Why the Bull is Not Back

Stock market
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Last week’s dour jobs numbers out of the US seem to have had a major effect on market sentiment. Overnight, the Dow jumped another 120 points to extend its rally to four straight days.

Does this mean the worst is over? Is it safe to jump back into the market? I’ll have a crack at answering these questions in today’s Daily Reckoning.

Before I do that though, just a quick word on the Precious Metals Investment Symposium that I’m presenting at in Sydney on 27 October.

Some of you have asked if we’re making it available on video. No we are not. This is not a Daily Reckoning event. I’m just one presenter among many. And because I think it’s a great event, I’m passing the information onto you. We have no organisational input, or financial incentive for you to come. The decision is yours.

But if you do want to attend, get in quick. The early bird discount ends this Saturday. You can go here to book.

It certainly is an interesting time for precious metals. Gold peaked in September 2011. Since then it’s been all downhill. That’s a four year bear market. All good and bad things come to an end.

Perhaps this is the beginning of the end of the gold bear market? Gold stocks have been strong lately, especially the Aussie producers. Even in US dollar terms gold has performed well over the past few months. Since bottoming around $1,080 an ounce in August (when every man and his dog said it was going to $1,000) US dollar gold has bounced back. It’s now trading near $1,150 an ounce.

It’s still in a bear market though. The trend, in US dollars at least, is decidedly down. Which brings me back to the recent market action.

As you probably know, this recent rally kicked off on Friday following a weaker than expected jobs number. This ‘bad news’ on the US economy was good news for the leveraged speculators who drive stock prices these days. It seemed to settle the debate — for the time being at least — that the Fed will hold off on its plans to increase interest rates.

That’s bearish for the US dollar and bullish for just about every ‘non-dollar’ asset in the world.

So the rally over the past week has much to do with traders’ positioning. For many months now, traders have ‘positioned’ for an imminent interest rate move from the Fed. That means selling commodities, emerging markets and Aussie dollars. And buying US dollars and getting out of debt.

But now that the Fed’s move is under a question mark, you’re seeing traders scramble to reverse their positions. The result is the powerful global rally you’re now seeing.

You can see this in a chart of the Dow Jones Industrial Index. After plunging in August, the Dow is now clawing back some lost ground.

Here’s a chart of the Aussie market, the ASX 200. The critical support level I mentioned is at 5,000 points. It only closed below this level once in the recent sell-off, and quickly bounced back.


Source: StockCharts

But is it any reason to get excited?

Not at all. Look at the chart. The downward sloping moving averages (the red and blue lines) suggest the Dow is still in a downtrend, albeit one that is moderating.

Technically, the market still looks weak. You really want to see a rally back above 17,250 at the least before becoming comfortable that the worst of the selling is over.

My guess is that the Fed still wants to raise rates as soon as they can. So this long running narrative of ‘interest rate normalisation’ hasn’t changed. The recent weak employment data just bought the bulls some time.

For this rally to continue, you’ll want to see more weak economic data coming out of the US…but not weak enough to cause worries about recession. Growth that is ‘too weak’ will see the sell-off resume.

My guess is that this is a bear market rally. It will soon run out of steam.

In Australia, it’s a similar story. The economy is weak, but not quite weak enough to see the market fall below critical support. If you’ve read Vern Gowdie’s work, you’ll know it’s just a matter of time before this happens. If you haven’t read it, you can get your free copy here. But be quick, copies are running out and we’re not printing anymore.

Here’s a chart of the Aussie market, the ASX 200. The critical support level I mentioned is at 5,000 points. It only closed below this level once in the recent sell-off, and quickly bounced back.


Source: BigCharts

Many people dismiss 5,000 as meaningless. It’s just a round number, they say.

It’s much more than that. As Cycles Trends and Forecasts editor Phil Anderson told his subscribers a few months back, 5,000 represents the exact mid-point between the market’s high point in 2007 and its low point in 2009.

And as Phil learned from the legendary WD Gann, these mid-points are very significant. So scoff at 5,000 points if you wish. But the bottom line is that it’s a strong level of support for the market. If prices break below here on a sustained basis, it’s a warning about the waning health of the Aussie economy. And it will tell you that the market is destined for much lower levels.

In the meantime, Aussie stocks are hanging in there. Like the Dow chart above, the ASX 200 is in a clear downtrend. The rally over the past few days doesn’t change anything.

But analysing an index only gives you part of the story. A market is made up of stocks. When the market goes down, there are some stocks that still manage to go up. You just have to work harder to find them.

If you want to find out how, go here.

Regards,

Greg Canavan

Editor, The Daily Reckoning

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Greg Canavan
Greg Canavan is the Managing Editor of The Daily Reckoning and is the foremost authority for retail investors on value investing in Australia. He is a former head of Australasian Research for an Australian asset-management group and has been a regular guest on CNBC, Sky Business’s The Perrett Report and Lateline Business. Greg is also the editor of Crisis & Opportunity, an investment publication designed to help investors profit from companies and stocks that are undervalued on the market. To follow Greg's financial world view more closely you can subscribe to The Daily Reckoning for free here. If you’re already a Daily Reckoning subscriber, then we recommend you also join him on Google+. It's where he shares investment research, commentary and ideas that he can't always fit into his regular Daily Reckoning emails. For more on Greg go here.
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