Market Wrap Up April 07/05

by Martin Goldberg

MARKETS AT KEY FORK IN THE ROAD

The stock, bond, gold, commodities, and currency markets stand at a serious fork in the road where the next couple of percentage points up or down may determine the direction of the next 10 to 15 percentage points. In this season of overstatements, I don’t think it would be an overstatement to suggest that the next week in the financial markets is critical. In the fundamental analysis community, positions have been taken and rationales described. Tonight, I’ll technical look at these markets because its time to either “put up or shut up”.

US Stocks

Every technician, amateur and professional alike, saw the bounce of the last few days coming in advance. The duration and magnitude of the bounce will establish whether the “on queue” rally has any serious trending implications. Just as the rally over the last few days was telegraphed, any decisive violation of the obvious support line will be taken as a sell signal by thousands of hedge funds and speculators in the amateur and professional ranks.

For this reason, my view is that if this neckline is broken decisively to the downside, the market will fall rapidly. The S&P 500 may drop down to the 1,100 mark in the blink of an eye. But if we pull back to a chart of the longer term time frame, a better perspective becomes apparent.

The chart below is a 3-year picture of the S&P 500. As you can see from the red arrow, there was precious little basing between the two blue trendlines shown on the chart. The apparent premise of that rally was that the winning republican president incumbent was “good for stocks”. As you can see from the lack of any significant basing in the rally forming the bottom of the support line, a decisive break through 1,165 may find support at 1,135 where the former resistance line may be presumed to be a potential support line. The supposition that monetary alchemy is clearly geared toward the prevention of any sudden moves in the financial markets, gives additional credence to 1,135 as S&P 500 support. (It would probably whip saw to 1,130 interday before producing a tradable bounce upward.)

It is a similar situation with the Nasdaq, where 2,000 must be maintained for neutral to positive market psychology to be maintained. A decisive break, which almost occurred last week, would spell immediate technical peril for the Nasdaq, and in all likelihood the entire stock market. As with the S&P and most other market indices, the magnitude and duration of the bounce will determine the longer term trend. A long and strong advance beyond January highs would be bullish in the longer term. Yet we are about 190 points from these highs and there is the temptation by many to “play” this telegraphed bounce for a potential gain of about 10% to the upside. “Players” are setting stops below the blue support line.

The tail wind behind the current bull market has been low interest rates and it is likely that maintaining low interest rates by way of a bullish bond market will be critical to the stock market.

Bonds

10-Year Rates
Below is a chart of the 10-year Treasury note yield dating back to January of 1999. The 10-year interest rate has bottomed in mid-2003, and in spite of some highly publicized rallies, the long-term trend of the 10-year note yield has been UP. If the 4.9% rate is broken to the upside (red dashed line), there is no significant resistance until 5.5%. One would have to wonder is this 5.5% rate increase would have a significant impact on the fragile and highly leveraged housing market. I’d expect that any threats of this line being broken will be met with a barrage of Greenspan and Bernanke speeches.

30-Year Rates
Some would argue that it’s the 30-year T-Bond yield that provides the better looking glass into the future of the housing market. That is fair enough and unlike the 10-year, the 30-year bond yield is still in a downtrend which began in the early 90’s and is very much intact; but to believe this rationale is to believe that the “conundrum” will continue into the long-term future. The red trendline is important.

Commodities – CRB Index

When commodities go up, it is generally not good for the stock market or the economy. Below is a long-term chart of the CRB Index, which is a basket of commodities. Note the trendlines. Remember during the technology boom how commonly believed was the premise that something has profoundly changed the world economy. Yet commodities have more than doubled in less than 4-years and the fact that this has profoundly changed in the world economy appears to be totally lost in most common knowledge circles. As is apparent from the chart, severe and expected pullbacks are occurring, yet the trend is steep, clear, decisive, and UP.

Oil

The 3-year chart of oil below shows two trendlines that have held true for over 2 years. Expect periodic swoons to the lower trendline, whereby a host of experts will suggest that the bull market in oil is over. For now, I’ll call these golden entry points.

US Dollar

Short term the US dollar is challenging 85, after having made a higher low. As of Wednesday evening, it looks like a good entry point to short the dollar with a stop out at a close of 85.6 or higher.

Following is the long term picture of the US dollar.

Gold

Gold is at an excellent intermediate term entry point as is apparent from the chart below.

Is the three year chart above a distortion of any longer term trends? I don’t think so. Yet a decisive break of the trendline to the downside would deserve the attention and action of traders.

Silver

The situation for the more volatile and powerful silver is similar to that of gold.

Today's Market

The “telegraphed” rally continued today, right on plan. Oil was down almost $2 per gallon, yet the oil-related stocks did better than the commodity. In general the stocks lead the commodity. I’ve heard a lot of speculation that the surging oil prices are due in a big part to speculation and not fundamentals. This rationale breaks down when you consider the prices and current fundamentals of the oil tanker stocks which are surging along with earnings and dividends from these companies. If the oil bull market is a result of speculation and not fundamentals (i.e., supply and demand), then you would expect that the oil tanker stocks would lag the integrated oil companies. Below is the chart of the Overseas Ship Holding to Exxon Mobil ratio which shows a linear uptrend. If surging oil was not supply/demand driven, you would expect that the fundamentals of the oil shipping stocks would lag those of the oil producers. Yet they don’t!

All the major indices were up today as the Dow, S&P 500, S&P mid caps, and Russell 2000 small caps were each up a little over 0.5%. The Nasdaq led with a gain of almost 1% on unimpressive volume. In spite of the bullish stock action and drop in oil, there was very little movement in the transportation index, and after hours, a key transportation stock, Yellow (YELL), is selling off.

Bonds got hammered, which is surprising in light of the fairly bond-friendly weekly job loss statistics which were higher than Wall Street expectations. Yet after a bullish open, bonds sold off as is apparent from the chart of the mid-range ETF, shown below.

Note that the ETF rallied back to the neckline, where the previous support is now a resistance line. Today, the ETF tickled the resistance line and then put out an ugly and decisive red (down) candlestick. You might say that the bears now have the ball and it is likely that bonds are heading down in the days to week timeframe. This begs curiosity in how the homebuilder stocks are performing.

Homebuilders, the former market leaders are no longer leading, and this is not in gear with the most recent bond market rally since the last couple of weeks in March. Lower interest rates (higher bond prices) are good for homebuilders. Now with bonds due for a short term drop (as indicated by today’s action), this may spell the end of the homebuilders Bull Run.

Time is short, but everything I said about gold, silver and an entry point still holds – It’s a good entry point for investors without a current position in that sector.

Got to go. Have a great evening.

Martin Goldberg

Martin F. Goldberg, MS, P.E.
Market Analyst
email mdelmgoldberg@comcast.net