Dow Theory Update Sector Weakness Shows Possible Resumption of Phase II Market Decline

Sector Weakness Shows Possible Resumption of Phase II Market Decline

According to Dow theory, once the primary trend is established, that trend must be considered intact until it is “authoritatively” reversed, which requires a joint move by the Industrials and the Transports back above/below their previous secondary high/low points. On March 9, 2009 the bear market phase I low was made. From that low point, the rally separating phase I from phase II began and on July 23, 2009 the bullish primary trend, in accordance to classical Dow theory and in association with the rally separating phase I from phase II, was confirmed. But, based on the longer-term work, this is expected to change and when it does, provided that the normal bull and bear market relationships still mean anything, the phase II decline will begin.

We are now seeing some intra-sector weakness within the Transportation sector. We are also seeing weakness in other areas, such as the automotive sector, banking, housing, commodities and even some of the overseas equity averages to name a few. But, is this a normal correction, or the beginning of the end for the advance that began at the 2009 lows? I have gone back to the inception of the Dow Jones Industrial Average in 1896 and identified a statistical based DNA Marker that has appeared at every major top since 1896. If things evolve in a way in which this DNA Marker appears, then it is highly likely that the decline into the phase II low has begun. If not, then this should prove to be a normal corrective period that will be followed by still higher prices until this Marker does appear. I look for this setup to occur later this year and I will be covering those developments in the monthly research letters at Cycles News and Views. For now, I want to take a look at some sub-sector weakness being seen by the Transports.

In the chart below I have included the Dow Jones Transportation Average along with the Dow Jones Marine Transportation Average. As you can see, the Marine average has begun to show more relative weakness than the overall Transportation average and it has moved below its previous secondary low point.

Next, I have the Dow Jones Transportation Average along with the Dow Jones Air Freight Average. Here too, the Air Freight Average is showing more relative weakness than the overall Transportation Average and has formed an upside non-confirmation with the Transports as well. Thus, this is currently a weak sector within the Transports and if we were to see this weakness spread to other sectors it would serve as a warning of further weakening for the Transports and perhaps of trouble from a Dow theory perspective.

The overall Dow Jones Transportation Average and the Dow Jones Rail Road Average is next. In this case, the rails are actually stronger than the overall Transportation Average. Note that the Transports formed a non-confirmation with the rails at the May highs. So, in looking at this sub-sector, it is a strong hold at this time.

Lastly, I have included a chart of the Dow Jones Transportation Average along with the Dow Jones Trucking Average. This sub-sector formed a minor non-confirmation at the May high, but is for the most part in step with the overall Transportation Average.

We have looked at these sub-sectors before, but the point in looking at them here again is to look beneath the surface of the overall Transportation Index in an attempt to see if there is any sign of weakness that could serve to give us a heads up on any Dow theory developments that may be potentially trying to materialize. Since we last reviewed these charts, there have indeed been further signs of weakness within these sectors. But, the key is whether or not the setup surrounding the DNA Marker appears.

Let’s now look at a couple of other sectors. The next chart we have is of the Dow Jones Auto Manufactures. This is a monthly chart and as you can see, it has moved to a new low for the year.

Next, is a monthly chart of the Housing Index. In this case, the high point for the advance out of the 2009 low has thus far occurred in April 2010. The high for this year was seen in February and like the Auto Manufactures has moved to new lows for the year.

Just for fun, let’s look at the Dow Jones Banking Index. Here too, a low was made in March 2009. But, thus far, the high for the advance out of that low has occurred in April 2010. In this case, the high for 2011 was seen in February and like the House and Auto Indexes above, it too has moved to new lows for the year. How can we be in a sustainable “recovery” with such key sectors showing this kind of weakness?

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Charting Key Breakdown Levels In The EURUSD, The S&P, The VIX And The Spanish 10 Year

Looks like John Noyce's prediction, who among the Goldmanites, has long been bearish on the EUR, is about to be proven right. Below we present his latest technical observations not only on the key FX pair, but on the VIX, The S&P, and, perhaps most importantly, the Spanish 10 Year. In brief: if today's weakness is not contained, there could be a very signficant downside risk breakdown in numerous market indicators.

EURUSD – The underlying signals of a significant top in place look clear, but a few levels to watch.

- 1.4166 – Uptrend from the January ’10 low
- 1.3968 – Interim low from 23rd May
- 1.3810 – 200-dma
- 1.3571 – Uptrend from the June ’10 low

Since sending the bigger picture piece on EURUSD last Sunday/Monday a number of clients have asked about potential MT-LT (multi-week/-month) targets. The first real weekly chart support comes in 1.3558-1.3528 where the 55-wma and uptrend from the June ’10 lows are converged. Ultimately however if this is as big a topping structure as it appears to be, a move back towards 1.20 is something to consider.

VIX - For the first time since the drop in equities began from the 2nd May high the VIX is attempting to make a meaningful push through the highs of the range. This likely has important implications for risk appetite correlated FX pairs which are still in a “stretched state” in trend terms. USDMYR is the clearest example, it having spent a similar extreme period below its 200-dma to EURSEK prior to its recent sharp upside correction (further details below).

S&P – First good support below here 1,257-1,241. This is where the 200-dma, interim low from March and the primary uptrend from the March ’09 lows are converged. Although there are further meaningful supports down to the 55-wma at 1,217, a break of this support region on the daily chart would be the first warning of a more meaningful downtrend beginning, as opposed to the drop from the May highs being a correction within the broader uptrend. Again important for FX from a broad risk appetite perspective.

Spanish 10-year yields – Is the market about to break from the triangle that never seems to end? Since the November ’10 high at 5.58% Spanish 10-year yields have been forming a tight triangle consolidation, making repeated attempts to break both higher and lower. While it’s been incredibly frustrating, technically the greatest risk has continued to look to be for an eventual upside break, i.e. toward higher Spanish 10-year yields and also very likely (taking into account the setup on the spread chart) wider Spain/Germany spreads. The pivot to watch at this point is 5.53%, a break above there would give a triangle extension target in the region of 6%. As previously highlighted there’s still a relatively strong inverse correlation between the Spain/Germany 10-year spread and EUR/Crosses such as EURCHF. Overall, a break higher in Spanish 10-year yields would therefore quite likely have significant negative implications for the EUR.

4.8

Opec to haul in $1 trillion as oil prices increase risk of double-dip recession

The cartel of oil-producing countries will have $1 trillion (£600bn) in revenues for the first time this year, benefiting from high prices that may cause a "double-dip recession".

Forecasts from the US government show that the Organisation of Petroleum Exporting Countries (Opec), whose key members include Saudi Arabia and Iran, will collect a third more in revenues because prices have averaged $111 per barrel this year.

But Fatih Birol, chief economist of the International Energy Agency, said that the current price of $120 per barrel could be the catalyst for a global economic crisis on the scale of the one experienced in 2008.

"If you don't see any softening of the prices, there is a risk of derailing the economy, of a double-dip," Dr Birol told the Reuters Global Energy and Climate Change Summit. "We all know what happened in 2008. Are we going to see the same movie?"

Oil prices fell nearly $3 in London to $117.30 and more than $5 in New York to $94.84 on worries about the faltering global economy.

However, economists believe the price is still at a level near to tipping the global economy back into a downturn. To combat sky-high oil prices, the US is reported to have attempted an ambitious swap with Saudi Arabia in the past month.

It is understood that US and Saudi officials met to discuss exchanging high-quality crude oil stored in the US emergency reserve for heavier, low-quality oil from Saudi Arabia.

The idea involved shipping some of the light low-sulphur – or "sweet" – crude out of the US strategic petroleum reserve to European refiners, who needed it because the civil war in Libya has cut off shipments. In return, Saudi Arabia would sell its heavier high-sulphur – or "sour" – crude at a discount back to the US.

However, the deal fell apart as Riyadh ultimately proved unwilling to subsidise European or US customers by discounting its crude prices below market value.

Saudi Arabia and its Gulf neighbours last week voted for an increase in production from Opec members in an attempt to dampen prices. However, the key meeting of the cartel fell apart after fellow members such as Algeria, Iran and Venezuela refused to back higher output.

Observers say Opec's failure to agree on production increases is almost irrelevant. Saudi Arabia is one of the only nations capable of boosting its production and it already ignores production quotas.

Opec's 12 members are already producing 28.9m barrels a day, substantially higher than the 24.8m that was officially agreed in December 2008. Saudi Arabia is likely to boost output by up to 1m barrels per day over the coming months.

Abdalla El-Badri, Opec secretary-general, claimed on Wednesday oil at this year's average of $111 per barrel is "reasonable". He added there was no need for the International Energy Agency to release emergency stockpiles.

"These are reasonable, averaged for the year," Mr El-Badri said. "One hundred dollars will not really affect the world economy. If a customer goes back to any of our member countries asking for more oil, I'm sure they will get it."

McAlvany Weekly Commentary

A Gradual Sudden Catastrophe

Posted on 15 June 2011.

A Look At This Weeks Show:
-Ottoman Empire Redux – Turkey moving toward radical Islam.
-Are we at the end of the age of paper assets?
-Is history (monetary and natural) a long, gradual, uniform progression or rather a series of unpredictable game changing catastrophes? Or both?

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The real U.S. cost of living is soaring

The cost of living in the U.S. rose more than forecast in May as prices for everything from autos to hotel rooms climbed, signaling raw-material expenses are filtering through the economy.

The consumer-price index increased 0.2 percent last month and was up 3.6 percent from May 2010, the biggest year-over-year advance since October 2008, according to figures from the Labor Department today in Washington. Another report showed factory production rebounded last month, easing concern the industry that helped propel the U.S. out of the recession was stagnating.

Prices excluding food and fuel climbed 0.3 percent in May, the biggest one-month gain since July 2008, highlighting efforts by companies like McDonald's Corp. (MCD) and Abercrombie & Fitch Co. (ANF) to charge customers more. The report may concern Federal Reserve policy makers like Chairman Ben S. Bernanke who are trying to maintain record stimulus while avoiding inflation.

"Economic growth will continue to accelerate and inflation should accelerate with it," said Omair Sharif, an economist at RBS Securities Inc. in Stamford, Connecticut. "The Fed is going to have to start worrying."

A third report showed manufacturers in the New York region unexpectedly turned pessimistic in June, a sign the industry still faces parts shortages following the disaster in Japan.

Stocks dropped as European officials failed to agree on a rescue plan for Greece and on concern over the slowdown in the New York Federal Reserve Bank's Empire State Index. The Standard & Poor's 500 Index dropped 1.3 percent to 1,270.7 at 12:02 p.m. in New York. Treasury securities rose, sending the yield on the benchmark 10-year note down to 2.99 percent from 3.10 percent late yesterday.

Survey Results

The median forecast of 79 economists surveyed by Bloomberg News projected consumer prices increased 0.1 percent in May. Estimates ranged from declines of 0.2 percent to gains of 0.4 percent. Economists projected the core gauge, which excludes food and energy, would rise 0.2 percent.

The core CPI climbed 1.5 percent from May 2010, the most since January 2010.

The gain in May core prices was led by a 1.1 percent advance in the cost of new vehicles, which may reflect supply shortages caused by the disaster in Japan. At the same time, the cost of other goods and services also advanced. Hotel rates climbed 2.9 percent last month, clothing prices increased 1.2 percent and recreation expenses increased 0.3 percent.

"We're seeing a broad-based bleed-through of energy and commodity-price pressures into components throughout the core," said John Herrmann, a senior fixed-income strategist at State Street Global Markets LLC in Boston, who correctly forecast the gain in core inflation. "The Fed has to be more adamant about their credibility as an inflation fighter."

Smaller Margins

Abercrombie & Fitch's Chief Financial Officer Jonathan Ramsden said on June 8 that rising costs would narrow the teen retailer's second-quarter profit margins. The apparel industry is facing higher costs for cotton, oil and Asian labor. Abercrombie plans to raise U.S. prices in early September, Ramsden said.

Food costs increased 0.4 percent, today's report showed. The 1.5 percent jump in meats, poultry, fish and eggs was the biggest since November 2003.

McDonald's, the world's largest restaurant chain, said last week that U.S. sales at stores open at least 13 months advanced 2.4 percent, the smallest monthly gain since February 2010. The Oak Brook, Illinois-based company has raised prices over the past year to offset surging meat costs, which analysts said prompted customers to buy cheaper items on the menu.

Bernanke's View

Fed Chairman Bernanke said the U.S. economy, which slowed in the first quarter, will likely pick up as fuel costs fall and as factories in Japan recover from the March earthquake and tsunami. There isn't "much evidence that inflation is becoming broad-based or ingrained," Bernanke also said at a June 7 speech in Atlanta.

The central bank's preferred price gauge, which excludes food and fuel, rose 1 percent in April from a year earlier. Fed policy makers aim for long-run overall inflation of 1.7 percent to 2 percent, according to their April forecast.

Fed officials are discussing whether to adopt an explicit target for inflation, according to people familiar with the discussions. Policy makers have argued that greater clarity on inflation could benefit labor markets by helping the central bank anchor price expectations even when rates are low.

Factory Production

Output at factories, mines and utilities rose 0.1 percent in June after no change the prior month, figures from the Federal Reserve showed. Factory production climbed 0.4 percent, led by the biggest gain in business equipment output in four months.

Manufacturing may pick up in coming months as Japan recovers. Overseas demand and business spending may also spur sales of U.S.-made equipment and technology, helping bolster the industry that's been a mainstay of the recovery.

"Underlying manufacturing activity is relatively healthy," said Sharif. "We are going through a little bit of soft patch that will fade over the next couple of months."

The Federal Reserve Bank of New York's general economic index dropped to minus 7.8, the lowest level since November, from 11.9 in May. Readings greater than zero signal expansion in the so-called Empire State Index, which covers New York, northern New Jersey and southern Connecticut.

Also today, the National Association of Home Builders/Wells Fargo sentiment index fell to 13 in June, a nine-month low, from 16 the prior month. The drop indicates housing will remain a weak spot in the economy.

Oil Plunges 4% on Demand Fears, Dollar’s Surge

Oil slid more than 4 percent on Wednesday, as signs of further economic weakness fed demand worries and a rising dollar also weighed, triggering technical sell-stops and sending U.S. crude to its lowest level since February.

U.S. crude weakened early on data showing a rise in core inflation and shrinking New York manufacturing. It succumbed to intensifying selling pressure as it broke below the 150-day moving average and $95 key support. That eradicated brief gains after a big drop in weekly U.S. crude stocks, reported mid-morning.

"It's a rush for the exits. The market has been overvalued for some time now...the Brent market has been a bubble and the bubble is bursting today," said Tim Evans, energy analyst at Citi Futures Perspective.

"In my opinion, WTI would be fairly valued at $85 a barrel and Brent at $90 a barrel," Evans added.

The slump came as the U.S. dollar extended gains for its biggest daily rise since September, with the dollar index up 1.8 percent, while the S&P 500 stock index tumbled by more than 1.6 percent to its lowest level since March.

The euro slid against the dollar, heading for its worst day in more than a month as investors fretted about the Greek debt crisis.

European ministers failed on Tuesday to reach agreement on how private holders of Greek debt should share the costs of a new bailout, putting the onus on leaders of Germany and France to forge a deal later this week.

U.S. July crude settled at $94.81 a barrel, losing $4.56, the lowest settlement since February 22. It hit a session low of $94.01, also the lowest since that day.

Brent crude for July delivery, which expires on Wednesday, fell $2.16 to $117.30 a barrel by 2:39 p.m. EDT. Brent hit a session low of $116.80

Brent's premium against U.S. benchmark West Texas Intermediate for the second-month August contract narrowed by $1 to around $18 a barrel after the July spread had blown out to a record $22.80 hit on Tuesday.

For oil traders it felt much like a repeat of early May, when prices twice swooned from recent post-2008 highs. Other commodities also suffered, with corn slumping toward its biggest three-day loss in a year and a half. The Reuters-Jefferies CRB index fell 2.5 percent.

U.S. core consumer inflation rose more than expected in May to post its largest increase in nearly three years, which could prompt the Federal Reserve to increase interest rates sooner rather than later.

A separate report showed manufacturing in New York State unexpectedly shrank for the first time since November, surprising economists who had expected a rise.

Macroeconomic conditions and debt fears overshadowed weekly oil inventory data, which confirmed a much larger than expected decline in stocks due in large part to a reduction in Midwest supplies as a key Canadian pipeline shut down.

June 15th 2011 Market Recap with Oil, Coal Updates

Today’s heavy volume reversal shows very clearly that over obvious support levels can’t always be trusted. With this out of the way, real signs of stress/panic are starting to show which means we are much closer to some sort of “bottom”.

Overall cash remains king unless you are an active day trader who can take advantage of this added volatility and play the swings intra-day. Stay frosty out there.