These are not good signs for the US$, and point up a growing
uneasiness about holding U.S. Treasuries and other dollar denominated debt
instruments, particularly those with higher default risk.
----- Original Message -----
Sent: Thursday, November 17, 2005 9:20
AM
Subject: [RT] Markets
My work is throwing off some serious
warnings. Attached are screen shots of my NYSE and NASDAQ breadth models. The
most serious divergences are in the new Hi-Lo model (upper right) where we
have a 5 month series of lower highs even as price has been rallying. I give
A/D volume (lower right) a lot more weight than A/D issues (lower
left). NYSE A/D volume broke out above previous pivots highs (green
horizontal line) on 10/31 and NASDAQ 11/2 nicely confirming the
rally. Subsequently we have had lower highs even as price has posted
higher highs.
Turning to risk measures, I keep an eye
on the spreads between treasury and corporate and treasury and high yield.
Widening spreads are giving warning of a negative change in investor
willingness to take on risk. Confirming this is the behavior of VIX which
broke out of the declining channel on 10/7. While this rally has brought a
nice decline in VIX (investors willing to accept more risk) the decline
has not come close to the lows established in July. Maintaining and expanding
P/E's depends upon investors being willing to accept increasing levels of
risk. There is now a significant divergence giving us warning that investors
are less willing to accept risk.
Lastly, I include a weekly chart of the
NYSE which shows a very clear rising wedge pattern. Rising (and falling) wedge
patterns are generally terminal to the trend. W/O 10/7 gave the first warning
when the shorter (blue) lower trendline was broken and confirmed on 10/14 when
the longer (gray) lower trendline was broken. We would generally expect a
retest of the trendlines. We have gotten that test with price rallying back
into the longer wedge on 11/4. A failure which fails can be a very good
reversal signal so the question at hand is this rally back into the
wedge a sign of a new bull leg? The internals discussed above
suggest that it is not.
Earl
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