Monday, October 8, 2007

Is This Really a Bull Market?

From the WSJ:

Other trends that weren't present during the last round of stock records: The dollar has plummeted to historic lows and gold, a traditional haven during times of investor nervousness, has leapt.

Also, crude oil has broken through $80 a barrel, raising concerns about a possible drag on consumer activity if average Americans start spending more at the pump and less on everything else. That is one reason consumer-discretionary components of the broad Standard & Poor's 500-stock index have lagged behind the index itself, falling 0.7% for the year. That part of the index would have to rise nearly 6% to reach its summer record.


The Dow Jones Transportation Average, which hit its July record and its August low on the same days as the Dow Jones Industrial Average, hasn't followed the industrials back to an all-time peak this month. The transportation average, which traders look to for hints about the staying power of trends in the Dow industrials, would have to rise 8% to return to the record.

I've written a fair amount about the dollar, but traders' opinions are really the important concern here. Since the rate cut traders have sold the dollar. While this helps US exports, this also means the US is essentially inflating its way out of the current slowdown.

While gold has broken its recent upward move, it is now consolidating at high levels instead of selling off. That means traders are still concerned about inflation and are waiting for a clear signal about inflation's next move.

Oil is consolidating above previous highs -- just like gold. There isn't a sell-off caused by simple profit-taking. That means traders are waiting for some confirmation about the future direction of oil supply and demand.

It's important to remember the above three charts are related. Gold and oil are priced in dollars. As the dollar drops in value traders will bid gold and oil up in price just to maintain price parity with previous price levels.

The transports still haven't confirmed the rally. For those people who subscribe to Dow theory that's a big warning sign.

Also note that transports have underperformed the SPYs for quite awhile.