US Financial Market Chart Book for February/March 2012 February 23, 2012
US Financial Market Chart Book Executive Summary: February 23 rd 2012 U.S. Stocks: The benchmark S&P 500 and bellwether Dow Jones Industrial Average are currently testing overhead resistance at their 2011 highs. This major resistance, combined with extremes in investor sentiment, historically low volatility, Dow Theory, overbought conditions, extremes in market breadth, and 54 years of seasonality data warn of the market s vulnerability to an upcoming decline before it moves appreciably higher. However, a number of more intermediate to long term market factors including the magnitude of the 2009 advance in the Dow Industrials, plus current intermarket relationships with US Dollar/Canadian Dollar (USDCAD) and the Paris CAC 40 Index, suggest that this upcoming decline is more likely to be corrective and temporary rather than directional and sustainable. US Market Sectors: Favorable conditions exist for upcoming relative underperformance by the Industrials Sector, which indirectly corroborates our expectations for an upcoming US broad market decline due to the positive correlation between Industrials and the Dow Jones Transportation Index. US Interest Rates: Both price and yield based chart patterns suggest that at least an intermediate term rise is emerging in long term US interest rates, one that targets an eventual +70 bps rise to 3.85% in US 30 year yields. 2
Price & Trend (1): S&P 500, Dow Industrials Vulnerable To At Least A Correction The S&P 500 met its December target and is now testing its 2001 highs. Both suggest the likelihood of an upcoming decline. Even though the Dow Industrials have slightly broken their 2011 highs, the index is equally vulnerable to at least a correction. 3
Price & Trend (2): Corrections Aside, Bigger Picture looks Bullish 1371 1387 also represents major resistance from a long term perspective. Even more reason to expect a decline. However, the Dow is already edging above its corresponding resistance area which suggests more eventual strength. 4
Intermarket (1): More Weakness in USDCAD Indirectly Suggests More Intermediate Term Strength In US Stocks Dollar/Canada has maintained a tight and stable inverse correlation to the S&P 500 since 2008. Per the correlation, more upcoming weakness in USDCAD indirectly suggests more intermediate term strength in SPX. 5
Intermarket (2): More Upcoming Strength In Europe Is Bullish For The US The Paris CAC 40 has maintained a tight and stable long term positive correlation to the S&P 500. Per the correlation, another 10% advance in the CAC 40 is also intermediate term bullish for the US market. 6
Investor Sentiment: Near Term Negative, Intermediate Term Positive Investor assets pouring out of the money market has historically coincided with near term stock market peaks. However, intermediate term oriented futures traders have not reached most bullish extremes, suggesting that the current advance is uncompleted. 7
Market Volatility: Historically Low VIX Is Near To Intermediate Term Negative For Stocks The VIX is has recently declined to 16.00, indicating an historic extreme in investor complacency that has previously coincided with or led the most important peaks in the S&P 500 in recent history. 8
Dow Theory: Non Confirmation of New February Highs In DJIA By DJT Is Bearish So far the Dow Transports have not confirmed the recent new high in the Dow Industrials. Note that a similar non confirmation in July 2011 led the sharp decline by both indexes into the October lows. 9
Overbought/Oversold: Near Term Negative, Intermediate Term Positive for Stocks The monthly rate of change in SPX is hovering at overbought extremes that have historically coincided with or led near term US stock market declines. However, SPX is still working off August quarterly oversold extremes which suggests that the October intermediate term market advance is not yet competed. 10
Market Breadth: Near Term Negative, Intermediate Term Positive For Stocks Near term breadth in the SOX Index has reached frothy extremes that has historically been coincident with minor market peaks. However, intermediate term breadth is still rising from September washed out extremes, suggesting that the larger advance is uncompleted. 11
Relative Performance (1): Market-Leading Technology Stocks Vulnerable To Upcoming Relative Underperformance & Outright Weakness NDX has become overbought versus the S&P 500 and thus vulnerable to upcoming relative underperformance. Meanwhile, the Technology Sector ETF is testing major resistance at its 2007 high, which is also near term bearish. 12
Relative Performance (2): Semiconductors Also Vulnerable To Underperformance, And Have Not Yet Confirmed Recent Broad Market Strength PHLX Semiconductor Index is overbought versus the S&P 500 and vulnerable to upcoming relative underperformance. Unless the SOX confirms recent US broad market strength, the result could be another sharp decline like the one in 2011. 13
Seasonality: February Weakness Leads Into March/April Strength February weakness is followed by escalating seasonal strength during March and April. The second to last week of February and the first week of March are the 1 st and 3 rd seasonally weakest of the entire 1 st Quarter. 14
Sectors Industrials (1): We Closed Out Our September Call For Outperformance On Feb 13 th. We closed out our Sep 2011 call for relative outperformance by Industrials on Feb 13 th. During that period Industrials outperformed the S&P 500 by +7%. Per the correlation, any upcoming relative underperformance by Industrials should coincide with a decline in DJT. 15
Sectors Industrials (2): Watch For At Least Some Near Term Weakness Due To Overbought Extremes While Initial Targets Have Been Met Industrials have become overbought versus the S&P 500, which has historically led to relative sector underperformance. In addition, the Industrials Sector SPDR ETF has met our January target of 37.50, which warns of some upcoming profit taking. 16
US Interest Rates Chart Patterns: Suggest Upcoming Rise In Long Term US Rates Amid Declining Prices The recent breakdown in ishares 20+ Year Treasury Bond Fund targets at least an 11% decline to 104.00 The recent breakout in the CBOE 30 year T Bond Index suggests an upcoming +70 bps rise in these yields, to 3.85%. 17
US Interest Rates US 10 Year Yields: A Rise Above 2.08% Would Clear The Way For A Move To 2.41% Benchmark US interest rates remain at 110 year lows. The last time 10 year yields were this low was in 1950. A rise above 2.08% in the 10 Year clears the way for a retest of 2.41%. A rise above 2.41% clears the way for a move to 3.25%. 18
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