Getting Slightly Bearish - A Short-Term Update
(June 9, 2004)
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:
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
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.
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:
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
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
Henry K. To, CFA