BLUE CHIPS STABILIZE WHILE TECHS ARE WEAK -- ASIA LOSES 5% -- THE CRB INDEX HITS AN 8-MONTH HIGH
NIKKEI LOSES 5%... The Japanese stock market had its biggest percentage loss in two years. Chart 1 shows that the Nikkie 225 fell 554 points last night to break its 50-day moving average by the biggest margin in six months. The Hang Seng Index lost 4%. That got the day off to a bad start. By comparison, Europe suffered losses just a bit over 1%. By the time we started trading here, the markets had already started to stabilize. By day's end, blue chip stock averages were trading higher here, although the tech-dominated Nasdaq still lost some ground. Over the past year, Asian stocks have led the global cyclical bull market. When corrections start, the leaders usually fall the most. And that's what we saw today. On Tuesday, I spoke about the close correlation between Asia and semiconductor stocks -- a subject that I've written about in the past (most recently on August 22 in a paragraph entitled "Rising Asia is Good for Chip Stocks"). With Asia selling off today, it wasn't too surprising to see the Semiconductor (SOX) Index have a bad day as well. Needless to day, if Asia continues to slide, that could cause problems in the tech sector here and the rest of the market as well. Right now, it looks more like Asia is simply correcting from an overbought condition. We may know a lot more by week's end. Last night's selloff in Asia may have been an over-reaction to bad earnings reports in the states. We'll be watching Asia very closely over the next week for directional clues.
Chart 1
Chart 2
THE MARKET HERE ISN'T CHEAP... It shouldn't come as a surprise to anyone to hear that the market isn't cheap at current levels. The stock market has been rallying for a year. The Nasdaq has been the strongest part of the market. Since last October, the Nasdaq Composite has gained 77%. It's also no surprise to learn that the weekly charts show an overbought condition. I've discussed that before as well. The weekly RSI line moved above 70 last month. That doesn't mean the Nasdaq market can't go higher; it's just harder to do when the weekly chart gets overbought. The weekly chart also shows that the next prominent peak is at 2098. That's only 6% over the recent peak at 1966. Earlier this summer, I used the 2000 level as an upside target for this phase of the Nasdaq rally. We're just about there. At the very least, that warrants a higher degree of caution at current levels. Since March, the Nasdaq has been trading between its upper Bollinger band and its 20-week moving average (dashed line). To signal that an intermediate top has been formed, the Nasdaq would have to close below the dashed line. That would also break the chart support formed at the end of September. Most of our trend-following indicators are still in an uptrend. However, our momentum indicators are starting to show some softness. I continue to believe that the Nasdaq market has bottomed. However, I also believe that this phase of the advance is nearing completion. I had hoped for the rally to continue into yearend. However, it may be time to take a more defensive posture to protect existing profits in the Nasdaq market. Trends in Asia may determine the direction of the Nasdaq.
Chart 3
CRB INDEX JUMPS... Throughout all the excitement of the past couple of days, it's important not to lose sight of one asset class that continues to act like an ongoing bull market. That's the commodity sector. The CRB Index rose 3.36 points today to close at the highest level since February. A close through the February high (which I believe will happen) would put the CRB at a new 6-year high. I've said it before, and I'll say it again. Commodity markets are in the midst of a major bull market. In my opinion, commodities are now the strongest of the three asset classes (bonds, stocks, and commodities). I expect that trend to continue. Gold got the ball rolling by jumping $11 in the past two days (it dropped $1.80 today). However, 12 of the 17 commodities gained ground today -- led by the grains, cotton, and livestock markets. Other winners were copper, platinum, silver, and heating oil. With the stock market looking stretched, and bonds going nowhere, commodities are a good alternative to consider. Chart 5 shows that the CRB is nearing another test of a fifteen-year resistance line extending back to 1988. The monthly chart shows a major "double bottom" followed by a bullish breakout early this year. The box area represents the consolidation pattern that's formed in the CRB for most of this year. An upside break of that trendline would leave little doubt that commodity markets have embarked on a major bull trend. I happen to believe that commodity markets will outperform both bonds and stocks for several years.
Chart 4
Chart 5
