Wednesday, May 28, 2008
The Market Top
by David Yu
I feel really bad that I haven't had time to update this site for two weeks. It's been quite a busy stint. There's also not much going on that really tickles my fancy. Now that everyone seems aware that the worst may have only just begun, I no longer felt as compelled to drop everything and write. Not much had changed since my last update on May 14. The economy's still encountering the same problems, and the stock market's still hesitating. Even though the S&P 500 had declined 1.27% since my last update, the uptrend channel from the March low remains intact (see Chart 1 below). This is one of the reasons why, in my replies to some of your inquiries, I had advised you not to get too aggressive shorting the market, yet.
Chart 1
In those responses, I mentioned that I saw the top forming. However, just like any market top, it takes time for the formation to complete. The October 2007 top, for an example, was actually the reaction high of the July 2007 top. The market had in fact topped out in July 2007, from the technical perspective. But, the market continued to chug along till November 2007 before it had finally collapsed. This time, the top had been in since last Monday, May 19, but ensuing reaction highs should be expected. The market also exhibits a tendency to move higher after the Memorial Day weekend. At least that's what had happened in the last 5 consecutive years.
Still, from the technical perspective, the market appeared to have already topped out on May 1, just 3 days after I warned my readers that the worst was not over. I'll share more technical evidence with you when I have more time to do so later. For now, let's take a quick look at one of the important indicators that I've been following, the BXD (the Dow Jones Industrial Average Buywrite Index).
The BDX Index tracks performance of a hypothetical portfolio using the BuyWrite strategy -- a portfolio that not only buys the equity but also writes (sells) the call options. This strategy outperforms in neutral and bear markets and underperforms in a bull market.
Normally, there's an inverse correlation between the BXD to the Dow ratio and the Dow (see double arrows). The strong uptrend of this ratio from October (blue line) indicates bearish bias of the market. It's peculiar, nonetheless, to note that this ratio continued to rise despite the fact that the Dow had gained more than 7% since March (black line). And, on May 1, when the Dow climbed to new high not seen since the 2nd trading session of the New Year, this BDX to the Dow ratio did not even fall below the trendline (red circle), as it's supposed to do in a strong rally like this. Instead, it made an U-turn and headed higher as though it's in a bear market.
Chart 2
That's it for now folks! I'd better get some Z's before the market opens. I'll write more later. It should be an interesting day tomorrow. We'll have the prelim GDP, the initial claim, and the crude inventory data in addition to Sears and Dell's earnings tomorrow.
email: dyuguard-2@yahoo.com