Just when you think it is OK to go out again, somebody opens their mouth and the storm starts all over. This scenario was surely played out last week. This time the storm clouds didn’t result from troubles with home loans, or overleveraged investment banks, or failing auto companies, or even toxic loans at banks. It was a whole nation about ready to go bankrupt! You have surely heard the details of the Dubai government’s debt problems by this time, so I won’t rehash it all again. But the important point about all this is that this time the world DOES understand the potential represented by this little expected shock to the economic system.
This time, investors are still keenly aware of the deep wounds that were inflicted many months ago and are far more likely to abandon the markets if the bottom falls out in the Middle East. Because of this wide-spread knowledge, you can be sure of one thing. The phones at the offices of central bankers all around the world will be hot all day the next few days. They too all understand that fragility is still the bottom line in financial markets everywhere.
But, the big question this week is just what will investors do? Will the waters calm quickly? Will it be back to buying stocks once again by next Friday? Or will it be something in-between all that? Hard to tell, so far. As of this morning, there is still no definitive direction as to an answer for Dubai. But, understanding the grave consequence possible if no action is taken, the United Arab Emirates Central Bank, located in Abu-Dhabi, did say yesterday that it “stands behind” its countries banks (which includes Dubai), and hopefully this action will relieve some of the pressure on investors.
Yes, this challenge to the world’s financial system will need more time (I am guessing several weeks) to get past this near meltdown. But, as I said, I am sure of this. Fed Chairman Bernanke and all the world’s central bankers will be burning up the phone lines, internet, and on-line conference lines to get ahead of this problem 24/7.
THE S&P SUPER CHART
As far as the Dubai effect on my Super Chart Keyline goes, you can see from the S&P chart below that (1) we are still above the Keyline, and (2) still above (barely) the Headline. I don’t often put the Super Chart into this report two weeks in row, but you needed to see that with last week’s problem, we are still over 30 points above the Keyline, closing the S&P Friday at 1091.38 (Keyline at 1059.07). So, if this problem were to continue to worsen by the end of the week, we still have some room to function before investors would make a challenge to break the Keyline.
YOU NEED TO KNOW THIS
But let me talk strictly CHART for a moment. What really caught my attention last Friday after the close was a formation on my Super Chart that you need to grasp, even if just slightly. A formation that began last August has developed on the Momentum Section of the chart and it relates to the S&P weekly price closes since then. I won’t go into all the deeper details, but put simply, as prices have gone up and down during the last 80 days or so, four higher price highs on the S&P have been matched by four LOWER highs on the Momentum Section of the S&P chart, an indication that the new highs were on lower buying pressure -– and also on lower volume in this case. Both of these are not strong signs, chartwise.
I have drawn in four red lines on the chart to illustrate this. At each red line you can see that the price of the S&P went to a new high. At the same time each peak of the Momentum Section green line (fast stochastic) was lower. This is not typically good bullish action. The most often seen result from this “divergence” is that the chart’s price (in this case the S&P) drops significantly. But, we are past the fourth new high and no precipitous drop so far, and that is the good news. Usually by now, a decline is in progress. Holding near the recent highs may be a help this time. But, close attention to the market direction is required from this chart warning.
My analysis of this formation, at the moment, is that we might instead see the Momentum Section green line move to the 45-60 area (closed at 72.67 Friday 11-20) and then move higher if –- and I emphasis the if here — prices can hold their present area –- about 1080-1110 S&P. At the moment the odds are in our favor, as I said.
But just in case, I would recommend that you be extra alert to the action of the market this week, checking it several times during the day to see if we are holding the S&P 1080-90 area or so, especially. A break of this support would signal you to get to this site to see a special report about what the charts are telling me. Hopefully, I will be right and the price will hold and go higher. But, this is a percentage game, so be very alert this week.
THIS WEEK CONCERNING REPORTS
That said, you also need to be alert in here because, as I said above, it will likely take most of this week, plus some, to really see how investors begin to come down on the Dubai issue. This morning, the Asia and Europe markets were at first up, but as their day progressed the closes of last Friday seem to be the safest levels to them. Of course, they are really just waiting to see what our market will say when they open at 9:30 am this morning. We remain the “800-pound gorilla in the room” for most investors around the world and until they gauge our response to it all, they will be cautious.
Part of the answer this week will most likely be the acceptance by investors of the sincerity of the UAE central bank offer and, in addition, the economic reports that are due out concerning our economy starting today. Shortly after the open this morning the Chicago PMI (Purchasing Managers report) will hit as a front runner to the more important ISM (old national Purchasing Managers report) due out tomorrow (Tuesday) at 10 am. Construction Spending and Pending Home Sales will accompany the ISM report tomorrow, so expect some reaction from this triad of numbers. But, the most important report of the week will be the Friday Employment Report at 8:30am. Much will be riding on this report, especially if markets remain weak all week.
I always tell you that I watch the charts for the direction of things and I do. But, I list these reports today especially because of the tentative Dubai situation overhanging the markets. Be assured I will be watching closely and if I see that a special report is needed I will have it posted here quickly.
DRUM BEATS IN THE DISTANCE?
Finally, there is another development that needs your attention, also. The Australian Reserve Bank (their central bank, like our Fed) will likely announce an interest rate increase today, the third such increase this year. The first two didn’t seem to roil the markets much, but this one might get a lot of attention from other world banks.
The Australian currency has had a strong run the last ten months against our U.S. dollar. This potential additional raise in interest rates could make their currency even more attractive and possibly sow the seeds of deeper discontent, so to speak, that maybe Australia has it right and interest rates should begin to rise for other currencies.
Will that happen? As I say so often, I don’t have a clue. Nobody really does, not even the Australian officials. But, the one major indicator I watch closely, the U.S. Bond market is so far saying no. Why? Bond prices have made a sharp rally this last 4 days, beginning even before the Dubai problem. That would indicate that the big players in the bond market are not yet too worried about the Australian move. But, again, be very alert to this announcement. It could be real problems for stock markets drawing ever closer.
CLOSING THOUGHTS
And now, before I close, a quick recap. Watch the Keyline at S&P 1059.07. Watch the reaction to the economic reports this week with an eye to what it does related to our Keyline price. S&P prices up would be good. Prices down would be a warning to remain vigilant. And watch the price of gold and the 30-year U.S. bonds and the U.S dollar. Gold and bonds going up and the dollar down would be the worst scenario. That would be investors running for cover. Gold and bonds prices steady to going lower and the dollar steady to a bit higher would be the best scenario, reflecting a calming of the markets. Anything in-between would be continued indecision. Yeah, this is an important week.
Well that’s a wrap for this week, except to say that if conditions warrant it, I will put up a special report during the week. Check back daily if the markets weaken. If we can get above and hold above the S&P 1,100 level all week, that would be best of all worlds.
And, as always, do have a good investing week –- being very alert all week, of course. And you keep in touch. I do! See you next week.
Closes as of Friday 11-27-09 (cash index)
DOW Indu. 10,309.90
S&P 1,091.49
NASDAQ 2,138.44
30 YR BONDS 123 6/32
GOLD 1,179.20
OIL 75.97
TOP 10 STOCK SECTORS LAST 6 MONTHS @11-29-09
1. ENGINES (+82%)
2. BROADCAST(+71%)
3. PRINTING (+65%)
4. AUTO (+58%)
5. PUBLISHING (+52%)
6. ELECTRICAL(+50%)
7. APPLIANCES(+49%)
8. TEXTILE (+45%)
9. TOOLS (+43%)
10. MINING (+41%)
*The name Super Chart Keyline is a registered Trademark of Max Whitmore.
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The S&P closed at just over 1095 today.
Max/ Thanks for all your insights Happy Holidays to you and yours!! Look forward to reading your columns! All the best!! hc