Dr. Wish

The GMI closed at 5 on Friday, up from one day at +4 on Thursday.  For the first time since last March we have had two days with more new lows than highs in my universe of 4,000 stocks.  There were only 40 new highs Friday, and 50 new lows.  Interestingly, the Worden T2108 indicator of stocks above their 40 day moving average fell to 46% after a mid-week low of just under 39%.  This indicator is down from 80% in April and tells me that the market pendulum is smack in the middle between the extremes where tops and bottoms occur.  Some market lows have occurred around the 30% level, but the large declines have typically occurred below 25%.  The GMI-L indicator remains at 100% and suggests to me that as yet there is no longer term down-trend in sight.   But the GMI-S is at 44% reflecting the short term weakness. Still, the QQQQ up-trend remains intact and is in its 47th day….

This week is a critical juncture for the market.  A large decline will tip the GMI below 4 and I will get very defensive.  I am trying to hold on to my covered writes until my call options expire on Friday.  So far, my positions have held up well during this decline…..

All of this talk about rising long term interest rates is ignoring the continuing down-trend in the short term interest rate indicator.   First of all, this decline means that the inversion in the  yield curve is disappearing.  But with the short rates turning down, is the Fed really intending to raise rates? Could it be that everyone is missing something here?  In the past, a sustained rise in this indicator  has telegraphed the Fed’s intentions to raise rates…….

The GMI remains at the maximum level of 6.  There were 488 new 52 week highs in my universe of 4,000 stocks on Friday, the most since December 5.  This is a very strong up-trend with many stocks moving up.  Friday was the 42nd day in the current QQQQ up-trend.  Why is the market so strong?  I searched for any technical indicator that might provide a clue to the rise.  And then I found it in an indicator I haven’t looked at for quite a while.

Take a look at this chart of the short term interest rate indicator.  Note that the 10 week moving average (dotted blue line) has curved down and is now below the 30 week average (solid red line), which appears to have peaked.  The last time that the 10 week was below the 30 week was in March, 2004, before the Fed started to raise rates.  It now looks like the next move by the Fed will be to lower rates.  It may already have begun.  Could that be why this market is rising?

See my caveats at the bottom of my prior post.