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Dow 10,000: Time For Euphoria Or To Run For Cover
Last week the Dow Jones Industrial Average passed the 10,000 mark for the second time on the way up. The first time the market closed above 10,000 was in October 2008. Wall Street celebrated with traders tossing commemorative caps and uncorking champagne. This time around the feeling was much more like that of relief.
According to Arthur Hogan, chief market analyst with Jeffries & Co. in Boston, "It's almost like an announcement that the bear market is over." But is the bear market really over?
Obviously it's hard to argue with the type of run up the markets have seen since the March lows. Is this the beginnings of a new bull market phase or purely a bear market bounce? Truth be told, no one knows for sure, except God, and he's not talking. So as investors, how should we be positioned?
The simple answer to this is to be skeptical, guarded, but realize that the market is a wild, untamed beast and if it wants to go up.....we must learn to accept it and participate. As trend followers, we have learned to sit back and let the trend be our friend. The current trend is up as one can plainly see.
However a closer look also reveals some cracks in the market's armor that should cause investors to be guarded. First, we really haven't had a sizeable correction in this market move. A sizeable, normal correction is a 33-62% retracement of the move. This speaks to the strength of this move.
Second, technically price action is rising within what is called a "rising wedge." This pattern is typically bearish and a break of this pattern should lead to a more sizeable retracement (33-62%) or possibly the end of this move. See Dow graph below.
Finally, most bear markets start with a strong inpulsive move down. This is followed by a strong, upward retracement move and then finally a longer, recessionary move lower. If this market holds true to historical form, we still have this latter down move to come. Will it? No one knows for sure, but if history tells us anything it's to have our guard up while still partying with the Dow 10,000 crowd.
Country ETFs Look Very Extended
Because of this rather annoying trait, we are constantly looking at the tea leaves for signs that a reversal may be imminent in one of the positions we follow or invest. Over the years, we have learned the hard way that the trend can remain intact, but the position or market become short-term overbought. This is what we are seeing now in many markets, especially the foreign equity markets.
Our research has shown that when an equity moves 5% or more above its 25 day moving average there is a 70%+ probability it will revert to its mean shortly thereafter. In fact, this can be quite a profitable trade for very short-term traders. Well, we are now there with many of our country ETF positions and our models are flashing short-term caution.
Of our top ten rated positions by long-term and short-term price momentum, only Turkey and India are still rated "neutral." If you are thinking about putting on new country ETF positions, it may behoove you to wait for the inevitable pullback in these names.
Does Dollar/Yen Signal Trouble Ahead?
In our ever vigilant search for clues to the end of the rally, could it be that the greenback and the yen are flashing warning signs no one wants to see. According to a report by Jonathan Clark of FX Concepts entitled Has the Yen Changed its Stripes, he writes that "the cycles argue that the financial markets are within two weeks of what should be the start of a period of distress. The exact reasons for the downward move in stocks and the accompanying decline in risk appetites will only be revealed later. However, the increase in risk aversion should be related to growing credit losses and weak final demand as consumers struggle to rebuild their savings."
He goes on to say "Normally when this occurs the yen strengthens aggressively as there are short yen positions on both inside and outside of Japan." We know this latter statement to be true as this was evidenced in the September/October period of 2008 and Non-commercial or "speculative" positions on the IMM are again pointing to significant shorting of the yen that can be fuel for a short squeeze.
A simple review of a weekly spread chart of the U.S. dollar and the yen, shows that this spread is approaching a signifant support level at .70 and could portend a bounce at this level. You can see from previous bounces at this level that the market generally moves inverse to any positive move in this spread.