By FS Staff
Interview with Louise Yamada of Louise Yamada Technical Research Advisors, LLC. Full audio podcast can be heard Saturday on the Newshour page here and on iTunes here along with our weekly market wrap-up and Big Picture.
Stock Market in a Topping Process
"Overall, we think that we're in the process of a top. To what degree is yet to be determined but I think that the rally has failed below the prior highs. It's possible before a bear market that you can equal those highs or slightly go through them but I think what's happening under the surface is that we're seeing progressive weakness: new highs vs. new lows remains in negative territory, the up-volume vs. down-volume remains in very deep oversold negative territory, which suggests to us that there's been more selling on those rallies than there has been buying and that's all part of the concern of an evolving top. We have to recognize that a top is not really a place, it's a process and the process is that more and more sectors start to underperform, then more and more stocks start to breakdown and fall through their trendlines and fall through their 200-day moving averages and individually enter bear market progressions (and this leads) the underlying strength of the market to be hindered."
Long-Term Monthly Sell Signals Still in Place
"The Transports this week, really on a closing basis, could be breaking below even the August low - they're already below the October low. The Transports have been a leading indicator in this unwinding or corrective process over the past year and a half to two years in that they started to go down first and the Dow Theory concept that when the Transports and the Industrials don't move in the same direction, you have a growing problem. And the Transports have continued to break down so that's not a good sign and the NYSE Composite itself, although it does have quite a few interest-rate sensitive members in it, is on the verge of possibly breaking below the November low. And, remember, all of these indices remain on our long-term monthly sell signals, which have come into place from Spring forward and none of that has changed at all so that itself is telling us that there's an underlying weakness."
Next Downside Target for Oil at $32
"We've seen a continuing bear market for oil and I think we're in a trend of $32 being a possibility - you're not very far away from it and that takes you back to the 2009 low. Early this year, the price of WTI Crude broke the 1999-2000 uptrend so you're really breaking some long-term structural support levels here because there's no guarantee that $32 is going to hold but I would certainly put that in as the next potential target. A lot of the banks have cut back or eliminated their commodity trading desks so you don't have as many players or as much activity going on on the trading desks so the price of oil may be falling more or less of its own weight and gold isn't doing much better. Everybody keeps expecting a good rally in gold and yet on this supposed rally in gold it hasn't even been able to get through $1100."
Stay on the Shorter End of the Yield Curve
"One of the things that we have noticed in long interest rate cycles is that the reversal from rising rates to falling rate cycles have been very sharp inverted 'V'-affairs because the Fed usually comes in to curb inflation and jacks up interest rates and then things subside. But the transitions from falling rate cycles to rising rate cycles have been multi-year saucer like affairs that have lasted from 2-14 years. If you think about the 1929 decline into '32, we didn't see the rise in interest rates until 1946 and that was 14 years after the bear market low so I think we are initiating a new rising rate cycle. I think it will probably be slow moving but I would suggest that one not be terribly long out on the yield curve. If you ladder 2-year, 5-year bonds - something like that - or 1-year, 2-year bonds, you'd be able to rotate into whatever the new higher rate cycle is once your Treasuries come due but I don't think I'd want to be out 10 years or longer at all."
Foreign Market Toppy as Well; Overweight Cash
"We have a lot of those long-term monthly sell signals across the majority of the foreign markets. Even if you were to look at the EFA, which is the foreign ETF for a lot of the foreign markets, it also is looking very toppy. The emerging markets, EEM, really broke a support and has only kicked back into that support so you broke really since 2009 - so you've got a 5-year support that was broken - and the rally that took place in October did nothing more than go back and tickle the former support, which is now resistance, and the price is coming down again. So I think one has to be very careful here overall. I have no problem having a majority of money in cash at this point."