Change is afoot

The Dow Industrials and the S&P 500 are in the process of testing their 52-week highs made last September. A successful test will mean that they will move higher. However, although the Dow has crossed above its 30-week moving average, its volume line is still under its 10week which is under its 30-week. The S&P 500 Unweighted and its volume line have crossed above their 30-weeks but the latter is lagging the index badly. Neither the Dow's nor the S&P's volume line has given a buy signal.

As far as the various sectors are concerned, Basic Materials and Consumer Cyclicals are over-bought and their volume lines are lagging; Financial Services and Utilities are working on sell signals; Energy is a disaster waiting to happen as the volume line heads south to new lows with a huge lead over the price; Consumer Staples and Industrials are still rallying but are getting overbought; and only Technology is oversold and working on a buy signal.

To add insult to injury, the Bullish Advisory Services are currently in dangerous territory at 61.8% and the 5-- week A-D Ratio got up to a very overbought 63.1% on January 5, 2000 and has only backed off to 60.6% as of February 2.

Therefore, I think that the current rally will fail and the market will pull back to do more work by getting the volume lines in shape for a sustainable upward move. Things do not look rosy for the big blue chips at this point.

The only indexes indicating that any accumulation is going on at the moment are the Nasdaq and the AMEX. While the huge price decline by the Nasdaq has been under way since September, the volume line has held its ground remarkably well and gave a buy signal last December. The AMEX's volume line also gave a buy signal in December and the index has now broken above its 30-week moving average with the volume line in the lead and almost back to a new high. Therefore, it would appear that investors are about to shift out of the big blues and back into the technology and mid- and smallcap stocks.

The decline in the markets since September 2000 has, in my view, been solely the result of aggressive tightening by the Fed which raised the Discount Rate no less than five times since August 1999. However, now the Fed is aggressively lowering rates (three cuts in the Discount Rate since the beginning of January) and appears ready to cut further if necessary to avoid a recession. Furthermore, the Dow, S&P 500, and Nasdaq were all higher at the end of January than they were at the end of December - so the January indicator is positive and suggests a good year overall for stocks.

In Toronto, all the volume lines of the major indexes gave buy signals in January. The Unweighted 300 and 100 are now outperforming the Weighteds. Both Unweighteds have crossed above their 30-week moving averages. The 300's volume line has just made a new high while the 100's has not quite done so but is leading the index. That's a big change from last September when the volume lines were giving sell signals. I might add that the TSE 200's volume line also made a new high last week, so the mid- and small-caps are receiving attention on this side of the border too.

To add to the bullish case, the 5-- week A-D Ratio, Net New Highs, percent of stocks above their 10- and 30-- week moving averages all bottomed ahead of the market and are currently leading it up.

As for the sectors, new volume line highs were made last week (February 2) by Financial Services and Utilities and Industrials got very close; Energy and Consumer Staples are still rallying with no sign of trouble; Technology is working on a buy signal; and only Basic Materials have fallen victim to a sell signal.

Canadians can look forward to further interest-rate cuts in order for our markets to compete with those in the U.S. if the Fed continues on its present save-the-economy course. It certainly appears that the stock markets sense this.

In the Bond market, the 10-year U.S. Treasury Notes are still headed to new highs with the volume line confirming. The 10-year Canada Bonds are a bit sluggish, having been held back by the poor performance of the Canadian Dollar. The U.S. Dollar's volume line gave a sell signal in the last week of December and the Loonie has been improving as the Dollar declines. Last week, the Loonies volume line made a new high and the price crossed above its 30-week moving average. That should help the Canada Bonds.

As the U.S. Dollar weakens, all eyes turn toward Gold. Don't expect much from the yellow metal. The volume line dropped below the September 1999 price low of $256 back in May 2000. The price rallied back to its declining 30-week moving average in December. It was a dismal failure because the volume line remained virtually flat. It is currently trying to rally again with no indication of any accumulation. I think the price will drop below $256.

PATRICK TAYLOR IS AN INDEPENDENT TECHNICAL ANALYST

Copyright Canadian Shareowner Magazine Inc. Mar/Apr 2001
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