April Trend Report

Although the market has been overbought on a weekly basis for awhile now, we are showing some early signs of perhaps a mild correction here.

The daily chart shows a mild bearish divergence with stocks making higher highs and higher lows as the RSI and slow stoch made lower lows and lower highs. It also is trending down from overbought conditions.

The weekly shows a bearish crossover of the slow stochastic from overbought conditions and we potentially could be breaking down from a rising wedge pattern and trendline break.

The monthly is a bit overbought, but only a bit and has yet to make the bearish cross over

July 2011 3.3% cash
August 2011: 3.4% cash
Sept 2011 3.8%R
Oct 2011 3.5%
Nov 2011 3.5%
December 2011 3.5%
January 2012 3.6%
Feb 2012 3.6

Still low cash levels in mutual funds, although corporate cash levels remain high as well.

Well this either is an excellent time to buy the dip or we are ready to break down through the longer term rising channel. Short term we have just barely broke the rising wedge to the downside, suggesting lower prices. Longer term we still are near support of a rising uptrend, suggesting higher prices. One of them have to give. I predict Bulls successfully defend here, but bears pierce an early warning sign of a correction, with a fall back to support somewhere above 1300 with secondary support around 1200-1250.
here is dow/nasdaq. It has been very rare for Dow to be undervalued enough relative to nasdaq (or nasdaq overvalued enough relative to dow) for dow/nasdaq ratio to get below 4.5

Perhaps growth can continue on for a long time. Perhaps nasdaq will one day be more valuable than the dow like they were saying in the 90s. Growth stocks are certainly not neglected right now though. Another way to look at it is relative PEs. I will have to do more work on this. Right now Nasdaq 100 has PE around 27. There are two ways the nasdaq can be overvalued. One can be through justified price appreciation that while justified by it’s previous earnings growth may not continue in the future. If either slower expectations or slower actual growth results in the future, even though the PE may be reasonable, the nasdaq still may be overvalued relative to the dow. If earnings expectations grow causing price to grow while the PE gets higher rather than staying the same, this is a sign of over enthusiastic market. It may be helpful to look at the dow PE divided by the nasdaq PE over a long period of time to see where we are at in comparison , but that can be done at a later time.
I believe that when the nasdaq is priced high, it generally is either a sign of over enthusiasm about the future (betting on future growth that won’t be there), or over enthusiasm in price caused by short sightedness with regard to current multiples vs the forward PE. (betting on the present without taking into account the inability for the company to maintain high rates of tgrowth in the future). But there are too sides to the coin, and that means that it could be a function of the dow being cheap either due to future growth that isn’t priced in, or low PEs because value stocks are being ignored.

Dow is really undervalued here, I think, more so than nasdaq being overvalued. But that is only due to all the cash tied up in bonds that is coming out and all the cash around the world that is migrating into the US due to the weakness in Europe and Japan.

You have to realize, although a weakening dollar may mean increasing asset prices relative to dollars, what does it mean for the price of those commodities priced in another currency? Probably it will stay the same (or go down even). If the dollar is weakening against their currency and they hold the assets measured in say Yen, then that means the yen is strengthening relative to the dollar. A stronger yen means it can buy more than it could of a particular asset as it strengthens, so if that asset is gold, that means that gold is cheaper in yen, or the price is going down. So a weaker dollar actually is bearish but everything trades on a relative basis so that is very masked by the fact that everyone else will follow the us and weaken their currency. If they didn’t, they risk a speculative surge which can prop things up very high and result in excess speculation and leverage and ultimately eventually take them lower as a country, and have capital eventually migrate away from them more than they can handle which could cause a collapse.
Well, I don’t know if the economists really “get it” for the most part, because they are looking at things from the perspective of an “island”economy. They miss the part in history books of the great depression where rates skyrocketing around the world and nations around the world defaulting starting with Austria resulted in skyrocketing rates and capital drew itself away from the US to other strong currencies and assets, globally.
October 1929 was when the Bank Austria (central bank) cut off discount window financing to the BodenKreditAnstalt and forced it to merge with Credit-Anstalt. In other words, Austria cut off cheap money in another part of the world. It was the failure of the new entity that was to kick off the acute phase of the crisis in 1931. So there is a direct continuity between the events of 1931 and those of late 1929.
So one should also consider the international aspect, since Europe was in many ways the epicentre of the crisis. The BodenKreditAnstalt had trouble financing itself as early as October 1929 when the Bank Austria (central bank) closed the discount window. The forced merger with Credit-Anstalt created the new entity that was to kick off the acute phase of the crisis in 1931. The bond market, much larger than the stock markets around the world began defaulting. Well cash was scarce internationally and so capital was drawn from anywhere possible. My understanding from what Martin Armstrong suggests is that the crash of 1987 was due to the G5 (now G20) announcement that they wanted to take the price of the dollar 40% lower. Much money was drawn out of the stock market from foreign investors, as they would rather hold cash in their currency that would get stronger against the dollar, and then they would be able to buy dollar priced assets cheaper.

If you held a bunch of real estate in Japan and you knew suddenly they were going to weaken the yen, this would be bullish only for Japanese real estate investors who choose to hold real estate rather than yen. For you, it is better to move to Dollars and the dollar will get stronger against the yen while the yen gets weaker. The improvement of real estate prices or whatever priced in YEN is not due to say rising wages, but instead increasing credit, then the fundamentals actually get weaker just as we saw with the subprime market getting pumped up in 2000 and then crashing later on, even though the price got higher priced in dollars initially, it perhaps didn’t priced in another currency, so the appreciation would not have been experienced relative to an external currency, but the crash may have. So for this reason, weakening the dollar internationally may actually have the opposite as intended consequence.

If the US suddenly wishes to devalue the dollar by 40%, the Japanese investors would move out of US stocks and assets.
A weaker dollar is not all that great, really. However, what is good for assets is if there is inflation in the dollar while globally there is inflation as well. This is what is happening, so stocks are SUPPOSED to be higher.
If China would start increasing rates and Europe would start strict austerity measures to strengthen the euro rather than inflate it, and the Yen got strong as Japan strengthened rates as well, the dollar would be the odd man out, and capital would migrate from stocks and US bonds out to other countries and foreign bonds and foreign assets… The attempt to weaken the dollar by say, lowering rates would just make US bonds less attractive to invest in, and also those holding US assets priced in a different currency than Dollars… Foretunately for us, every single commodity IS priced in dollars, even though there are some attempts to make sure that doesn’t happen.

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