CNBC INTERVIEW AT 4:05 -- A SUMMARY OF MY MARKET VIEWS -- ANOTHER LOOK AT SILVER
WITH MARIA ... I'm scheduled to be interviewed at approximately 4:05 pm (Eastern time) this afternoon by Maria Bartiromo on CNBC. If you tune in, you won't hear anything that you haven't already read on this site. Given the events of the past week, however, I thought this would be a good time to explain my views more fully and put things into a more organized framework. Let's start with the stock market. Last week I showed the S&P 500 meeting resistance at 1315 which was the previous peak hit in May 2001. I explained that would be a logical spot for the rally to stall. The market selloff over the last week has put the market on the defensive. The weekly MACD lines for the S&P are on an intermediate-term sell signal. The key support level to watch is the mid-April low at 1280. A close below that level would confirm that the market is headed lower. The blue line is the 20-week moving average which has acted as support since last October. It's being tested. If it doesn't hold (and I suspect it won't), the next downside target would be the red line which is the 80 week (20-month) moving average. That acted as major support during the last two market corrections last April and last October. The fact that the market selloff has come on heavy volume (and weak breadth numbers) makes the latest selling look even more serious. The Nasdaq is in an even more dangerous situation.
Chart 1
NASDAQ COMPOSITE IS TESTING 200-DAY AVERAGE ... I also expressed concern last week about the relative weakness in the Nasdaq market. The daily chart shows it threatening its first quarter lows, the 200-day average (red line), and a yearlong (green) support line. Any significance violation of those support levels would be bad for the Nasdaq and the S&P 500. That's because relative Nasdaq weakness is a bad sign for the market. That's why the recent plunge in the Nasdaq/S&P ratio is so worrisome. So is the bad chart action in the Nasdaq 100. Chart 3 shows the NDX having already broken similar support levels. Recent selling in small cap stocks is another cause for concern.
Chart 2
Chart 3
LOSS OF SMALL CAP LEADERSHIP ... I explained last week that the recent downturn in small caps stocks was cause for concern. For one thing, they've been market leaders. For another, selling of small caps is a sign that investors are turning more defensive. When they do so, they tend to favor large caps over small caps. Weaker small caps also weakens market breadth figures which have also been falling lately. That's because there are more small stocks than large ones. The next chart shows the Russell 2000 Small Cap Index having broken its 50-day average and its April lows. Its daily MACD lines have fallen below zero for the first time this year. The relative strength line of small caps versus large caps has also broken its 2006 up trendline. As I suggested last Friday, investors are turning more risk averse. That also explains yesterday's selling of commodity related stocks.
Chart 4
SEASONAL FACTORS ... There are two seasonal and cycle factors that support a more defensive view of the market. One is the fact that the six-month period between May and October is usually weaker that the period from October to April. The other is the tendency for the market to hit a major bottom in the fourth quarter of every fourth year -- and more specifically during mid-term election years. The monthly bars in Chart 5 show the last two four-year bottoms (first two green arrows) occurring in October 2002 and 1998. The next bottom is due in the autumn of this year. I've placed the third green arrow at 1100, which is an educated guess on my part. That would represent about a 38% retracement of the 2002-2006 price advance. The first red arrow shows the resistance peak formed in early 2001 at 1315 where I drew my resistance line. The second red arrow shows where we are now. A move down to 1100 would represent a 15% correction from current levels. We haven't had a double-digit correction since the bull market started four years ago. We're about due.
Chart 5
SECTOR ROTATIONS ... One of the signs of a market top is a change in market leadership. If you look at John's Latest Performance Chart (posted yesterday), you'll see that the year's strongest groups have been basic materials, energy, and precious metal stocks. The weakest have been consumer staples and healthcare. At market tops, investors often rotate out of former leaders into former laggards. On page 110 of my latest book on Intermarket Analysis, there's a diagram of how market sectors perform at different stages of the business cycle. [You can see a similar diagram by going to the Stockchart Perfcharts and looking under AMEX Sector SPDRs]. At the end of an economic expansion, the two top performers are basic materials and energy. When those two start to weaken, money starts rotating into more defensive groups like consumer staples, healthcare, utilities, and financials (and in that order). It's interesting to see that consumer staples and healthcare have been two of the market's strongest groups during the recent selloff. Chart 6 shows the Consumer Staples Sector SPDR (XLP) bouncing impressively off its 50-day moving average. Its relative strength line has also started to climb. Within the healthcare group, drug stocks have been rallying. Chart 7 shows the Pharm Holders (PPH) bouncing off their 200-day average and trying to clear their 50-day line. Their relative strength line has also jumped this week. Although I wouldn't categorize these stocks as safe havens, they may be a good place to put some money coming out of commodity and small cap stocks.
Chart 6
Chart 7
REVIEW OF STRATEGIES ... The market is in a short-term oversold condition (as evidenced by a high put-call ratio). That may lead to a short-term market bounce. Rather than putting new money into the market, I'd use any short-term rally to take some money out -- or do some rotating toward a more defensive position. The safest place for money coming out of the market is a money market fund. The best place for some of the money coming out of recent leaders is defensive groups like consumer staples and healthcare. More aggressive traders might even want to use a bear fund to profit from a market downturn. Conservative traders who want to stay put might consider buying a bear fund as a hedge just in case the market does fall between now and October. As far as commodity stocks are concerned, I recommended yesterday some partial profit-taking. I don't think the major bull market in commodities is over; but it's over for the time being. I don't see any reason to be taking any unusual risks at this point. I see this as a time to turn more defensive. If a market downturn does materialize, international stocks will correct as well. The riskiest ones are emerging markets. I'd do some lightening up there. A weak dollar still favors foreign markets. But it doesn't insulate them from some profit-taking. I remain a long-term bull on Japan. But it's still a good idea to use prudent money management strategies in that market as well. Chart 8 shows the Japan iShares pulling back over the last week, but no serious chart damage has been done. The daily MACD lines have turned down which is a short-term warning signal. I'd so some selling if and when the 50-day line gets broken.
Chart 8
ANOTHER LOOK AT SILVER ... Silver has gotten a lot of attention lately. Much of it due to the new ETF. The daily bars in Chart 9 show the recent action in the iShares Silver Trust (SLV) since it started trading twelve days ago. It's been in a sideways trading range since then. Yesterday's heavy selling has put it near its late April low and its 50-day moving average. No serious chart damage has been done. I suspect, however, that it will continue to churn for awhile before resuming its uptrend. Part of the reason for that is the presence of major resistance around the 150 level. The monthly bars in Chart 10 show what a long-term chart of the SLV would look like based on the price of silver. (The ETF is 10% of the silver price]. It shows that the price has tripled in the last two years and has doubled in the relatively short span of the last six months. Anytime a market doubles in price it's usually due for a rest. Chart 10 also shows that the SLV has reached a major resistance barrier at 150 that was formed in the early 1980's (see arrows and flat line). Given the fact that the Commodity Channel (CCI) Index is also in major overbought territory, it's a logical spot to expect a pause in the long-term uptrend. Another hint of an interim silver top is recent selling in silver-related shares.
Chart 9
Chart 10
SILVER STOCKS SELLOFF ... I recently showed two silver stocks that were riding the silver wave. After climbing for awhile, both have fallen well below their 50-day averages on rising volume. That's usually a justification for doing some selling. A breakdown like that, however, is usually a clue that the related commodity is also getting over-extended and vulnerable to some selling. And that is certainly the case with silver. The good news is that Coeur D Alene Mines and Hecla Mining are approaching major support at their 200-day moving averages. Hopefully, the worst is over for both stocks. They should start to do better when the price of silver starts to climb again.
Chart 11
Chart 12
