CNBC Report by Bill McLaren – 24 April 09

FIRST LET’S LOOK AT THE S&P 500 DAILY CHART

The past four weeks the index has been struggling upward as each instance it breaks to a new high it immediately falls back below that high. But within that pattern of trend each move down was becoming smaller and smaller indicating buyers were willing to come in at very high levels. Now there is a two day move down that exceeded the two previous moves or counter trends down in price. If this is a top then we will see a rally of 1 to 4 more days that will either fail to reach the high or get just marginally above that high and then trend down with support at the 800 level.

If this is a new leg in a bull campaign the index will drive above the last high and counter trend down and show support on top of that resistance and take off to the 950 level.

NOW LET’S LOOK AT THE FTSE 100

This is the weakest of the markets I follow especially relative to the DAX and CAC 40. You can see this is a weak trend and the last move down was 4 trading days and now it is up 9 days and still way below the high. A new high would be three thrusts and a likely top but trading this many days below the last swing high is a market struggling. So if the world indexes start to trend down this is the weakest and will show the strongest move down.

But notice one important aspect of this chart which can be seen in many other charts. Except for the false break in March the index has been moving sideways for over 6 months and that could be establishing a base. I don’t have any evidence to indicate that probability but the charts say that is now possible. But this index is so weak it wouldn’t be the choice for the long side and could still be in a severe downtrend.

LET’S LOOK AT THE 1938 DOW JONES

Other than the 1930′s decline there have only been three other instances where the index declined 50% or more. The 2000/2002 decline, the 1973/1974 bear trend and the 1937/1938 decline. Last month we looked at the 1974 base and this chart is 1938 low and base. All of the instances where the index fell 50% the index didn’t change the trend to up until a significant base was formed. This (1938) market had an October capitulation and a November break of that low and a new low in March exactly as our current circumstance. You can see after the March false break low the index showed two higher lows and once that base was complete the index took off running like it stole something. We are looking for a higher low to develop to confirm the possibility of a base forming. And for now we are looking of evidence of trending down with a weak move up next few days it help set that up.

Source: McLaren Report

Mixed Signals on March Short Interest Report

Following large rallies like the one we have had off the March lows, it’s typical to see short interest decline as traders cover their negative bets.  As Thursday’s short interest figures for the end of March illustrated, short interest on the Nasdaq declined by 4.1%.  On the NYSE, however, we have seen a completely different picture.  Even after the sharp rally in Financials (most of which are listed on the NYSE), short interest as a percentage of shares outstanding is currently at 4.23%, which is higher than it was at the start of March.

Source: Bespoke Research

Market waits for the ECB and G20…..

50bp ECB rate cut widely expected but “non-conventional” element will grab the headlines

US Dollar Has 3rd Biggest One-Day Decline Ever

The US Dollar index had its third biggest one-day decline today since daily pricing begins back in 1970.  After the Fed announced that they will be purchasing US Treasuries and other assets, the Dollar fell sharply and ended the day down 2.69%.  As shown in the one-year chart below, the US Dollar index broke below its 50-day moving average today after breaking below its short-term uptrend a few days ago.  The Dollar is still trading above its longer-term uptrend, but the technical damage done in recent days is not a good sign.

Below we highlight all one-day declines of 2% or more for the US Dollar index, along with the percent change on the following day and over the following week.  As shown, the average return over the next day and week has been -0.18% following these big down days in the past.

Source: Bespoken Research

Financials Wipeout

In the first chart below we highlight a ratio of the S&P 500 to the S&P 500 Bank group going back to 1940.  When the ratio is rising, the financials are getting weaker relative to the S&P 500 as a whole.  As shown, the ratio is currently as high as it has been over the entire time period, meaning the banks are as small as they’ve been relative to the overall index.  Where we go from here, nobody knows, but the financials are pretty much getting wiped off the investment map.

Below we highlight the percentage declines from peaks of various asset class busts in the last decade.  Prior to the declines that financials, oil, and homebuilders are seeing currently, the only recent comparison for the current generation of investors was the Nasdaq bust from 2000-2002.  As shown, the Nasdaq went down 78% from its March 2000 peak to its October 2002 low.  Following the bursting of the Internet bubble, many investors didn’t think they’d see a similar bust for decades.  But the current declines in financials and homebuilders have now eclipsed those of the Nasdaq, and oil has also gone down just as much. 

Oil’s decline of 77% from July 2008 to its low in December was the fastest bust of the group, while homebuilders have gone down the most and for the longest period of time.  Since July 2005, the homebuilders are down a whopping 87%!  And the S&P 500 Financial sector is down 81%, which isn’t as bad as the homebuilders, but given the fact that it didn’t go up nearly as much as the homebuilders, it’s probably worse.

Source: Bespoke Research