Although the Dow is hitting all time highs in nominal dollar terms, not all of the 30 Dow stocks are in bull markets. The bull market is largely being led by the financial stocks within the 30 Dow Stocks. Some key Dow stocks are in long term technical peril in spite of a rally in the index to all time highs. Some, such as Alcoa are also in short term technical peril.
Below is a 5 year weekly chart of Alcoa. Alcoa topped at the end of 2003 before correcting from a high of about 38 all the way down to 22 in early October 2005. Alcoa then enjoyed a sharp rally almost back to its old high, but it ran out of gas at 36 in June of 2006. Since then, while the market has rallied, Alcoa has been in a fairly consistent downtrend. This stock is an early reporter of their earnings, and given the level of upside generated by upside earnings reports, this is not a stock to “fool with” at this time.
While all time highs were logged by luxury retailer Nordstrom and pseudo-luxury retailer J.C. Penney on Wednesday, Wal-Mart has been stuck in neutral. The key support/resistance level is 50. The fundamental news was bad Wednesday morning, sales were lower than expected on calculation errors, but the miraculous rally was even enjoyed by stocks reporting such negative fundamental news, including Wal-Mart. If I were forced to take a short position in this market, I would have to choose Wal-Mart. And the stop out point would have to be a daily close above 51.5.
With the rip-roaring rally enjoyed by General Motors since early 2006, it’s hard to believe that this stock is in the throws of a vicious bear market. The 5-year, and long-term charts make this observation more apparent. The publicity on which this stock is trading is typical of an overheated market. As I penned here a couple of years ago, auto stocks have, for the most part, always been heartbreakers to long term investors. Personally, I don’t think that Chinese manufacturers are going to have any difficulty figuring out the secret of the Chevy Cavalier and competing with GM. The key technical level for GM is 35. Once the secular bear market asserts itself again, GM and its balance sheet and its pension obligations are going to be vulnerable.
General Electric is one of the largest companies in the world in terms of market capitalization. The left side of the 10-year monthly chart below shows how one of the largest companies in the world can benefit from a stock market bubble if they own the most popular media outlet of financial news. If the rally continues, General Electric is likely to get to about 39, from its current level of 36. This would be a 50% retracement of its post bubble downtrend from 56 to 20.
A prime beneficiary of the housing bubble, Home Depot, may have put in a triple top with the last top in April. The intermediate term chart suggests it’s too early for bears, but the pattern of equal highs and lower lows suggests a bearish longer term prognosis.
Intel, also a prime beneficiary of the stock market bubble, is clearly in a long term bear market. Enjoy the rally while you can; and we’ll see you after the elections.
In the meantime, Intel could poke its head on the blue trendline before its bear market resumes.
Similarly Microsoft is a Dow Industrial stock that previously enjoyed the technology stock market bubble. It is now at a level where further advances would represent a successful climbing of the stock market bubble. While this could happen, current precedent suggests it is unlikely. Former technology darlings Amazon and Yahoo have thus far failed to scale this mountain. While E-bay and Apple did scale the tech bubble and exceed their former highs, unlike Microsoft, these companies were agile and dynamic. Microsoft is a mature company and it is unlikely that it can produce the excitement it did in the past, even in today’s market.
Marty’s E-Mail Bag
If you haven’t already, please read “The Great American Pump and Dump”. Ceri Shepherd expresses a compelling explanation of what he believes is moving this market rally.
The following is a note to a friend who sold out some of his gold mining shares during the carnage yesterday…
This is the analysis we discussed, but I couldn't email on Wednesday. Notice the overall Elliott Wave pattern as indicated in red roman numerals. Assuming a secular bull market for gold shares, we are in Wave III. This Wave III should break into 5 (sub) waves. Now we have completed Wave 1 of Wave III. The correction now in progress is difficult to trade because it is moving against the primary (UP) trend. Yet within the correction, (wave 2 of Wave III), it did correct over 50% of the previous advance from Red Wave II to blue 1 (this correction is indicated by the dashed horizontal line). Yet the correction was not over at that time, because not enough time had elapsed (it was a 5 quarter advance and only a 1 month correction back to the dashed line - not enough time). But, the point is that we are now around the support area where the HUI could be bought with a logical and small loss stop out point thereby minimizing your capital at risk. It is important that blue wave 2, not enter the territory of Wave I (about 260 on the HUI). That is why today's action was a good entry point for the HUI (ETF - GDX). I bought GDX today, but if we close in the area of Wave I, I’m selling with a small loss.
Here's the short term action on the HUI (based on the Gold Miners ETF). It’s bullish, until it breaks below and closes below today's low at 32.25. That would be a good short term stop out point. (As opposed to the intermediate term stop out at a close of the HUI of below 260, 255 clinches it!). Note the bullish "hammer" candlestick pattern. A host of commodity stocks also showed the same bullish hammer pattern.
Hope this helps provide some technical perspective. Also see this link.
The major indices were slightly higher to the bullish side today, and volume was high, although not as high as yesterday’s rally day. The market was led by biotechnology, and transportation stocks. The 80 level on the transportation ETF seems to have been decisively taken out.
Tomorrow’s jobs number will have an impact upon the bond market. With regard to the market, a “good” number will probably be a bad number. Today a couple of Fed representatives chirped about inflation and the potential for higher interest rates. These comments were largely ignored by the stock market which is blind for the moment. As you can see from the daily chart of the long bond ETF, the previous unsustainable uptrend breakout has been rejected. Technically, this suggests lower bond prices (and higher interest rates) in the next few weeks. My prediction is for higher-than-expected jobs creation, and lower-than-expected unemployment news tomorrow morning. This will conveniently provide some “good economy” rhetoric for the incumbents to campaign on. This will hurt the bond market, while the stock market is totally blind for the time being. Short term, the higher interest rates may keep the gold markets and gold shares in their corrective phase. How sure is this prediction? If the long bond ETF closes over 90, all bets are off.
The other scenario is a bad jobs number. This will boost the bond market (a new high in ETF terms), as well as the stock market, which is blind at the present time. However, this is the last monthly jobs number before the election, and such economic “news” would not at all help the incumbents who already have enough problems.
Oil and commodity shares acted well yesterday and today.
Have a great evening.
James J. Puplava Financial Sense™ is a Registered Trademark
P. O. Box 503147 San Diego, CA 92150-3147 USA 858.487.3939