Friday, January 20, 2012

MTU Weekend Ed. - Shifting Odds (1/20/12 Close)

Have a healthy and prosperous Year of the Dragon !
Bottom line -
[1] The upswing off the December low in stocks is getting incredibly mature. The lack of confirmation between broader market indexes and INDU/NDX is bearish (less bullish) near term.
[2] If the Dow makes a new recovery high, odds would shift to favor a larger triple three correction or a leading diagonal bull-run off the 2009 low.
[3] However, a new recovery high does not exclude a (meaningful) near term decline. It had happened before with a 17.18% sell-off in the Dow.

Near term outlook
Markets continued to price out risks this past week, with SP500 up 2.04% and 10-year Treasury yield up 17.5bp. In fact, the Nasdaq 100 index made a fresh recovery high and the Dow is just 1.22% away. On the other hand, broader stock market indexes lagged: SP500 is still 4.2% shy of a new recovery high and the NYSE Composite Index is 11.36% away. With the upswing off the December low in stocks getting incredibly mature (Chart 1 and Chart 2), the lack of confirmation between broader market indexes and INDU/NDX is bearish (less bullish) near term.



Long term considerations
If the Dow makes a new recovery high, odds would shift to favor a larger triple three correction (Chart 3, red, cycle wave b) or a leading diagonal bull-run (Chart 3, blue, [1]-up or I-up) off the 2009 low. The long term wave structure of NDX (Chart 4) appears to favor the bearish cycle-wave b-up interpretation. Chart 5  presents these long term counts on SPX.




However, a new recovery high in the Dow does not exclude a (meaningful) near term decline and could even indicate that the Dow has topped. It had happened before.

Recall the Y2K experience. The Dow topped two months before SPX at the turn of the century.  A 17.18% sell-off in the Dow quickly followed before SPX bounced back to a minor new all-time high (and a major market top) in March 2000. The Dow, however, was not able to eke out a new high. See Chart 6.



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