Best of the Week
Most Popular
1. Crude Oil Price Trend Forecast - Saudi's Want $100 for ARAMCO Stock IPO - Nadeem_Walayat
2.Gold Price Focusing on May Cycle Bottom - Jim_Curry
3.Silver, silver, and silver! There’s More Than Silver, People! - P_Radomski_CFA
4.Is the Malaysian Economy a Potemkin Village - Sam_Chee_Kong
5.Stock Market Study Shows Why You Shouldn’t “Sell in May and Go Away” - Troy_Bombardia
6.A Big Stock Market Shock is About to Start - Martin C
7.A Long Term Gold Very Unpopular View - Rambus_Chartology
8.Stock Market “Sell in May and go away” Study When Stocks Are Down YTD - Troy_Bombardia
9.Global Currency RESET Challenge: Ultimate Twist - Jim_Willie_CB
10.The Coming Silver Supply Crunch Is Worse Than You Know - Jeff Clark
Last 7 days
Gold, US Stocks and Bonds - 26th MAY 18
Climate Change Canaries and Our Changing Climate - 26th MAY 18
Gold Junior Stocks GDXJ ETF Fundamentals - 26th MAY 18
What to Expect at a Critical Stock Market Point: End of a Wave 2 Rally - 25th May 18
Merlin Passes Top Tips for Buying and Using Premium vs Standard, Theme Parks UK - 25th May 18
Trump “Victories” on Trade are Anything But - 25th May 18
Crude Oil: It’s Here! - 25th May 18
Stock Market Distribution Pattern Revealed - 25th May 18
Stock Market Topping - Everything Looks Rosy at the End of a Trend! - 25th May 18
Trump Puts North Korea Nuclear WAR Back on Track as Plans for Nobel Peace Prize Evaporate - 25th May 18
Insane EU GDPR SCAM Triggers Mass Email Spam Attacks! - 24th May 18
Stock Market Higher Again, but Still No Breakout - 24th May 18
Study: Slowing Global Economic Growth IS NOT Bearish for U.S. Stocks - 24th May 18
What if This Week’s Rally in Gold is Already Over? - 24th May 18
EUR/USD – Reward for Bears - 24th May 18
5 Terrible Trading Mistakes That Rookie Investors Keep Making - 24th May 18
More Clarity for the Short Term for Bitcoin Price - 22nd May 18
Study: A Rising and Strong U.S. Dollar Isn’t Consistently Bearish for the Stock Market - 22nd May 18
Gold, Silver & US Dollar Updates with Review of Latest COTS - 22nd May 18
Upside DOW Stock Market Breakout May Be Just the Beginning - 22nd May 18
5 Reasons Why Forex Trading Is Becoming Such A Big Deal In SA - 22nd May 18
Fibonacci And Elliot Wave Predict Stock Market Breakout Highs - 21st May 18
Stock Market Ideal Cycle Low Near - 21st May 18
5 Effects Of Currency Fluctuations On The Economy - 21st May 18
Financial Conditions are Still too Easy for the Stocks Bull Market to End - 21st May 18
US Stock Market Elliott Wave Predictions for 2018 and Beyond - 20th May 18
Are You Still Fearful of Cryptos? - 20th May 18
US Stocks - Why I am Short-term Bearish, Medium-term Bullish - 20th May 18
Looking for a Turn in Gold Price - 20th May 18
GDX Gold Mining Stock Fundamentals 2018 - 19th May 18
Semiconductor Stock Market Canaries: Chirp, Warble… Soon a Croak and Silence? - 19th May 18
Three Drivers of Gold Price - 18th May 18
Gold Market in First Tertile of 2018 - 18th May 18

Market Oracle FREE Newsletter

Trading Lessons

US Toxic Economy and the Questionable Stock Market Advance

Stock-Markets / US Stock Markets May 19, 2008 - 07:04 AM GMT

By: Tim_Wood

Stock-Markets Best Financial Markets Analysis ArticleThe equity markets continue to advance out of the January/March lows, commodity prices surge, oil continues to hit record highs and the consumer is now pulling back in a big way. History tells us that manipulation ultimately fails and that it typically only serves to make matters worse in the end. Well, when looking at what is physically happening around me, if the technical picture that I now see developing continues to unfold, then the backlash from the attempts to “stimulate the economy” may have now created a witches brew with a not so happy ending.


First, I want to begin with the equity markets. My intermediate-term Cycle Turn Indicator turned up at the March lows just as the dumb money indicators that I follow were recording the most bearish sentiment readings since the 1998 4-year cycle low. Yes, that's right. By this measure we saw even more bearish sentiment readings surrounding the March 2008 low than we did at the 2002 4-year cycle low. When my intermediate-term Cycle Turn Indicator turned up in conjunction with that low and these extreme readings I told my subscribers then that the extended move into the 4-year cycle low had likely found its mark. To date, I continue to believe that the 4-year cycle low was made back in January on the Industrials and the Transports and in March on the S&P 500.

However, the question now is: “How long does the advance up out of that low last?” Back in the fall of 2007 Jim Puplava announced his “Oreo theory,” which called for a decline into the first part of 2008. This analogy then called for a rally as we hit the creamy filling and then once we worked through the creamy filling there would be more weakness. The first time I heard this analogy I agreed with it because fit perfectly with the technical landscape that I was watching. So, as I said back in March, we have made it to the creamy filling. But, now in order to know when we reach the end of this filling I have to monitor my statistical data, the cyclical structure and my Cycle Turn Indicators at the various levels along with the other technical indicators that I follow.

In the chart below I have included the Dow Jones Industrial Average along with the NYSE cumulative advance/decline line. One of the issues that I am now seeing with this rally is the light volume and lagging breadth. Price bettered its February 1 st high on April 18, 2008. It was not until Friday that the NYSE cumulative advance/decline line finally bettered its February high.


For those that question the integrity of the NYSE data because of the interest sensitive securities, I have also included in the next chart below the Industrials along with the AMEX cumulative advance/decline line. Here you can see that the AMEX, stock only, advance/decline line is lagging badly. The fact that breadth is not expanding along with the price advance is reason to question the health of this advance.

But wait, it gets worse. Below I have included a chart of the Nasdaq 100 along with the cumulative Nasdaq advance/decline line. First I want to point out that the divergence, or non-confirmation seen surrounding the October 4-year cycle top was even more pronounced here than it was by the other two advance/decline lines. Secondly, as price has advance out of the March low the NDX 100 has moved up some 21% as opposed to a 13% advance by the Industrials. Yet, the breadth expansion seen by the Nasdaq is anemic at best. Again, the fact that this advance is occurring without an increase in breadth is not a healthy sign for a brand new 4-year cycle advance. Should breadth begin to build in the weeks ahead, then I would feel much more comfortable about the future of this 4-year cycle advance. But, until such time this serves as one of many reasons that I am beginning to question the sustainability of this advance.

Another item that is contributing to the toxic American economy is rising commodity prices and the stagnate business environment that rising commodity prices have caused. Let me give you a few examples. This past week I went to my local lube and car wash. The manager and I were talking while I was waiting on my vehicle to be washed. He told me that a year ago they would do anywhere between 80 and 100 oil changes in a typical day. But, with the rising fuel prices business has dropped to an average of somewhere between 50 and 60. As for car washes, he said that they were doing upwards of 400 a day. At present, business has dropped to between 60 and 100 per day.

Another friend of mine is a boat dealer and sells bay boats and pontoon boats. This time last year you could go by his store and you could hardly talk to him because he was so busy. I remember needing something and literally not being able to get to him. He told me this week that June is his peak month and it was absolutely dead at his store. He said that he counts on the summer sales to help carry him through the winter season. He is now worried about making it through the summer. There was also another local business owner present and he too is also now feeling the exact same pain.

In yet another example, I needed a trailer ball so I stopped in at a truck accessory store. It was also dead there and I quizzed the owner. He too was telling me how slow it had gotten. He said that recently he had 13 employees between all of his sales and installation people. He is now down to one sale person, a secretary, one installer and himself. He said that it is now costing him to keep the doors open. He had a beautiful black 4-door F-250. He said that it cost $170 to fill it up and he had it parked in the shop and is no longer driving it.

Here's another one. I went to the local mall with my wife this week. She knows the lady that runs one of the shops in the mall. This lady is looking for a job because sales are so bad that the company is not going to renew its lease this summer and will be closing the doors.

In yet another example, I was talking to a lady at the local gym. Yes, I talk with everyone trying to get a feel for things. Anyway, she was telling me that they are now seeing gym memberships declining.

I also know people at one of the local giant home improvement stores. Sales are down and I am being told that they are not refilling positions in an effort to cut overhead. This slow down is not just affecting the small business owner. It is hitting everyone.

The so called “stimulus package” was like handing a band aid to a Ted Bundy victim. Rising commodity prices are now squashing the economy. On top of that the stock market advance is so far anemic. It may last a while longer, but when my intermediate-term Cycle Turn Indicator turns down, it will be a time for extreme caution. I personally feel that at this time the current 4-year cycle is setting up to be the polar opposite of the last one. What I mean here is that the last 4-year cycle stretched and advance for 60 consecutive months, finally peaking in October 2007. The current 4-year cycle should ideally contract slightly and is shaping up to potentially top much much sooner than the last 4-year cycle. In fact, this 4-year cycle is at risk of topping much sooner than the historical norm and if this does in fact occur the statistical implications would be disastrous.

Now I want to speak briefly about commodities. Many have misunderstood my previous comments. I have not said that commodities have topped. What I have said is that we are entering a “cyclical window of opportunity” in which a major top could occur. I have also said that I think there is a reasonable chance that this top could occur. At present, I have absolutely no confirmation that any such top has in fact occurred. When I look at the statistical and technical data surrounding commodity prices it tells me that if commodities should fail to top as we approach this “cyclical window of opportunity,” then by default this data will be telling us that commodity prices will continue to rise until we move into the next “cyclical window of opportunity” for a top, which would then be years away. These details have been and will continue to be covered in my monthly newsletter. When I consider the impact that I'm already seeing on the American consumer I just don't see how we could possibly stand several more years of rising commodity prices. It is in part for this reason that I have to think there is a reasonable chance we could see commodities top within the nearing window.

So, on top of the unhealthy stock market advance we have a tapped-out and fed-up consumer. People are without a doubt pulling back as rising prices have choked off discretionary spending. We also have poor business conditions as a result. In the meantime, both commodity prices as well as the stock market continue to rise. If commodities miss their upcoming opportunity to peak, then the fallout from still years of escalating prices will hit the consumer very very hard and my guess is that that would indeed knock the stock market to its knees. At the same time, I think it is also possible that given what is so far a weak rally by the stock market and the tapped out consumer, both the stock and commodity markets could find themselves on the way down in a much bigger way than most people can currently imagine.

The key to these developments lie with my statistical data and the Cycle Turn Indicators, which I cover in great detail in the monthly newsletter. The bottom line is that we have a weak equity rally, rising commodity prices, poor business conditions and a tightening consumer. The price action this summer as we move into the potential turn points are beyond important and I can tell you now that we had best pray for a top in commodities. Otherwise, rising commodity prices beyond the statistical turn point will set the stage for rising commodity prices for years to come.

I have begun doing free Friday market commentary that is available at www.cyclesman.com/Articles.htm so please begin joining me there.

By Tim Wood
Cyclesman.com

© 2008 Cycles News & Views; All Rights Reserved
Tim Wood specialises in Dow Theory and Cycles Analysis - Should you be interested in analysis that provides intermediate-term turn points utilizing the Cycle Turn Indicator as well as coverage on the Dow theory, other price quantification methods and all the statistical data surrounding the 4-year cycle, then please visit www.cyclesman.com for more details. A subscription includes access to the monthly issues of Cycles News & Views covering the stock market, the dollar, bonds and gold. I also cover other areas of interest at important turn points such as gasoline, oil, silver, the XAU and recently I have even covered corn. I also provide updates 3 times a week plus additional weekend updates on the Cycle Turn Indicator on most all areas of concern. I also give specific expectations for turn points of the short, intermediate and longer-term cycles based on historical quantification.

Tim Wood Archive

© 2005-2018 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules