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10/24/2010

October 24, 2010 Leave a comment Go to comments
Current Status of the LWX (Leading Wave Index)
 
The LWX Indicator in Last Four Weeks (Past)
 
The LWX Indicator in Next Four Weeks (Forecast)
  
 
The Broad Market Volatility is below the Panic Threshold
The Broad Market Volatility (BIX), measured from over 8000 U.S. stocks, closed at 7 on Friday and it is below the panic threshold level of 47. Although the volatility has a slight increase, the volatility level of 7 is low and it indicates that the current market is bullish. The BIX is plotted in the following chart as compared with the Wilshire 5000 index.
 
 
Broad Stock Market Continues Rally with Weakening Momentum
 
The Dow Jones Wilshire 5000 index, as an average or a benchmark of the total equity market, continues the rally that has been led by the internet and the basic materials sectors since September 1. In the short-term scale, the Wilshire 5000 index has established a 7-week uptrend channel (orange lines). The 6-month Inverted Roof or Complex Head-and-Shoulders Bottom pattern (blue lines) suggests there would be potentially another 4% upside measured move from the present price to the target price of 13000. With the strong support from either the neckline of the inverted roof pattern or the 89-day exponential moving average, the midterm election year bottom should be behind us.
 
The Leading Wave Index (LWX) indicator, color coded into the price bars of the following daily chart of the Wilshire 5000 index, for easy reference, has been bullish since September 1. Based on the forecast of the LWX indicator, the bullish time-window for the market extends to the early of November that coincides with the time of the midterm elections. For the last two months, the bullish projection of the LWX has been in sharp contrast with the popular bearish and scary opinions of “Head-and-Shoulder“, “Hindenburg Omen“, and “September-October-Bearish–Season“.
 
As we approach November, my momentum indicator shows weakening signs of the current rally. Also the forecast of the LWX indicator shows that the bearish time-window may begin at earliest from early November. It gives us another puzzle: will we still have the year’s best three-month span of November, December, and January again, or will we have something else this time?
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Trend indicator: stalling
Momentum indicator: positive but very weak
 
Sector Ranking
 
The following table is the percentage change of sectors and major market indexes against the 89-day exponential moving average (EMA89). The Dow Jones Wilshire 5000, as an average or a benchmark of the total market, is 5.46% above the EMA89. Outperforming sectors are Internet (+12.63%), Materials (+8.10%), and Technology (+7.40%). Underperforming sectors are Banks (-3.87%), Financials (1.34%), and Utilities (+3.28%). The NASDAQ 100 (+8.62%) is outperforming the market, and the Dow (+4.78%) is underperforming.
   
 
 
China’s Shanghai Index Reaches the Price Target of 3000
 
The following chart is a weekly chart of China’s Shanghai Stock Exchange Composite Index. A bullish Golden Cross, defined by a successful breaking through both the 17-week moving average (equivalent to the 89-day moving average) and the median line of the 14-month downtrend channel around 2650, gives a sign of starting a new bull market. The Shanghai index had a 12% explosive surge after the golden cross, and it reached the first price target of 3000 at the upper border of the 14-month downtrend channel. The 14-month downtrend line may not have enough strength to resist this fierce advance.
 
Last week China’s central bank announced the first increase of its key interest rate since 2007.  Contrary to conventional thinking, I see China’s rate move as a very bullish sign for the Chinese stock market. 
  
The “Three Peaks and Domed House” pattern of the Shanghai index is still on track and will be updated next week.
 
 
 
Decoupling Sign of Gold and the Stock Market
 
Last week China’s first interest rate hike would be an inauspicious news for precious metals.  Gold and silver had a sharp downside move instantly in response to this news while the stock market inched up.  It raises the question of whether gold is decoupling from the stock market.
 
By using a correlation indicator calibrated for the intermediate-term, the following weekly chart shows the change of coupling between gold and the S&P 500 index during past six years.  The value of the correlation indicator lies between 1 and -1.  If the correlation value is 1, it indicates a perfect positive coupling between gold and the S&P 500 index, that means gold and the stock market move in the same direction regardless of up or down.  If the correlation value is -1, it indicates a perfect negative coupling that gold and the stock market move in opposite directions.  If the correlation value is 0, there is no coupling at all between them.
  
Before June of 2009, the correlation value almost stayed in the negative region for a quite long time, gold and the S&P 500 index normally moved more or less against each other due to their negative coupling.  From the early summer of last year, the correlation value moved into the positive region, and both gold and the stock market abnormally moved in the nearly same direction.  But since the beginning of July this year right after the S&P index made year’s low, the coupling between the two has dramatically reduced and the correlation has moved back into the negative region.
  
The recent very low negative correlation values around -0.2 (very close to 0) indicate that gold and the stock market are decoupling.  It means that gold may or not go up when the stock market keeps rally, or the stock market may or may not go down if gold declines. That is an exact market behavior we saw last week. Therefore, China’s rate hike and the decoupling process of gold and the S&P 500 index suggest that gold and silver may not join the party if the Chinese stock market and the U.S. stock market advance in 2011.
    

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To find previous weekly reports, click dates marked with blue color in the calendar on the right side, or just click the following link “Older Entries” :

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