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Getting Slightly Bearish - A Short-Term Update

(June 9, 2004)

Dear Readers:

One thing that has bothered me about the stock market action has been the dismally low trading volume on both the NYSE and the NASDAQ since the May 17, 2004 low - something which I mentioned on my May 24th commentary. At the time, I also mentioned that the "persistent refusal of the Dow Jones Transports to confirm the Dow Jones Industrials on the downside" should be a prelude to higher prices for both indices. Since then, the market has rallied. But what is this classic Dow Theory indicator telling us now? I have updated this chart to reflect the action of the two Dow indices over the last couple of weeks:

Bearish sign for the market? Upside non-confirmation by the Dow Industrials with three declining tops

The action of the last couple of weeks has been bullish for the Dow Jones Transports - despite a crude oil price of over $40 a barrel. While the Dow Industrials has also rallied, please note that the Dow Industrials has not confirmed the Dow Transports on the upside. This is obvious once readers take into account the three declining tops which the Industrials has traced out since January earlier this year. For this non-confirmation (and the bearish implications of the three declining tops) to be negated, the Industrials will have to rally and close above the April 6 high of 10570.81. As of this writing, we are approximately 200 points away from that confirmation.

The author of this website is also bothered by the number of breakout failures and the breakdown of certain industries and industry-representing stocks over the last few trading days. Of particular note is one of the major backbones of the Nasdaq - the semiconductor sector as represented by the SMH, the semiconductor Holders. Please note that the 50-day simple moving average is still below its 200-day simple moving average - with the former still trending down. Also note that the SMH plunged back below its 50-day moving average today. If the price of SMH remains below its 50-day moving average (or even declines below its recent low of 36.68) for a considerable period of time, then things could get ugly on the downside.

Semiconductor Holders(SMH) breaking below its 50 DMA again today

The same case can be made for Phelps Dodge, the barometer for the copper market (July copper futures plunged over 7 cents today), although the 50-day moving average has not crossed below its 200-day moving average as of yet. On a longer-term chart, you can see that the price of PD is being capped at the 40-week (or 200-day) moving average. Note that relative strength against the S&P 500 is also trending down. In recent years, there has been no market rally or decline that has not been confirmed by a same directional movement in copper.

The barometer for the copper market, Phelps Dodge's rally is being capped at 40-week moving average with declining relative strength

Similar long-term patterns can be found on the charts of U.S. Steel (X) and Alcoa (AA). The fact that interest rates are again trending higher is also bothering me, as exemplified by the following chart of the 30-year Treasuries:

30-year Treasuries - double top or breakout?

If one solely bases his or her stock market analysis on the 30-year Treasuries, then it is really do-or-die time here. The 30-year Treasuries closed at a yield of 5.486% today, a mere 7.4 basis points lower than the recent high of 5.56% reached on May 13, 2004 (two trading days before the May 17 low). If the yield of the 30-year Treasuries closes above 5.56% anytime soon, then again, we may be seeing some fireworks ahead.

While insider selling and the number of offerings have remained subdued, the lack of trading volume on both exchanges could mean that any current or potential demand of common stocks would be overwhelmed once insider selling and offerings materialize again. If the market is to maintain a sustainable uptrend from here, then trading volume on both exchanges will need to increase. Bottom line: While the author is bullish in the longer-term, the current market looks tired. Coupled with the fact that the market is still very overbought on a short-term basis (despite today's decline), the author is expecting at least a test of the bottom of its recent trading range, at around 10,000 on the DJIA and 1,900 on the Nasdaq. For now, I believe the trading range will hold - with a stronger rally materializing later in the month - but for now, we will take it one day at a time.

Signing off,

Henry K. To, CFA

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