With the last all time closing high on the Dow Jones Industrial Average having
occurred on September 18th, it is an indisputable fact that as of this writing,
structurally, the advance out of the 2009 low remains intact. From a Dow theory
perspective, the bullish primary trend change also remains intact. The money
makers continue their infusion, the commentators in the mainstream news continue
telling us why all is well and what to believe. All the while the public continues
taking the bait and seemingly believing that the illusion is real.
But, I maintain that this is a financial house of cards, a bull trap, a bull
market mirage, whatever you want to call it and that once again the public
will be left holding the bag. In this article, I want to take a very simplistic
look at the equity market, the advance out of the 2009 low and the very obvious,
but also very simplistic warning signs that all is not so well.
The first chart below is a monthly chart of the Dow Jones Industrials Average
and in the upper window I have included a very basic technical indicator, the
Relative Strength Index. This indicator does not measure the underlying market
relative to another. Rather, this indicator is a momentum indicator that in
effect measures the relative strength of the underlying market against its
recent price action. The ongoing long-term divergence or non-confirmation,
by definition, shows that we are seeing an increasingly weakening market. Folks,
this is about as basic as technical analysis gets. Don't take my word for it.
Please, just take the time to read about this indicator in any technical analysis
book. You will see for yourself that this is not healthy behavior. Or, you
can even go to www.bloomberg.com/video/56591362-relative-str...ngth-index.html and
there is a quick video explaining this very basic indicator. Their explanation
of this indicator confirms what I've been saying about this rally all along.
Further evidence of the continuing weakening of the market can be seen on this
chart simply by the fact that not only does the very long-term bearish divergence
continue, but note that each more minor divergence since the 2000 top, which
is noted in red, has been followed by a decline below the previous longer-term
cycle low, i.e. the 2002 low, which moved below the 1998 low, and the 2007
low, which moved below the 2002 low.
But wait, this is just one technical indicator and like Bloomberg said in
the video, RSI should be used with other technical indicators. So, I want to
show you another very very basic measure of the underlying technical health
of this market. Below, is another long-term chart of the Industrials, plotted
in black. I have plotted in blue the Total NYSE Issues Traded. Let me walk
you through a very very elementary observation in which one does not have to
know anything about technical analysis. Note that the 2007 high occurred with
less total issues traded than was seen in conjunction with the 2000 top. In
other words, total issues did not confirm the move to new highs in 2007. The
outcome that followed that advance was labeled as the worst financial disaster
since the great depression. Obviously a rising market with shrinking issues
traded is not a good thing. Now, note the advance once again to new highs with
what is this time an even greater contraction of total issues traded. So, as
is the case with the Relative Strength Index, the number of issues traded is
also not confirming the progressive price highs. Thus, I have to pose a few
very very basic questions. First of all, why and how can we realistically expect
a different outcome this time? How could this really be a secular bull market
environment? Does it really look like the man behind the curtain has fixed
the underlying issues with the market? Is it not logical that the man behind
the curtain has actually made matters worse by driving price up in such a weak
technical back drop?
Let me show you another little piece of basic technical data. In the chart
below we once again have the Dow Jones Industrial Average, which is plotted
in black and in red is the NYSE Advancing Volume. This chart shows the advance
into the 2007 top, the decline into the 2009 low and the rally to present.
It is from the 2009 low to present that is most important. As price began to
rally out of the March 2009 low, advancing volume increased with price, which
is a positive development typically seen in normal healthy rising markets.
But, in August 2009 advancing volume peaked. The advance out of the July 2010
low into the May 2011 high was not confirmed with higher advancing volume.
Thus, this set a non-confirmation/divergence between price and advancing volume
into play as well. Since then, this divergence has only intensified.
So, rather than confuse the issue with fancy talk about cycles, Dow theory,
the alleged meaning of some fundamental report or whatever, I have shown you
a few very very basic charts in which just a little common sense is needed.
How can we realistically look at these charts and conclude that the market
is healthy? If we compare just the divergences seen in the first two charts,
how can we expect a different outcome this time? Compound this with the contracting
volume and how is it remotely logical for rising price on the back of a weakening
market, per the RSI, and contracting issues and volume to be a positive environment?
How can this possibly end well? I don't care what the politicians, the economists
or some Phd. type on TV says. They are wrong! They are wrong! They are wrong!
This data is indisputable, Period. These same people did not warn the public
of the top in 2000, in 2007, of the housing top, the banking crisis or any
other market peak or downturn. Even if they wanted to, the mainstream media
would not allow it or they would make them out to be some sort of extremist.
I know this first hand. The media cannot and will not tell the truth. They
can't. It would obviously cause a stampede. Their job is to keep the cattle
calm and corralled.
Yes, I have been saying since the rally out of the 2009 low began that it
was a rally within the context of a longer-term secular bear market. These
basic charts present very elementary, but indisputable supporting evidence
to this effect. We have yet to see the technical setup to cap this advance
and I have consequently not once said that the top has been seen. All the while,
my longer-term view about this advance, which is based on hard data, not emotion,
has not changed.
These very basic charts should speak volumes to anyone that can think for
themselves. I do not want to see the working person being suckered into the
trap and decimated as he was with the housing collapse and the stock market
collapse that followed the equity peak in 2007. I realize that when you see
higher stock prices and hear the positive spin from the so-called "experts" on
TV, that it is hard to believe anything any different. But, I'm telling you,
in spite of their rhetoric the perfect financial storm quietly continues to
brew.
If you are interested in more detailed analysis on the underlying
developments and my expectations for the near and longer-term, that research
is available in my monthly research letters via a subscription at Cycles News & Views, target="_blank" www.cyclesman.net
