Ralph Acampora Technical Analysis Market Letter - August 2013
An article by New York Institute of Finance Technical Analysis instructor Ralph Acampora.
When Good News Can't Take The Stock Market Up, That's Bad News
In late July headlines stated that the US economy was gaining momentum - this news carried the S&P 500 over 1,700 for the first time in history. However, it only lasted three short days. And then in early August investors were treated to further good news: China's output showed that their economy was steadying and then a few days later, news came out stating the Euro-zone was recovering from the longest recession in post-war history. Many emerging markets and European bourses responded immediately by rallying nicely while the US market rolled to the downside.
This shift in absolute and relative performance between us and them quickly sent up warning signals. Upon close scrutiny I noticed that our all-time new highs in early August were accompanied on accelerated price trends - in other words, these upside advances mirrored mini-blow-offs, suggesting that we were too stretched and definitely in need of some kind of correction - a correction deeper than the three 3% - 5% versions witnessed since the summer rally began at the June 24th low. Oh, and let's not forget that the market was up 20% YTD.
My "What if.......Study?"
Whenever I sense that there might be an important change taking place, I immediately do an in-depth review of all thirty component stocks that make up the Dow Jones Industrial Average. I calculate their major downside potentials, technically. Since the DJIA is an arithmetic average, I then add up all of these technical targets and divide the total by the Dow's current divisor of 0.1302. My initial observation uncovered ten suspicious components - they appear to have traced out meaningful top patterns over the past several months (this distribution suggests that their anticipated declines are intermediate-term in nature): American Express (AXP), American Telephone (T), Coca Cola (KO), Home Depot (HD), International Business Machine (IBM), McDonalds Corp. (MCD) - see Figure 1, Travelers (TRV), Verizon (VZ), Wal-Mart (WMT)and Walt Disney (DIS). This study came up with the following downside objective for the Dow Industrial of 13,333.33 or 14.8% from its August peak. Historically, the months of September going into October are usually choppy - thus, I suspect that this decline will take a couple of months to unwind.
Figure 1. McDonalds Broke Down In Price
The Secular Bull Market Is Alive And Well
For me, the market's bottom registered in March 2009 is "A Generational Low". By definition, secular means a move that lasts the better part of two decades. Having lived through the 1982 - 2000 secular bull market, I experienced many near-term pull backs of 3% to 10%; intermediate-term corrections of 15% and cyclical bear markets of 20%+. There was even a "Crash" in 1987 that erased 50%+ of the secular gains in a matter of a few weeks. But, every time these interruptions occurred, they gave investors another opportunity to add to their long-term investments. The following are key factors that support the continuation of our current secular bull market:
The public is not in this market - there are trillions of dollars sitting in money market funds and bonds
Corporate America also has trillions of dollars of investible money yet to be spent
The inevitable decline in the bond market over the coming years - this money will eventually work its way back into equities
The US economy is still in its early stages of a major recovery
No major tops visible in the leading indexes and sectors
No major divergence in market breadth
Dow Theory is currently in a secondary corrective phase
No "speculative bubble" which attends the terminal stages of a secular bull market
Short -term traders should take advantage of the current volatility - use rallies to short and/or sharp near-term declines as re-entry points for quick rebounds. For those who got into this secular bull market early on, you fortunately have captured some handsome gains. Assuming that I am correct and the current environment calls for a meaningful sell-off, then it would be prudent to lighten-up, especially on those issues that appear technically vulnerable. Over the next several months, I believe you will have another opportunity to re-invest at lower prices.
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