----- Original Message -----
Sent: Friday, November 18, 2005 1:20
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
