Wealthbuilder Quarterly Market Brief

by Christopher M. Quigley, B.Sc., M.M.I.I., M.A., WealthBuilder.ie | September 24, 2009

Dow Jones 30 Industrial Index: One Month Chart 2002 – 2009

Dow Jones 20 Transport Index: One Month Chart 2002 – 2009

The monthly charts above of the Dow Industrials and the Dow Transports are most revealing as they allow one immediately get a long term perspective on the current market situation. The Dow 30 hit an intraday high in October of 2007 touching 14,198. The Dow 20 got there in May 2008 hitting 5,536. The current Dow Industrial and Transport "highs" can thus rise by a further 45% and 40% respectively before the matter of a new "Bull" economy can really be decided upon (based on classic Dow Theory that is). Yes we are definitely in a "bull" trend but we are most certainly not in a bull market. For a new bull market to be in place the indices must reach higher highs and higher lows, off the 2007 and 2008 highs, and both movements must confirm.

Now "the trend is your friend" and must be traded on by active market participants. For me a tradeable trend is one where both Dow indices give me higher highs and higher lows, on three day charts. Such a trend commenced in March of this year. So far this trend has not failed. It was tested by the Dow 30 but was not confirmed by the transports. The trend thus stayed in place and you remain invested until both averages confirm otherwise. They are the rules and I use them. However, such a trend should not be invested in "on a buy and hold regardless basis". Nobody can have fundamental confidence in this market. The theory thus indicates we have a trending, capital gain making, opportunity but not a safe, income generating, economic boom. Momentum alone does not remake a shattered economic structure. Sooner or later the rubber has to hit the road. When it does, the smart money will know what technical trigger to use to short in unison on the downside. They will be ready. You should be alert. A perfect position for such a test would be the previous all-time highs. Inability to break this psychological barrier would be serious. Look to the Transports first for an early indication. Currently we are in no-mans land. There is plenty of technical up-side and substantial fundamental down-side and earnings season is upon us. Therefore "all is well", provided the trend holds. It's as simple as that. Any other thinking will cause you paralysis by analysis.

Short to mid-term, any forceful downside movement could be sharp and will put some manners on unbridled optimism. Therefore trade with hard technical sell-stops should you enter on weakness or desire to protect up-trending profits. The severity of any ensuing technical damage will dictate how long the market will take to lick its wounds and consolidate. The longer this latter phase lasts the better in my opinion as it will allow the real economy an opportunity to regroup and rebuild and rematrix. Ideally a substantially lower dollar (in effect a phased re-valuation of the currency) would be a great boost to America for it would promote inward investment in real estate and other capital assets by foreign entities. Such inward investment is sadly needed.

However, with the indices so far off their former highs of 2007 and 2008, we could be waiting a little longer for any significant correction. The Over The Counter (OTC) "masters" on Wall Street, the Contract For Difference (CFD) "spartans" in London, the spread-betting (SB) "ninjas" in Hong Kong and the Exchange Traded Fund (ETF) "gurus" in New Jersey may decide to hold off on their delivery of a hyper leveraged reality check. They may thus continue to let us believe a little longer there are no such things as joblessness, under-employment, economic velocity collapse, mall malaise, derivative dysfunction, American production obsolescence, wage-rate shrinkage, and private and corporate credit disintegration. Life must go on for sure but will consistent compounded EARNING, that is the sixty four hundred billion dollar question that has remained unanswered since 18th. January 2000.

Contact Information

Christopher M. Quigley, B.Sc., M.M.I.I., M.A. | Dublin, Ireland | Email | Website