Trend Still Up?
(October 19, 2003)
The major broad market indices all
made new highs for the week, including the Dow Industrials, Transports, Nasdaq,
S&P 500, the S&P 400 mid caps, and the S&P 600 small caps.
That being said, the current market is
overbought and looks tired - as evident by the Intel reversal and the weak
market on Friday. Moreover, earnings
look only okay so far at best. Insider
selling is restricted until two weeks after earnings, but it is currently
picking up. The insider sell-to-buy
ratio was only 12 at the end of last week. Today, it is at 32.50.
One thing that people have not been
talking about but which may have broad implications is the domestic money
supply. Back in the 1960s and 1970s, it
was something that many people paid attention to today it is greatly ignored
by all which is fine with me, since once an indicator becomes popular, it
usually ceases to work (with the low VIX being the latest case).
Below is a quick analysis which I have put
together by summarizing the M3 and the subsequent Dow action since January 1,
The five semicircles on the above
chart highlights the periods during the last four years when M3 growth was
flat. Please note the action of the Dow
Industrials following or during each of those periods in the first four
instances - DOWN. Please also note M3
growth in the last four to five weeks.
The latest week ending October 6, 2003 was a shocker - a negative growth
of M3 of $39 billion! Need we say more?
We spoke about the VIX in the
previous paragraph. Note that the VIX
has been a very reliable predictor of stock market declines for the last few
years, as evident by the second chart shown on our
During the last few months, however, the "low VIX"
had been cited so many times by the popular financial media that it
had ceased to work as a reliable indicator. That
being said, once the decline failed to materialize, the financial media stopped
talking about it. Therefore, after
ignoring the VIX for the last few weeks, we believe the VIX should now be
closely watched and that the current low reading of 17.62 (19.19 on the VXO -
which is the old VIX) should be respected.
Three weeks ago, we discussed the
implications of a rise in yields in 30-year Treasuries.
Despite the rise in yields during the past
two weeks, this huge downtrend still remains in place.
In fact, yields may have peaked in the very
short-term as suggested by the following candlestick chart:
The action of last Friday may have
been a short-term trend reversal of the yield in the 30-year Treasuries.
I would closely watch the action of 30-year
Treasuries during the early part of this week.
If yields manage to pierce Thursday's lows any time this week, then the
probability of a short-term trend reversal of the 30-year Treasury yield would
be greatly increased. That being said,
I am not the only person out there that claims there is an artificial market in
U.S. Treasuries (please read the latest Barron's interview with
Rudolph-Riad Younes, manager of the Julius Baer International Equity Fund
whose 10-year performance
puts him ahead of 91% of all U.S. mutual fund managers).
While breadth and volume remains
bullish, the secondary trend is most probably in the midst of turning bearish,
as evident by the negative growth in M3, the low VIX, and the McClellan
Oscillator turning negative (coupled with an overbought and "tired-looking" market).
Insider selling should also pick up once
earnings season is over. This is a good
time for my readers to start selling their weakest holdings, and re-investing
those cash in the market once the "all clear" signal is given or if the market
becomes oversold again. A breaching of
the 9,500 level on the DJIA (on a closing basis) would most probably lead to a
more serious correction ahead.
Readers interested in the yellow
metal may be interested in this article from the Economist:
It is interesting to note that gold
has been the purest form of money for the last five thousand years of human
history - with the latest boom in the precious metal ending only a mere 23
years ago. Meanwhile, experiments in
paper currency which sprouted up in the last 700 years have all ended up in
major failure (special examples include the Ming Dynasty in China and John
Law's infamous experiment in paper money in France in the 1720s).
The author believes the latest experiment in
paper currency all over the world would also collapse in time, but when?
Only God knows.