12/18/2011
Table of Contents
- Status of Key Market Parameters
- Broad Stock Market is in a “Symmetrical Triangle” Pattern
- Broad Market Instability Index is below the Panic Threshold
- Next Financial Perfect Storm
- Gold is Still in a “Bump-and-Run” Pattern
- Silver is Still in the “Run” Phase
- US Dollar is Forming an “Ascending Triangle” Pattern
- 30-Year US Treasury Bond is Forming a Horizontal Channel
- Asset Class Performance Ranking with Treasury Bond Leading
- Sector Performance Ranking with Pharmaceuticals Sector Leading
- BRIC Stock Market Performance Ranking with All BRIC Markets Lagging
Current Status of the LWX (Leading Wave Index)
The LWX Indicator in Last Four Weeks (Past)
The LWX Indicator in Next Four Weeks (Forecast)
Broad Stock Market is Forming a “Symmetrical Triangle” Pattern
The Dow Jones Wilshire 5000 index, as an average or a benchmark of the total equity market, is still in an intermediate-term “Symmetrical Triangle” pattern (see here). The price trend can be any direction leading to this pattern depending on which side to break out. Last week the market had no success in testing the upper boundary of the symmetrical triangle. Now it may test the lower boundary. Currently the Wilshire 5000 index is below the 89-day moving average and it is in the choppy zone of the triangle with negative readings of both the trend and momentum. The Leading Wave Index (LWX) indicator, color coded in the price bars of the following daily chart of the Wilshire 5000 index, closed in neutral on Friday. Based on the forecast from the LWX (see the 3rd table above), the bullish time-window has closed, and the market would be in a bearish time-window for about two weeks by 12/29/2011, but followed by a bullish time-window going into January of 2012.
Broad Market Instability Index is below the Panic Threshold
The Broad Market Instability Index (BIX), measured from over 8000 U.S. stocks, closed at 31 on Friday. The BIX is plotted in the following chart as compared with the Wilshire 5000 index. Although the current reading is below the panic threshold level of 46, it is increasing in last several days. As I mentioned in October and November, the next minor instability spike is expected to be 60 trading days away measured from the monster instability spike of October 4, and it would occur on 12/29/2011. Based on the forecast of both the LWX and the BIX, it looks like 12/29/2011 would be a notable inflection point for the broad market.
The Next Financial Perfect Storm
The Chinese and Indian stock markets have dropped over 20% since their previous highs in November of 2010, meeting the common definition of a bear market. As shown in the chart below, last week both of them further tumbled to new 52-week lows that triggered a large sell-off in gold. Elevated risk of housing and credit bubbles in China and India is creating the next financial perfect storm.
Following the steps of the U.S., Japan and others, a fast growing credit bubble has squeezed China at a cliff’s edge. According to an article last week wrote by Ambrose Evans-Pritchard in the Telegraph (see here):
The International Monetary Fund’s Zhu Min says loans (in China) have doubled to almost 200% of GDP over the last five years, including off-books lending. This is roughly twice the intensity of credit growth in the five years preceding Japan’s Nikkei bubble in the late 1980s or the US housing bubble from 2002 to 2007. Each of these booms saw loan growth of near 50 percentage points of GDP.
Also Indian slowdown is in critical watching. According to Jason Overdorf in his article last week (see here):
We’ve already heard that growth dropped below 7% for the first time in two years in the most recent quarter. Now, the rupee is spiraling out of control — setting new record lows against the dollar practically on a daily basis. Industrial output contracted 5 percent in October, the most recent month available. And during the quarter ended that month production of domestic capital goods shrank 25 percent, compared with growth of 21 percent in the same period of 2010.
Current situation in Asia is very similar to the middle of 1990s right before 1997 Asian financial storm. Asia 2012 = Asia 1997?
Gold is in “Bump-and-Run Reversal Top” Pattern
The gold index is still in an intermediate-term “Bump-and-Run Reversal Top” pattern and it now comes to the late part of the “Bump” phase. Last week gold reached the price target of 1570 at the Lead-in Trend Line. If it can not hold above the Lead-in Trend Line here, gold could step into the “Run” phase and the next price target is 1400 at the 1st Target Line. Please note that gold has breached both the 3-year up-trend line and the 200-day moving average which are bearish signs for the long term.
Please don’t confuse this chart with the chart I posed in my special mid-week update on 12/13/2011. This chart is a daily chart for the intermediate-term, and other one is a weekly chart for the long-term.
Silver is in the “Run” Phase
The silver index is still in the “Run” phase of the “Bump-and-Run Reversal Top” pattern. Silver has been a dead cat already and the downside price target is project at 24 on the third target line, which is close to the price level when this pattern originally started on the left side of the following chart.
U.S. Dollar is Forming an “Ascending Triangle” Pattern
The US dollar index is forming a 12-month “Ascending Triangle” pattern (see here).
U.S. Treasury Bond is Forming a Horizontal Channel
The 30-Year US Treasury Bond index is forming a horizontal channel pattern (trading range) between the upper boundary at 145 and the lower boundary at 135.
Asset Class Performance Ranking with Treasury Bond Leading
The following table is the percentage change of each asset class (in ETFs) against the 89-day exponential moving average (EMA89). Currently Treasury Bond and the US dollar are outperforming. Food and gold are underperforming.
Sector Performance Ranking with Pharmaceuticals Sector Leading
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 index, as an average or a benchmark of the total market, is 0.72% below the EMA89. Outperforming sectors are Pharmaceuticals (4.82%), Utilities (1.99%), and Healthcare (1.27%). Underperforming sectors are Precious Metals (-7.52%), Materials (-5.00%), and Banks (-4.38%). The Dow Jones Industrial Average (0.98%) is outperforming the market, and the NASDAQ 100 (-1.75%) is underperforming.
BRIC Stock Market Performance Ranking with All BRIC Markets Lagging
The table below is the percentage change of the BRIC stock market indexes against the 89-day exponential moving average (EMA89). All BRIC markets are underperforming the US market.
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