contrarian John Templeton Speaks
When ‘old and out of touch’ sage dispense financial advice, the least we can do is give him the respect and courtesy of listening. Most investors, both retail and professional nowadays, never saw the dark gloomy depression of the 30's and the recessions in the 60's and 70's. Most of them aren’t even born then and the rest not old enough to walk. Future more, the majority of current retail investors only started owning stocks during the great BULL run from 1990 to 2000. When they bring up the charts, they see the great 45% ascending line of stocks during that period. By drawing a straight line on the stock prices, they envisioned a prosperous period ahead, and the 2001-2002 price depreciation is only a break for the next or the continuation of the great BULL run.
I believe in the cosmic 40yr cycle--20yr up and 20yr down. Of course we are not talking about a precise 20yr breakdown. Below is the breakdown of the cycles.
09-29 ~ 09-41 = BEAR
10-41 ~ 09-65 = BULL
10-65 ~ 09-81 = BEAR
10-81 ~ 09-99 = BULL
10-99 ~ xx-xx = BEAR
Like fashion, those ‘old and out of touch’ professional money managers, who have at least invest through one cosmic cycle are now coming in fashion as the cycle rotates back to their time.
Sir John Templeton is one of those old knights who is, fortunately for young and naives, willing to cast a guiding light upon us.
Please read the following interviews of Sir John Templeton and heed his words.
Apr 1, 2004
Feb 4, 2004
Jul 14, 2003
Dow Theory is Alive, Thank You Very Much!
Who says Dow Theory is out of date?
The important non-confirmation between Dow Jones Industrial Average (DJIA) and Dow Jones Transport Average (DJTA) is causing a major sell off in both averages.
My last blog stated that the market may turn bullish when DJIA breaks above the most recent high of 10537 in order to confirm the strength of DJTA. Unfortunately, DJIA never stood above that level, while DJTA broke through another previous high, resulting in double non-confirmation. In time, the imbalance will force the market to correct itself, and it is in the process of doing so.
DJIA is down 260 pt since last blog.
DJTA is down 22 pt since last blog.
Following the Dow Theory major trend, a cursory read of the charts indicates DJIA may fall below previous low of 9906 before regaining a noticeable upward traction.
If that indeed does play out, I can say “Dow Theory is alive and kicking major ASS!”
