Project Description

2006 Market Low June

Advice Written: 13 June, 2006 MDSnew Investment Advisory

Context: Short-term trading

Terminology: Communicating to experienced investors, familiar with indicators and signals mentioned

Stocks such as Apple and Intel have already discounted a drop in consumer confidence. They have been selling off since January, five months before the index correction started. The current US equity corrections are playing out to plan, and until the indexes stabilize there is not a buyable low, only countertrend rallies or look for a double bottom retest of the prior low.

A couple of weeks ago I thought the DJIA would make new highs from the next low that forms but the economic environment is changing. It is a different economic environment than when the buyable low formed in October last year. Whether the next market lows go on to make new highs in the DJIA will be wholly dependent on the U.S. Treasury market.

Additionally, there is conflicting economic data occurring in the inflationary indices and bond market. The bearish price action in gold, commodities, metal and other indices since May suggests inflation was overpriced by the market and the current correction says the Federal Reserve is managing inflationary issues.

However, the bond market after moving out of the yield inversion danger zone has fallen back into it. Last week the yield on the 10 year note drop below the Fed funds rate. This is a picture of economic weakness suggesting the Fed has been too aggressive with the tightening cycle and that it is negatively impacting in the economy.

The 30 year yield is just above the short rate but it too is signalling a danger zone for equities. So when buying the next equity lows it would be vigilant to keep monitoring the bond market. The bond market will tell us what price action to expect either new highs or a lower high on the weekly time frame.

Reproduced with permission