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Equities: The Picture of an Unhealthy Market

Equities: The Picture of an Unhealthy Market

2011-01-11 20:32:00
Jamie Saettele, CMT, Sr. Technical Strategist
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DJIA

Monthly Bars

011111SpecialReport_body_dow.png, Equities: The Picture of an Unhealthy Market

Prepared by Jamie Saettele

The sideways nature of the stock market for the last 10 years is obvious when one views a plot of monthly bars. In fact, the rally from the 2009 low has almost reached the January 2000 top (7 Dow points shy of the 2000 top as of 1/11/11). The January and March 2008 lows are less than 1% below the January 2000 high, which increases the importance of the current level. I also want to point out that volume has plummeted since the 2009 low. The blue line is a 3 month average of DJIA volume. Volume increased throughout the 90s bull market, the bursting of the tech bubble, the recovery and rally to all-time highs in 2007 and the credit crises decline. The 3 month average of volume has declined over 50% from its high. If the old adage that ‘volume follows trend’ has any merit, then this market is unlikely to hold up much longer.

DJIA - BND

DailyCloses

011111SpecialReport_body_dowbnd.png, Equities: The Picture of an Unhealthy Market

Prepared by Jamie Saettele

The chart above is a comparison of the DJIA and the Vanguard Total Bond Market ETF. Bonds tend to lead stocks, although the window can be quite wide. The oft cited reason for this relationship is that an increase in the cost of capital (increasing yields / declining bonds) is not conducive to growth (or a rising stock market). Whether or not you subscribe to the reason for the relationship is irrelevant. The historical record is full of instances in which bonds turned prior to stocks. With this in mind, notice that this latest rally in equities is not confirmed by a new high in BND, which remains well below its November peak.

DJIA – XLF

WeeklyCloses

011111SpecialReport_body_dowxlf.png, Equities: The Picture of an Unhealthy Market

Prepared by Jamie Saettele

Interest rate sensitive sectors such as financials and utilities also tend to lead the general market (as per the same logic described above). The XLF (SPDR Financial Select Sector) failed to confirm the final high in the general market in October 2007 and has yet to confirm the new high this time around. This is not indicative of a healthy bull market.

DJIA - AUDUSD

Daily Closes

011111SpecialReport_body_auddow.png, Equities: The Picture of an Unhealthy Market

Prepared by Jamie Saettele

Since the credit crisis, the AUDUSD and DJIA have moved more or less in lockstep. At turns however, the AUDUSD has led equities. Neither the 2009 low nor the 2010 lows in the Dow were confirmed by lows in the AUDUSD. The circled areas on the chart are Dow tops that followed AUDUSD tops by no more than 12 calendar days (based on daily closes). The June 2009 AUDUSD high was on 6/2 and the June 2009 Dow high was on 6/12. The January 2010 AUDUSD high was on 1/14 and the January 2010 Dow high was on 1/19. The April 2010 AUDUSD high was on 4/14 and the April 2010 Dow high was on 4/26 (prior to the flash crash). The most recent AUDUSD high was on 12/31/10 and the most recent Dow high was on 01/05. Keeping mind the tendency for the AUDUSD to lead the Dow, equities are vulnerable from the current level.

Jamie Saettele publishes Daily Technicals every weekday morning, COT analysis(published Monday), technical analysis of currency crosseson Wednesday, and Friday (Euro and Yen crosses), and intraday trading strategy as market action dictates at the DailyFX Forum. He is the author of Sentiment in the Forex Market. Follow his intraday market commentary and trades at DailyFX Forex Stream. Send requests to receive his reports via email to jsaettele@dailyfx.com.

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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