Watch for correction

For the week ending March 19, 1999, the Dow Industrials made a new all-time high. The volume line failed to confirm it but only slightly, so although there is no major sell signal, the non-confirmation could be enough to start a correction. While the Dow was riding high, the Transports were 350 points from their previous high with a lagging volume line-the old Dow Theory self signal.

Other indicators such as the Dow and the Advance-Decline Line rallied together from the October '98 bottom into November. Then the Dow continued to climb while the A-D Line headed south and failed to confirm three new highs by the index. As a matter of fact, the A-D Line made its last high in March '98 and has since failed to come even close. That simply means that fewer and fewer stocks are participating in and supporting the rally.

The 5-week A-D Ratio and the Net New Highs (highs minus lows) failed to confirm the January '99 high in the Dow and were even lower when the March 19 high was made. Normally, they turn up well in advance of the index but this time they did so coincidently and have been lagging badly. Just another indication of poor support.

And, to add insult to injury, the S&P Deposit Receipts' volume line has given a sell signal. The Spiders, as they are colloquially known, are similar to the TIPs in Toronto, except that they encompass the S&P 500 stocks, so you get even more diversification. They are listed on the American Exchange under the symbol "SPY" and trade at about 1/10th the value of the SSP. When there is nervousness in the market, it quite often shows up in the Spiders first.

So why the Bull at the top of this article? Well, I haven't seen a sell signal in the NYSE, Value Line, Nasdaq, Amex or, for that matter a major one in the Dow. So, while the conditions are ripe for a hefty correction, I don't think it's time for the Bear to take over yet.

As far as the TSE is concerned, all the volume lines are leading the indexes on the upside and there are no hints of sell signals. Furthermore, the Tuey Special gave another buy signal at the end of February when it came in with a reading of -11%. Remember the rule: When the TSE is down 10% year to year, wait two months and buy. And there are still other reasons for the continuing Bull:

The 5-week A-D Ratio and Net New Highs are more or less keeping up with the TSE but they also turned up coincidently instead of well in advance. So, while the support is better in Toronto, it is nevertheless waning, albeit to a lesser degree than in New York. However, as the old saying goes: If New York coughs, Toronto catches a cold. So don't count on our being able to buck a decline. Be prepared for it.

LONG-TERM OUTLOOK

On a longer term basis, there are three things I see (there are undoubtedly more) which should eventually have adverse effects on the North American stock markets.

The first is the poor performance of the bond market. In October of last year, the volume lines of the U.S. 30year Treasury Bond and 10-year Canada Bond futures plummeted without warning after making new highs. Prices followed swiftly and both have been trending lower ever since. Word is that Greenspan has the money-supply floodgates wide open because he is worried about deflation. The bonds don't like loose money because it can lead to higher interest rates.

The second thing is the condition of the major foreign stock markets. The London FTSE 100 has given a major sell signal. It tends to be a bad omen for New York. The volume lines of the Frankfurt Dax and Paris CAD 40 are lagging the indexes and are close to giving sell signals themselves. The Nikkei Dow has been rallying of late but is ahead of its volume line which never gave a buy signal.

Finally, Greenspan's fears of deflation are not unfounded. One look at the extremely poor performance of the commodities would make that obvious. Oil is receiving most of the hype at the moment. However, it is up about twice as much as its volume line without the benefit of a buy signal. The stock charts look wonderful. However, back in September '97, oil took off under much the same conditions and the stock charts looked wonderful then too. In October '97, oil, lacking adequate support from its volume line, took a dive and the stocks followed soon thereafter without warning from their volume lines. The same thing is, in my view, likely to happen again.

Copyright Canadian Shareowner Magazine Inc. May/Jun 1999
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