Back on August 4th, I discussed the current state of the Dow Jones Industrials (DJI) and the signs of a fracturing market. Specifically I mentioned:
- Failing to close above the May 22nd high illustrated market hesitation.
- The Dow Jones Utilities operating well below their April 30th highs.
- A parallel trend line channel showing more open price area below the current level.
- Dividend yields still in historically low territory.
- Record levels of stock repurchases by companies.
- The media beginning to question the move.
Those six reasons were sufficient to give me pause to believe this market was close to running out of steam - at least temporarily. Last week while at The MoneyShow San Francisco, retail brokerage firm TD Ameritrade introduced me to their Investor Movement Index (IMX). The IMX illustrates what TD Ameritrade's investors are actually doing. Though TD Ameritrade did not see the chart as a bearish omen, it clearly showed a move towards the exits by their investors while the stock indices moved higher (in their case the S&P 500).
Three weeks from my August 4th article, reveals a DJI that has broken down. In the attached photo, I highlight three (3) key points in the DJI daily chart. The first is at the top of the chart illustrating once again how the market failed to meaningfully penetrate the May 22nd high via a closing price. While prices did close for three days above that level, none of those closes were above the intraday high of July 23rd. Failing to rise above the July 23rd level, prices broke down after that. The next point on which to focus occurred on August 14th. Using a proprietary method, the price action on that day indicated to me the market was going to head down in a decisive fashion. Finally, direct your attention to the bottom of the chart where the caption reads "Next price level to test". This price level (around 14,500) represents the next important point of support in this market. Breaching that price level will allow a more significant decline in the DJI.
It is still unclear whether this recent fracturing represents the final stage of the bear market rally in effect since 2009. More needs to occur for confirmation. But one thing is clear. The catalyst for the market's demise was likely to be interest rates after gold broke down in 2011. Long term interest rates have been in a persistent state of increase since May (long bond prices falling). This action is merely the reversal of a 30+ year trend and the market getting more and more uneasy with bloated levels of debt.
The combination of increasing rates and a collapsing stock market is something I have been anticipating (though prematurely) for some time. This will be the point of recognition that the Wizards at the Fed and government are not in control of things like they claim. Fasten your seat belts for the bumpy metaphorical return to Oz.
Jim Mosquera is the author of Escaping Oz: Protecting your wealth during the financial crisis.