January 5, 2007 -- Yesterday I pointed to what appeared to be new developments in the markets. Let's call them "suggestions of disinflation." If the US economy is moving into deflation or even disinflation, this will have important implications, particularly if it rubs off on housing. So saying, let check out a few weekly charts to see if there's any evidence.
The first chart shows the CRB Commodities Index. What we see here is a clear breakdown. RSI is heading down and the weekly histograms have turned negative. The blue 10-week moving average is below the red 40-week MA, and after a mild little rally, the 10 week MA has turned down again. Not a pretty picture -- in fact, it's a deflationary picture.
Next we see the wise old devil that we call Dr. Copper. Why "Doctor"? Because copper is used everywhere for everything including housing. Because copper is used everywhere, economists call it "The Doctor." It's a time-honored barometer of the world economy. The trend here is clear enough. I call this a "waterfall formation." And it's not inflationary.
Below we see a daily chart of oil. Oil is the life-blood of the world economy. Some call it "black gold." Call is what you will, right now oil appears to be topping out. That's a plus for transportation companies, but it's basically deflationary. Declining oil implies a world slowdown or at least a slowdown in transportation. RSI is pushing into oversold territory, but MACD could go considerably lower. In all, it's not a healthy picture for the planet's "life blood."
What about housing and the hoped-for "soft landing"? The verdict is still out. But if anyone has a handle of what's coming up in housing, it should be the homebuilders. Below we see a weekly chart of one of the leading builders, and the chart is typical of the major builders.
This is how I interpret this chart. I see a long crash-like decline taking TOL from a high of 58 in July of 2005 to a low of 22 in July 2006. Following crash action, there is always a rebound that tends to recover up to 50% of the crash losses. Such a rebound should have taken TOL back to 40, but the recovery, so far, has halted at 33. I call that weak action.
Now we have three declining tops (red arrows), which is hardly bullish. We also see the histograms about to go negative. Conclusion -- I can't see how this chart can be construed as a plus for housing.
Bill Gross must be looking at the same charts I'm looking at. How do I know? I can read. The paragraphs below were posted on Bloomberg.
Jan. 4 (Bloomberg) -- Bill Gross, manager of the world's biggest bond fund, says the Federal Reserve will lower its benchmark interest rate by a percentage point to 4.25 percent this year to avert a recession. Ten-year U.S. Treasury note yields, which move inversely to prices, will decline to about 4.50 percent, Gross wrote in a report published on his firm's Web site. The 10-year yield, 4.6 percent at 4:36 p.m. in New York, has risen the past two years.
The Fed will start cutting its target for the overnight lending rate between banks during the first half of the year as the economy's growth rate, unadjusted for inflation, slows to about 4 percent, Gross wrote.
Russell Comment: Ah, but the question -- will falling rates be enough to offset declining business as far as the stock market is concerned? And remember, the Transports have never confirmed the series of new highs in the Industrials.
TODAY'S MARKET ACTION -- My PTI was down a full 8 to 5775. Moving average was 5757, so my PTI remains bullish but now only by 18 points.
The Dow was down 82.68 to 12398.01. No movers in the Dow today, but only two of the thirty Dow Industrials closed higher.
Feb. crude was up .72 to 56.31.
Transports were down 60.75 to 4612.35.
Utilities were down 7.91 to 447.65.
There were 836 advances on the NYSE and 2446 declines. Down volume was 74.2% of up + down volume.
There were 102 new highs and 35 new lows. My 5-day high-low differentials declined from Thursday's plus 986 to today's plus 791.
Total NYSE volume was 2.91 billion shares.
S&P was down 8.63 to 1409.71.
Nasdaq was down 19.18 to 3434.25.
Dollar Index was up .33 to 84.65. Euro was down .79 to 130.08 and looks to have topped out. Yen was up .34 to 84.33.
Bonds were lower. Yield on the 10-year T-note was 4.64%. Yield on the long T-bond was 4.74%. Yield on the short T-bill was 4.95%.
My Big Money Breadth Index was down 8 to 772.
CRB Commodity Index was down 3.84.
Feb. gold was down 19.30 to 606.90. Mar. silver down 60 to 12.23. Apr. platinum down 23.50 to 1112.00.
GDX down .51 to 37.21. HUI down 2.97 to 314.12.
ABX down .13, ASA down 1.70, GFI down .22, GG down .77, NEM down .35. PAAS down .28.
Gold and silver stocks down minimally despite the big drop in the metals. I'd call that a plus. I suspect in the metals almost every stop-loss was hit today.
STOCKS -- My Most Active Stocks Index was down a large 11 to 418.
The five most active stocks on the NYSE were -- MOT down 1.61, F down .08, NOK down 1.08, T down .54, PFE down .08.
Also on the most active list, NYX (the NYSE) up 7.29. Stocks up or down, the exchanges make moola. The exchange loves volume.
The VIX was up .63 to 12.14. No panic here. A VIX at 13 or above would start to show fear.
McClellan Oscillator down 85 to -160.
CONCLUSION -- As for the market, one down-day doesn't prove anything. The commodities, however, do appear to be in trouble.
The Dow's closing low in December was 12194.13. If the December low is violated, that would be important, and could imply that 2007 was going to be a down-year. Write that number down, please -- 12194.13.
Have a restful weekend, and please stay off margin.
The following is from the current issue of US News & World Report -- "By mid-January President Bush will have delivered his high-stakes speech setting forth 'the way forward' in Iraq. Bush will then give his State of the Union address on January 23. 'Anything the President wants to do in the last two years of his term will be contingent on the reaction to his new course in Iraq,' says a senior GOP adviser. 'If he bombs when he gives the Iraq speech, the fat lady sings.' White House officials, however, argue that Democrats won't be able to escape responsibility for improving the situation in Iraq. 'The Democrats are going to own this policy too,' a senior White House official says.
Russell Comment -- My bet is that the Dems won't go along with any "surge" in troops for Iraq (and we're getting word of that position already). The Dems are sensing the will of the American people. My take is that the majority of Americans are now of the opinion that the war in Iraq is a dysfunctional disaster -- and that the sooner we get out of Iraq, the better.
ASX Price at posting:
0.0¢ Sentiment: Buy Disclosure: Held
(20min delay)