Thursday, March 6, 2008
Countertrend Forces
by David Yu
I stayed up real late last night trying to finish this Thursday update just to find my website down again. This is getting quite irritating. Last time this happened I had to re-draw the charts and re-write the whole editorial, but I don't have the time to re-do everything this time. So, here it is. I'm sorry if this update seem a bit incoherent; I was under extreme time constraint trying to get it done and posted. The server's still unstable, and you may continue to have problem accessing this site.
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It's a monotonous distribution day on relatively low volume. Broad-based indices like the S&P 500, the Wilshire 5000, and the Nasdaq had all lost more than 2%. Today's descent comprised of series of lower highs and lower lows (see Chart 1 below). I haven't seen an intraday pattern like this for a long while. There's neither struggle nor exertion from the bulls throughout the day. The market had decided to let whoever needed to sell do their thing with little interference right from the beginning.
Chart 1
Sure, UBS' additional write-downs, the Dollar's decline to all-time low, and oil's surge above $100 had all contributed to the overall negative market condition, but they're not the least unexpected. Financial institutions' write-downs had been discussed repeatedly, and the estimates had also been revised upward repeatedly. It's really nothing new there. In addition, oil price has been trading above $100 since 2/20/2008, and the Dollar has been hitting one new low after another since 2/26/2008.
Even if Friday's payroll report came out to be negative, it shouldn't be too much of a market moving event. The payroll number's been in a long-term downtrend since the July 2005 peak (see Chart 2 below) even though the market's still expecting an increase of 25,000 for February. A negative payroll number should've been widely expected instead. A higher than expected payroll number, however, could turn into a market moving event, but it's unlikely to occur.
Chart 2
The real force that's been driving the market lower since the end of February is perhaps this new development that few have mentioned. Take a look at Chart 3 below. Japanese yen has appreciated over 14% since October. And, during the final week of February, it had broken through the upper trendline of the price channel and never looked back. This strong show of force is due primarily to the repatriation of Japanese yen.
Japanese are large buyers of foreign bonds and equities. Japan's fiscal year end in March, and this is when Japanese money goes home. The seasonal repatriation of yen is not really much of a surprise, but the magnitude is. This year, the deterioration of the Dollar and interest rate disparity, among other things, had contributed to the acceleration of the repatriation. We'll cover this subject in more details later when I have the time to do so.
Chart 3
In any case, what made this Thursday an unusual session is all the counter forces behind the aforementioned peculiar descending pattern (revisit Chart 1). For one thing, the large-cap tech stocks that got pummeled today were among the declining issues that have the largest inflows of money. Apple, for an example, lost 2.86% today, but the dollar value of uptick trades surpassed the downtick trades. The uptick dollar value of Block Trades, trades by large institutional traders, was 4.69 times of the downtick value (see blue bars on Chart 4 below). Meanwhile, although the UltraShort QQQQ ProShares (QID) that returns 200% from the decline of the Nasdaq 100 had gained 4.80% today, the money flows were negative (see red check mark).
Chart 4
I keep getting disconnected from the server... I was going to post a few more charts, but I'm running out of time here. Let's cut this short. My inspirations have all but dissipated. We'll pick this up again next week.
The Accumulation/Distribution Indicator that combines price and volume is yet another force that diverges from the market trend. The Accumulation/Distribution Indicator that assigns value based on closing value location's relationship to the trading volume has been in an uptrend since the January 23 bottom while the market's been weakening.
Chart 5
That's all folks. I will not be around this weekend to write anything. I'm wishing all of you a relaxing and stress-free weekend in the real world.
email: dyuguard-2@yahoo.com