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D.B.
Hi Ike, how are doing?
I.I.
I am doing well, thank you.
D.B.
For the past six months the markets have
endured and overcome many "negative
divergences" isn't this a sign of a
strong bull market?
I.I.
If you go back and review our interviews
for July, August, September, and October,
as well as, my weekly commentaries, and my
articles for other sites such as Financial
Sense, ( http://www.financialsense.com/Market/iossif/main.htm
) I have always pointed out that
"negative divergences" don't
mean much until the market is ready to act
upon them, and obviously it hasn't up to
now. The fact that the market hasn't acted
upon them for six months, can be viewed as
a sign of a strong market, or, a sign of
increased risk, personally I think there
is truth to both.
D.B.
How can a strong market be also risky?
I.I.
To get your answer, you ought to be asking
the folks who were buying the market in
June and July of 1998, that was a strong
market, but it also plunged nearly 20% in
a matter of six weeks!
In
addition, we ought to look under the
surface in order to determine if what
appears to be strength -in terms of price-
is indeed backed up by the internals.
Let's examine the gains in A/D units,
versus the gains in Cumulative volume
units between March 12th, and November
28th.
 |
 |
| DATE |
A/D |
CUM.
VOL. |
NYSE |
| 3/12/2003 |
-46224 |
-24715745 |
4486 |
| 6/17/2003 |
-11531 |
-7519406 |
5722 |
| GAIN |
34693 |
17196339 |
1236 |
|
|
|
|
| CUM.
VOLUME/ A-D
RATIO: |
495.6717 |
|
|
|
|
|
|
|
|
| 8/6/2003 |
-17477 |
-10265501 |
5460 |
| 11/28/2003 |
11145 |
-1299350 |
6073 |
| GAIN |
28622 |
8966151 |
613 |
|
|
|
|
| CUM.
VOLUME/ A-D
RATIO: |
313.2608 |
|
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The
rally has had two phases, from 3/12/03 to
6/17/03, and from 8/6/03 to 11/28/03.
During the first phase the a/d line gained
34,693 units, and the Cumulative Volume
line gained 17,196,339 units, meaning one
unit of gains in the a/d line was supported
by 495 units of gains in cumulative
volume, during the same time, the NYSE
gained 1236 points, or, 27.55%!
During
the second phase, from 8/6/03 to 11/28/03,
the a/d line gained 28622 units, and the
Cumulative Volume line gained 8,966,151
units, meaning one unit of gains in the
a/d line was supported by 313 units of
gain in cumulative volume, that is a drop
of 36%. During the same time, the NYSE
gained 613 points, or, 11.22%.
Therefore,
as a matter of simple arithmetic -not
as a matter of subjective opinion- one
must acknowledge, that yes the market has
been able to move higher, but
internally it has weakened. Volume has
lagged considerably, and one has to
legitimately wonder, how much further the
market can go under these circumstances?
It can certainly move higher, but at the
same time, risk is increasing is not
lessening.
Furthermore,
if you look at other risk measurements
such as the ratio between SPX and VIX, or,
NDX and VXN (see charts below)
We
see that the market rejected present
levels of risk premiums in three
different occasions during the past three
years, in February '01, July '01, and
April '02. In the entire history of the
VIX and VXN, their ratios with respect to
SPX and NDX, have exceeded present levels
only two times, in March and August of
2000, neither of these two times was
particularly rewarding to investors.
Can
the market move higher? Of course it
can, but that doesn't change the fact
that internally the market is weakening,
and its risk is elevated to levels
we have only seen twice in the last
fifteen years. This is not an opinion
based on qualitative analysis, which can
be highly subjective, it is based on
quantitative analysis, numbers don't lie,
and can't be argued with. When I
see, in black and white, that the
current up-leg is supported by a 36%
decrease in up volume, how in the world
can anyone argue that this is a sign of
"continuous strength?" Moreover,
the decrease in up volume has taken place
during seven consecutive months of
double digits inflows by mutual
funds. If the public has been pouring
record levels of funds into the market,
yet, up volume has shrank by 36%, it means
someone is selling, someone is
distributing! I have never seen a
market being able to advance
significantly, while it is under
distribution.
So,
until the trend turns down -which of
course it has not yet- by definition the
market is in a bullish phase, at the
same time, given the internals, I also
have to conclude that the risk of a
serious disruption to the bullish phase
is elevated, and real, not
imaginary as the CNBC chirpers would have
you to believe.
D.B.
Any comments about the short term?
I.I.
I would have to look at the 5 day trading
oscillators to answer your question.
Both
Oscillators are near the top of their
range, which means there is some room to
the upside, but no more than 2%, before
another pullback -significant, or,
insignificant- takes place.
D.B.
Should we look at the rest of the charts?
I.I.
Of course!
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