09Jly2006 Derivative driven market
Since March 2003, the accepted although unorthodox low of this bull market, the U.S. as measured by the SPX, has underperformed nearly every international market. As of friday's close 07/07/06: SPX +53%, FTSE +69%, HSI +85%, NIK +89% and the DAX +134%. It would seem to me that world's economic engine should be leading the charge, not lagging. Fundamentally, compared to these other countries, we are still the juggernaut of capitalism. No insult to our neighbors. But we invented the word and the system that all the world has accepted as a path to economic prosperity, and most of all, worldwide peace. Capitalism has replaced the need to pillage and plunder, by means of warfare, to gain wealth and power. Now it can be done in an orderly and methodical fashion: economically. In the decades ahead, I have the suspicion, that day will arrive.
Having invested in the U.S. markets for some forty years, I've noticed a gradual and accelerating shift from a cash driven market, to one driven by derivatives. In other words, cash has taken a back seat to the futures market. This is probably the biggest reason why our market has been lagging behind in the world scene. In the past, I have commented about this phenomenon many times. Many would argue the point, but I see it as fact. Accepting this as a premise to investing in the U.S. markets, one's next objective is to turn this scarcely accepted knowledge to their advantage. One always needs an edge, of course, a legal edge. And that edge is always provided by sound technical analysis.
The two most heavily traded index futures contracts in the U.S. are those involving the SPX (S&P 500) and the NDX (Nasdaq 100). The SPX represents the cyclical sector of the economy, and the NDX the growth sector. Most of the time, while the market is trending up or down they move together in the same direction. When this occurs the trend continues. When they start to deviate from each other, however, the trend begins to stall. Then, if they completely diverge from each other, the trend reverses. I've observed these events throughout the bull market.
I've posted a chart in the photo section that displays this phenomenon: "derivative mkt". It is a four year daily chart of the SPX vs the NDX. Highlighted with green lines are the positive divergences between the two indices; i.e. when one of the two indices fails to confirm the new low during a downtrend. Highlighted with red lines are the negative divergences; i.e. when one fails to confirm the new high during a uptrend. Notice how on every single occassion, one of these divergences occurred, the trend reversed! Also, I have overlayed my OEW wavecount on the chart, and again, at every termination of a significant wave these divergences occurred.
Many technicians I know are concerned about the weakness in the NDX. And rightfully so, considering the NDX and the Nasdaq have been the driving force of this bull market. Reviewing the chart, you will notice a positive divergence (green lines) has occurred eight times: five times the divergence was caused by the NDX, and three times by the SPX. This simply implies that it doesn't matter which index diverges, only that the divergence occurs. I posted a chart yesterday; "ndx.spx12m". It is a close up look of the two indices over the past year. Notice a positive divergence is occurring. The SPX is failing to confirm the continued weakness in the NDX! Unless the SPX takes a precipitous drop this week, which I doubt, our derivative driven market will be forced, by its own means, to reverse and start uptrending higher. The bull market will then resume in earnest.
| 06Jly2006 The Danger of IPO's
Initial public offerings can be a dangerous enterprise, especially in a bull market. One only needs to recall all the .Com IPO's that went bust at the beginning of the decade to understand this statement. One can also review several IPO's that came to market from apparently viable companies, but came to market at the wrong time in their growth stage. One in particular is JetBlue Airways (JBLU). When JBLU went public in April 2002 it appeared to be a very viable offering. They had conquered the labor problems of the major airlines, were flying fuel efficient jets, and were offering a no frills - low cost option to several desired destinations. When the market bottomed in October 2002, the stock bottomed below the offering price and started rising from just under $9 per share. During the torrid stock market rally of 2003, JBLU rallied from just above $10 to over $30 per share. In OEW terms, however, the rally had a major problem. It was not impulse waves that were driving the stock higher, but corrective waves. As a result, the entire advance from just under $9 to over $30 was fully retraced by April of 2006. The entire movement up and down was nothing more than an ABC bear market.
Now that JBLU has fully retraced the entire advance, the opportunity again arises for a potential bull market. Based upon the wave structure and the my market momentum indicator (MMI), it appears the recent low has completed cycles in both wave structure and investor sentiment. This might now be the correct time to be investing in JetBlue Airways. And, it might also serve as a relative proxy for the TRANsport Index, which has been soaring to new highs on every impulse wave. I am not recommending the stock! As I do not make recommendations for any stocks, stock indices or commodities. However, I will be following the stock on a regular basis in the chart link to see how this potential bull market unfolds. I have posted a chart of JBLU in the photo section, that illustrates the entire price activity since the public offering until fridays close. And, have labeled the wave structure with the appropriate series of ABC's to demonstrate the usefullness and objectivity of Objective EW. Also, I would like to thank one of our International OEW group, Levi B., for bring this stock to our attention.
|