Mounting evidence makes case for bear market
TheStar.com - columnists -
October 19, 2007
Bill Carrigan
If it looks like a bear and acts like a bear, it could be a bear. That possibility ran through my mind early in the week as broader North American indices began to retreat from their recent highs in reaction to surging crude prices and some nervous "Fed-speak" comments on housing and the credit crisis.
From a technical perspective, the key reversal on Oct. 11 was a warning of a probable important trend change. Keep in mind the equity markets have posted about an 8 per cent advance from the mid-August lows and a time out would not be unreasonable.
Technical analysts worry about key reversals because sometimes they are the start of something big, in this case a big correction.
The key reversal is a one-day chart pattern in which prices sharply reverse during a trend. This reversal can signal the end of a strong advance on a day when prices open higher, sometimes to new highs, and then "reverse" and end below the previous day's close.
The wider the price range on the key reversal day and the heavier the volume, the greater the odds that a reversal is taking place.
For those who follow candlestick bar charts, which are used to plot an equity's highs, lows and closes, the reversal is known as a bearish engulfing pattern.
A one-day event such as a key reversal can often signal only a brief change, and after a pause, the long-term trend is resumed. The key reversal can have more deadly consequences if a number of them occur across a broad range of stocks and indices.
On Oct. 11, key reversals occurred in just about every North American stock index and their related stock sectors. The important groups affected in Toronto were the materials and telecommunications groups; in New York, the semiconductor and financial sectors.
The experienced technical analyst will also know that such a single event, no matter how widespread across so many stock groups, is not enough evidence to declare a significant stock market reversal.
Bull markets also require leadership from key stock groups, such as the period's innovators and economic drivers. A century ago, it was the steel industry, later railways and then the auto industry, which were the drivers for highways, hotels, fast-food restaurants and the petroleum industry.
Our modern economic driver is technology, so we need to focus on key companies in that sector to determine their status as market leaders.
The day before yesterday, analysts were watching as shares of Intel Corp. surged by more than 5 per cent at the opening of trading on the New York Stock Exchange. The chip maker, whose stock is a component of the Dow Jones industrial average, had reported a profit increase of more than 40 per cent in the third quarter, thanks to record microprocessor shipments and cost-cutting efforts. The bullish earnings report also seemed to quiet fears of an imminent inventory glut and a slowdown in PC demand that had kept Intel shares in check in recent weeks.
We also had upbeat profit reports that day from Yahoo Inc., JPMorgan Chase & Co. and Altria Group Inc. But after the market's strong opening, the rally fizzled and the Dow closed down 20 points.
The negative evidence just keeps piling up because, in addition to a strong technology sector, another requirement for a bull market is participation from two other important bellwethers, the transportation and financial sectors.
Our chart this week shows the weekly closes of the Dow transportation average plotted above the SPDR financial sector exchange-traded fund and the Philadelphia Exchange's semiconductor sector index.
Our chart displays problems in each of these important sectors. The transports are treading water just under their April 2006 peak, the financials are trading just at their April 2006 peak and the semiconductor index is trading well below the April 2006 peak.
All in all, not a bullish scenario.
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Bill Carrigan is an independent stock-market analyst. His column appears Friday. He can be reached at www.gettingtechnical.com on the Internet.