----- Original Message -----
Sent: Friday, November 18, 2005
1:20 AM
Subject: [RT] Markets
My work is throwing off some serious warnings. Attached are screen shots of my NYSE and NASDAQ breadth models. The most serious divergences are in the new Hi-Lo model (upper right) where we have a 5 month series of lower highs even as price has been rallying. I give A/D volume (lower right) a lot more weight than A/D issues (lower left). NYSE A/D volume broke out above previous pivots highs (green horizontal line) on 10/31 and NASDAQ 11/2 nicely confirming the rally. Subsequently we have had lower highs even as price has posted higher highs.
Turning to risk measures, I keep an eye on the spreads between treasury and corporate
and treasury and high yield. Widening spreads are giving warning of a negative change in investor willingness to take on risk. Confirming this is the behavior of VIX which broke out of the declining channel on 10/7. While this rally has brought a nice decline in VIX (investors willing to accept more risk) the decline has not come close to the lows established in July. Maintaining and expanding P/E's depends upon investors being willing to accept increasing levels of risk. There is now a significant divergence giving us warning that investors are less willing to accept risk.
Lastly, I include a weekly chart of the NYSE which shows a very clear rising wedge pattern. Rising (and falling) wedge patterns are generally terminal to the trend. W/O 10/7 gave the first warning when the shorter (blue) lower trendline was broken and confirmed on 10/14 when the longer (gray)
lower trendline was broken. We would generally expect a retest of the trendlines. We have gotten that test with price rallying back into the longer wedge on 11/4. A failure which fails can be a very good reversal signal so the question at hand is this rally back into the wedge a sign of a new bull leg? The internals discussed above suggest that it is not.
Earl