The Top Out Parade
By Frank Barbera CMT. July 3, 2007
This week’s Market Observation is somewhat abbreviated as the author is headed out of town for the long holiday weekend. Yet over the last few weeks, we have made the case that the global equity markets are in the process of topping out. With a tip of the hat to the great Richard Russell, who pioneered this concept many years ago, here is the Top-Out-Parade of Various Indices around the world using their ‘High Water’ Marks seen thus far in 2007:
Dow Jones REIT Index
02/07/07 Bombay Sensex Index
02/21/07 Dow Jones Bank Index (all other Bank Indices)
02/23/07 Physical Comex Silver
04/16/07 Philly Gold and Silver Index
04/20/07 Physical Comex Gold
04/25/07 Amex Biotech Index
05/04/07 Amex Pharmaceutical Index
05/04/07 Physical NYMEX Copper
05/07/07 Physical NYMEX Platinum
05/08/08 DowJones Corp. Bond Index
05/11/07 Nuveen Municipal Closed-End Bond Index
05/15/07 S&P Insurance Index
05/21/07 DowJones Utility Index
05/22/07 Dow Jones Healthcare Index
05/23/07 Dow Jones Home Construction Index (lower high)
05/25/07 China — Shanghai Composite Index
05/31/07 Dow Jones Transportation Index
05/31/07 Dow Jones Financial Index
06/01/07 Dow Jones Steel Index
06/01/07 Dow Jones Railroad Index
06/01/07 Paris CAC-40 Index
06/01/07 Amex Broker-Dealer Index
06/01/07 S&P Retail Index
06/04/07 Russell 2000
06/04/07 Dow Jones Coal Index
06/04/07 Dow Jones Wireless Telecomm Index
06/04/07 Dow Jones Consumer Services Index
06/04/07 S&P 500
06/04/07 Dow Jones Industrials
06/04/07 S&P Small Cap 600 Index
06/04/07 Value Line Arithmetic Index
06/14/07 Mexico — IPC Index
06/15/07 London FTSE 100
06/19/07 South Korea KOSPI Index
06/20/07 German DAX Index
06/20/07 Australia All Ordinaries
06/21/07 Tokyo Nikkei 225 Index
06/21/07 Singapore Strait Times Index
So what does this leave as “still untopped”? Well, going down the list, we boil it down to the following: the Chinese Red Chips — which play a large influence in the Hong Kong Market, so we start the list of the un-topped with the Hang Seng Index in Hong Kong. Here at home, the China 25 ETF is a close track on the Hang Seng and that is still making higher highs through today. In addition, the US Energy sector has been quite robust, including indices such as the Amex Oil Index (XOI) and the Philly Oil Service Index (OSX). Technology has also held up very well, with the NASDAQ, the AMEX Technology Index and the Philly Semiconductor Index (SOX) still near their highs. And finally, Basic Materials have been the blow-off leaders of all markets -- the strongest of the strong, if you will -- and they too remain near all time highs. In addition to a number of Deep Cyclical stocks like Rio Tinto PLC, BHP, Martin Marietta, Posco, and others like Brazil’s Rio Dolce have also continued to advance. In the case of the resource sector, this has kept the Brazilian Bovespa Index quite robust and near new highs.
However, as pointed out in prior reports, when one steps back to look at a market like the Chinese Red Chips, or US Basic Materials, it is clear these sectors are in a near vertical ‘blow-off’ advance. Of course, these are tricky. Every passing day, these stocks move higher, and just when you think they can’t move any higher, they move even higher. Until they don’t. That’s the ‘catch’ with fast markets, which are prone to turn suddenly back upon investors with no warning and with great and violent vengeance. When riding a running train to the upside, there is always a jumping off point; otherwise, the investor will ride the train over the proverbial cliff, when the train jumps the tracks. And they virtually always jump the tracks.
Thus, one needs to always check the air pressure, check the wind direction and try to gauge how quickly the storm, which is the ‘downside reversal,’ is brewing up. In our view, we just don’t like the atmospheric conditions we see as each day passes. Take the Financial Sector for example, as shown in the chart below. Note that since the mid-March lows, the S&P 500 has moved to new multi-year highs, but over the same period of time, large cap money center banks have not. A potentially bearish divergence to be sure. Could this be signaling mortgage default problems yet to come at the major banks? Who knows? But clearly, the share prices are acting as if something is very wrong. Perhaps the Inverted Yield Curve, which hurts banks profitability, is the reason for the relative weakness. While we would not argue that point too vigorously, it nevertheless looks like one heck of a lot of weakness to be ‘just the yield curve.’
Let’s have a look at some of the other Bank Indices including the S&P Bank Index and the America’s Community Bankers NASDAQ Index (ACBQ). Do these charts look healthy to you?
In the case of the S&P Index, even with the sharp stock market rally of the last few days, this index has barely lifted off the low. Note the potentially large H&S Top with prices now below both the 50 and 200 day moving averages, both of which are rolling over. A lot not to like on that chart! What about the Smaller Cap Regional Banks? Wow, talk about ugly! This is one heck of an ugly looking chart, with the NASDAQ Index of Regional Banks now plumbing the depths of 19 month lows. Is this just the Yield Curve or is this something more?
Above: the S&P Bank Index, and below: the America’s Community Bank NASDAQ Index
Our bet: Bank Stocks are forecasting a contraction in credit, derived and kick started by the now on-going debacle unfolding before our eyes in the Mortgage Market. For those who like to read good horror stories, we suggest a perusal of the latest Bloomberg Magazine sure to send a shiver up the proverbial spine entitled “Toxic Debt.” Brrr…. Just thinking about it should give any investor of “sound mind and body” wild amounts of PAUSE as the prognosis being voted on in the ever sinking ABX Index doesn’t sound like everything is as rosy as the bulls would have us believe. Another round of new lows anyone? Oh, never mind… there’s no contagion here now, is there?
Going forward, our job as we see it is to follow the remaining strong sectors on the look out for signs of an important “turn.” At the moment we see many hints at a turn, including a number of overbought readings in the US Tech Sector -- currently on most indices -- right up against major resistance at the 200-day upper band. Within the tech rally of the last three weeks, we note a good deal of internal deterioration with fewer and fewer names participating, and most of the heavy lifting coming from stocks like RIMM and AAPL, the darlings of the day. On that note, a few weeks back we mentioned our index that we use to track these ‘darlings,’ the GST Creatures of Confidence, which is also at the present time showing some bearish indications on the 14-day RSI and the A/D Ratio. Even big leaders like Mastercard and BHP look like they have either already exhausted their run, or are very close to the end. The charts tell a compelling story, and right now the sequence of events, that of a Top-Out-Parade, suggests an ever greater need for caution as we move into July, a month which will more than likely kick start the downcycle.
Above: GST High Tech 50 Composite — US Technology stocks with medium term A/D Ratio, a series of lower highs, index extended near 200 day upper band resistance. Breakout pending? Maybe, but will it last?
Above: GST Creatures of Confidence with 14-day RSI shows internal momentum thinning after long and extended advance. Healthy?
Above: GST Creatures of Confidence Index — High Relative Strength leaders with A/D Ratio showing a series of lower highs, less stocks participating in the advance. Healthy?
Above: Big Market Leader MA, looks exhausted. No new highs thus far, despite S&P rally over last few days.
Above: BHP Billiton with a top I sketched in a few days back. Has it rolled over yet? No. Is it generally in the zone of where we expected an important top? You bet. Note MACD extended, and all the way back up to the same type of readings that marked an important peak back in April 2006. We’ll see, MACD can’t stay where it right now for very long. Something has to give, and soon.
Above: Bovespa Index in Brazil blowing off, up and outside the long term channel… Hey Baby, …these moves don’t last forever, get ready to jump off the train… Short term rate of rise = unsustainable … The downside is… well, unpleasant.
Want to Wish All Readers a Very Pleasant Independence Day Holiday!
That’s all for now,
© 2007 Frank Barbera