WATCH OUR FOR A FIFTH WAVE -- MONEY IS LEAVING EUROPE AND MOVING TO ASIA -- THAT'S GOOD FOR THE SOX
NASDAQ COULD BE IN FIFTH WAVE ADVANCE... The recent downside correction in the Nasdaq market took place in three waves -- which qualifies that as an A-B-C correction. This week's move to new high ground signals the completion of that minor correction. While that's good news, there is still reason for some caution. That's due to the make-up of the rally that started during March. If we examine the waves closely, it appears that the Nasdaq has advanced in five waves. [A five-wave advance is comprised of three uplegs and two intervening corrections or consolidations]. My read of the wave structure is shown on the chart below. As a result, I find it hard to get overly enthusiastic about the latest move to new highs. If anything, it may just have brought us closer to completion of the upwave that started in March. That could set the stage for another correction or consolidation phase -- which could occur during the traditionally weak September-October period.
Chart 1
S&P 500 IS SHOWING NEGATIVE DIVERGENCE... When a market is in a fifth wave of an advance, short-term divergences become especially meaningful. As Chart 2 shows, the S&P 500 has yet to confirm the Nasdaq move to new highs. It may still do so; but it hasn't yet. Until it does, this week's move to the upside has to remain somewhat suspect.
Chart 2
GLOBAL MONEY FLOWS... The Euro has fallen to a four-month low against the dollar. In my view, this is primarily due to signs of economic weakess in the Euro-zone. The yen has been attracting new money lately as has been the Japanese stock market and the rest of Asia. It seems money has been leaving Europe and moving to Asia. The explains the recent relative strength in the whole Pacific Basis region.
Chart 3
Chart 4
A RISING ASIA IS GOOD FOR CHIP STOCKS... Strength in Asia is usually associated with strength in semiconductor stocks, since Asia is a major producer. That may also explain recent strength in chip stocks. Rising Asian markets are also often associated with rising commodity prices and rising global interest rates. Charts 6 and 7 show a close correlation between the Nikkei 225 index and the 10-year T-note yield. Deflationary trends coming from Japan were one of the main reasons global rates fell so low. Recent strength in Asia suggests the tide may have turned away from deflationary toward some early hints at inflation. That may explain why commodity markets have been so strong of late -- and why global interest rates appear to have bottomed out which also hints at a global economic recovery. Deflation started in Asia; it may be ending there as well.
Chart 5
Chart 6
Chart 7
Chart 8
CNBC THIS AFTERNOON... I'll be on CNBC around 3:40 pm (NYT) today with Ted David. Time permitting, we'll be talking about the current state of the market. Of course, there's never enough time during a TV interview to explain one's views as throughly as one would like. That's why a website is so much better. Rightly or wrongly, at least here I can explain my views more fully. That's the main reason I don't work on TV anymore. TV is more fun and more glamous, but not nearly as instructional.
