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I post one of these periodically when something worthy of note occurs. We
just surpassed the July high in the S&P Earnings/TBill ratio. We have
reached this lofty level only 3 times previously in the past 40 years
(actually since my S&P earnings history begins in early 30's) and in each
case a significant correction has followed. The alternatives would be
another huge cut in interest rates (unlikely) or huge gains in S&P earnings
for the quarter (also unlikely). Also of note is the ratio decline following
each time the ratio has crossed the "Extreme Danger" level - the latest
decline is the only time that the ratio did not fall to the "Opportunity" or
"Extreme Opportunity" levels. Does all of this guarantee a sell-off? No, but
the odds are extremely high. Does it mean we should be shorting stocks? Not
until we see some downward momentum. Does it mean that Buy and Hold is
extremely risky? You bet!
Other tidbits from my weekly chart review:
1) My 10 week moving average of special short sales ratio indicates that the
NYSE specialists have continued to liquidate inventory into this rally and
are averaging short positions at the highest levels in a decade. Specialist
short sales reports are delayed two weeks.
2) The transports have been unable to confirm the new highs in the
industrials in spite of the lowest real fuel prices in nearly 50 years
3) The Amex Broker/Dealer has lagged the S&P 500, however it has recently
sprung back to life which could be bullish.
4) The small caps still have not sprung to life to expand breadth as
evidenced by daily and weekly a/d numbers as well as the Value Line Geo. The
Ru2000 futures shows a very interesting "W" price pattern with a double top
in the top middle of the W and appears poised to breakout to upside - either
way, this bears watching as this has been a seasonally strong time for small
caps.
5) Bonds should get a bounce in here, however bonds appear poised to (at a
minimum) retest the November low of 124^23. More likely are declines to fib
price objectives of 120^25 or 114^16.
6) Recent chart patterns in bonds seem to be tracking the US$. The dollar
appears to have put in a failure and top, however this won't be confirmed
without a break below 9106 and a rally above 9681 would call the failure
into question.
Earl
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