Short vs. Long Term Outlook
Dow Jones Industrial Average 10,087
Value Line Arithmetic Index 1651
30-Year Treasury Index 4.63%
The Big Picture for Stocks: The 4-year cycle looks negative into 2006.
Technical Trendicator (1-4 month trend):
Stock Prices Down
Bond Prices Up
The technical position of the market suggests a possible rally. We are oversold on the daily charts (see below). The sentiment numbers are good as traders and investors are pretty scared at present. For example, the American Association of Individual Investors survey showed only 17% bullish last week - a 13-year low. The put-call numbers have taken a big jump which is further evidence that there is a healthy level of fear. These are things seen at market bottoms.
According Jason Goepfert at Sentimentrader.com, who tracks dozens of psychology indicators, "From an anecdotal standpoint, the angst we are seeing and hearing is as great as it has ever been, except perhaps after 9/11 and prior to the low in July 2002. With Friday's rout, many of our measures have simply gone off the chart, leaving little historical precedent."
But while the short term is oversold and a rally is quite possible, there are some key industry groups that are just now breaking down on the charts, notably housing. And the longer term weekly charts are still overbought (see below)!
We have been saying that the downward portion of the 4-year cycle is ahead of us. The 4-year cycle has been an incredibly reliable cycle, with bottoms in 1958, 1962, 1966, 1970, 1974, 1978, 1982, 1987 (a year late), 1990, 1994, 1998, and 2002. The next one is due to fall in 2006. The most likely scenario is that we are in a bear market that will last for another year, with rallies along the way.
Regarding bonds, our buy signal on bonds at the end of March is looking pretty good. While this is only a trading swing buy, this signal may be telling us that the economy is worsening and that the Fed is about done with their tightening cycle.