All I read this week (on a dozen or more financial web sites I frequent) was about how “this rally is all over!” The world is about to end this “all-wrong” stock market buying spree, most of them said in one way or another, and “that it was about time, too!” For the most part, they all felt that the Dow 10,000 level was the final straw of “the madness in this ‘economically unjustifiable’ rally” and that we could now expect that the next move was going to be a decided decline of large proportions.
As I sit here writing to you, the thought keeps coming “All because we hit Dow 10,000?” Now, understand, hitting the Dow 10,000 level was of great interest to me. After all, just six months ago we were over 3,000, that’s 3,000, Dow points lower and by most all accounts about to fall below the Dow 5,000 very soon. But, from the true economic standpoint Dow 10,000 is no different than Dow 9,000 or any other Dow even thousand number. The truth is that a Dow number is not what will start a selloff anyway. Selloffs occur when the large majority of investors see the expectations that fuel a rally slipping away.
Yes, I do agree with most of the sites that we have come a very long way very fast (creating what they call a “V” bottom on the Dow chart). But, just because we hit the 10,000 mark will not of itself end this rally.
So, what could actually start a selloff? Well, we might continue higher until we hit my Super Chart well-defined S&P 1220-1260 target, the target of the head and shoulders formation I have been chronicling for you. But, not until we get there, can I tell you what the chart looks like and decide if a selloff is then warranted.
Or we might break the key Super Chart supports currently below our present prices on the Dow and S&P and see a sell move begin. Currently, the supports I see are at about S&P 950-960 and Dow 8,800 or so. Additionally, for my part, I would begin to get concerned if we break the head and shoulder formation’s “headline” on the Dow at about 8,800 or on the S&P at about 990-980, as shown on the S&P chart below.
And, as promised last week, here is an update, with comments, on the S&P Super Chart.
First off, note that we are still ABOVE the Keyline on the Super Chart, currently at 1063.69 (Friday’s S&P close was 1079.6). That is as important to me as being above the “headline” just now. If we did break the Keyline just a bit, I would still not be terribly concerned. But, breaking the Keyline AND breaking the supports I mentioned above would most likely have me sending you a warning about this market. But, for now, no such warning.
There is one thing, however, I don’t like too much which occurred on the lower portion of the Super Chart called the Momentum Section. The green (or “fast”) stochastic indicator (see the circle marked “1”) has pulled up to the 80 level from the 55 level and hooked down to 77.24. I am concerned because the previous hook down of the high of the green “fast” stochastic was higher than the hook down point that occurred this week . Then, note on the Super Chart that the last price high hook down, occurring just before it crossed up the thick red Keyline, was lower than this latest high hook down which occurred this week.
This is called a “divergence.” The last low of the Momentum Section green line was lower than the last high before it hooked down and the last high on the price was higher than the last price high before that price high hooked down. Usually this is a signal that leads to a price decline of some sort. Too soon to tell if it will be anything substantial at this point, but I will keep a close eye on it and keep you updated. Odds say a decline is 70% likely. We will see. Other than this, the Super Chart overall remains BULLISH.
As you know, I don’t look to the fundamental factors very much when analyzing the markets, but I do make an effort to keep abreast of what the drift of the financial news is. This week it was earnings, tinged a bit more to the down side than expected by investors and, of course, the talk last week that Paul Volker, a key financial advisor to the President, is actively talking up his proposal that banks be stripped of their investment powers and that this activity be reserved only to investment banking houses like Goldman Sachs, Merrill Lynch etc.
There will be a long fight for this change and it may never come about. But, it would remove a major conflict of interest for the financial industry to separate banks from potentially using depositor funds to finance programs such as sub-prime loans, Collateral Debt Obligations (CDO) and the like.
This separation existed from the 1930’s until 1999, legislated by a law called the Glass-Steagall Act. While as I said, this is not a likely change right now, it is important to keep your eye on this future possibility as it could radically change the financial landscape and how your portfolio might need to be managed.
Mr. Volker’s favorite closing to his speeches about this proposal, one that gets laughs and the nodding of heads is something like this: “The combination of both powers in one bank is why we are in the mess we are in ladies and gentlemen.”
Not much more to add this week, except to tell you I will be on a business trip from this coming Thursday until late Monday (11-2), so my next week’s column will not be posted until Tuesday PM (11-3).
And just to keep you up to date, I hope to have a section on the new web site, which will be up quite soon, so that you can log in weekly and see where each of the Dow stocks are on my Super Chart. This is a first installment of the exploratory program that I told you about several weeks ago to try and make the Super Chart’s great advantages available to you for any stocks that you may own or are considering owning. But, that advanced phase is getting way ahead of myself. For now, the weekly Super Chart update of each of the Dow stocks being available to you on the new web site will be the one to watch for when it opens.
Well, as always, I do hope you have a good investment week. In the meantime you keep in touch. I do! See you next Tuesday.
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