Best of the Week
Most Popular
1. Stock Markets and the History Chart of the End of the World (With Presidential Cycles) - 28th Aug 20
2.Google, Apple, Amazon, Facebook... AI Tech Stocks Buying Levels and Valuations Q3 2020 - 31st Aug 20
3.The Inflation Mega-trend is Going Hyper! - 11th Sep 20
4.Is this the End of Capitalism? - 13th Sep 20
5.What's Driving Gold, Silver and What's Next? - 3rd Sep 20
6.QE4EVER! - 9th Sep 20
7.Gold Price Trend Forecast Analysis - Part1 - 7th Sep 20
8.The Fed May “Cause” The Next Stock Market Crash - 3rd Sep 20
9.Bitcoin Price Crash - You Will be Suprised What Happens Next - 7th Sep 20
10.NVIDIA Stock Price Soars on RTX 3000 Cornering the GPU Market for next 2 years! - 3rd Sep 20
Last 7 days
Silver Price 2021 Roadmap - 22nd Jan 21
Why Biden Wants to Win the Fight for $15 Federal Minimum Wage - 22nd Jan 21
Here’s Why Gold Recently Moved Up - 22nd Jan 21
US Dollar Decline creates New Sector Opportunities to Trade - 22nd Jan 21
Sandisk Extreme Micro SDXC Memory Card Read Write Speed Test Actual vs Sales Pitch - 22nd Jan 21
NHS Recommends Oximeter Oxygen Sensor Monitors for Everyone 10 Months Late! - 22nd Jan 21
DoorDash Has All the Makings of the “Next Amazon” - 22nd Jan 21
How to Survive a Silver-Gold Sucker Punch - 22nd Jan 21
2021: The Year of the Gripping Hand - 22nd Jan 21
Technology Minerals appoints ex-BP Petrochemicals CEO as Advisor - 22nd Jan 21
Gold Price Drops Amid Stimulus and Poor Data - 21st Jan 21
Protecting the Vulnerable 2021 - 21st Jan 21
How To Play The Next Stage Of The Marijuana Boom - 21st Jan 21
UK Schools Lockdown 2021 Covid Education Crisis - Home Learning Routine - 21st Jan 21
General Artificial Intelligence Was BORN in 2020! GPT-3, Deep Mind - 20th Jan 21
Bitcoin Price Crash: FCA Warning Was a Slap in the Face. But Not the Cause - 20th Jan 21
US Coronavirus Pandemic 2021 - We’re Going to Need More Than a Vaccine - 20th Jan 21
The Biggest Biotech Story Of 2021? - 20th Jan 21
Biden Bailout, Democrat Takeover to Drive Americans into Gold - 20th Jan 21
Pandemic 2020 Is Gone! Will 2021 Be Better for Gold? - 20th Jan 21
Trump and Coronavirus Pandemic Final US Catastrophe 2021 - 19th Jan 21
How To Find Market Momentum Trades for Explosive Gains - 19th Jan 21
Cryptos: 5 Simple Strategies to Catch the Next Opportunity - 19th Jan 21
Who Will NEXT Be Removed from the Internet? - 19th Jan 21
This Small Company Could Revolutionize The Trillion-Dollar Drug Sector - 19th Jan 21
Gold/SPX Ratio and the Gold Stock Case - 18th Jan 21
More Stock Market Speculative Signs, Energy Rebound, Commodities Breakout - 18th Jan 21
Higher Yields Hit Gold Price, But for How Long? - 18th Jan 21
Some Basic Facts About Forex Trading - 18th Jan 21
Custom Build PC 2021 - Ryzen 5950x, RTX 3080, 64gb DDR4 Specs - Scan Computers 3SX Order Day 11 - 17th Jan 21
UK Car MOT Covid-19 Lockdown Extension 2021 - 17th Jan 21
Why Nvidia Is My “Slam Dunk” Stock Investment for the Decade - 16th Jan 21
Three Financial Markets Price Drivers in a Globalized World - 16th Jan 21
Sheffield Turns Coronavirus Tide, Covid-19 Infections Half Rest of England, implies Fast Pandemic Recovery - 16th Jan 21
Covid and Democrat Blue Wave Beats Gold - 15th Jan 21
On Regime Change, Reputations, the Markets, and Gold and Silver - 15th Jan 21
US Coronavirus Pandemic Final Catastrophe 2021 - 15th Jan 21
The World’s Next Great Onshore Oil Discovery Could Be Here - 15th Jan 21
UK Coronavirus Final Pandemic Catastrophe 2021 - 14th Jan 21
Here's Why Blind Contrarianism Investing Failed in 2020 - 14th Jan 21
US Yield Curve Relentlessly Steepens, Whilst Gold Price Builds a Handle - 14th Jan 21
NEW UK MOT Extensions or has my Car Plate Been Cloned? - 14th Jan 21
How to Save Money While Decorating Your First House - 14th Jan 21
Car Number Plate Cloned Detective Work - PY16 JXV - 14th Jan 21
Big Oil Missed This, Now It Could Be Worth Billions - 14th Jan 21
Are you a Forex trader who needs a bank account? We have the solution! - 14th Jan 21
Finetero Review – Accurate and Efficient Stock Trading Services? - 14th Jan 21

Market Oracle FREE Newsletter

FIRST ACCESS to Nadeem Walayat’s Analysis and Trend Forecasts

Signs of Stock Market Concern in the Economic Recovery Process

Stock-Markets / Stock Markets 2010 Jun 20, 2010 - 05:21 AM GMT

By: Donald_W_Dony


Best Financial Markets Analysis ArticleEconomic recoveries generally take a fairly standard pattern. The stock market usually bottoms 4 to 8 months before the low in the business cycle. Risk levels that are associated with the final days of the bear market ease. Expanding Gross Domestic Product (GDP) gradually develops and improves. Rising unemployment numbers stabilize and begin to decline. Early advancing industrial groups, such as consumer discretionaries, transportation and technology start to strengthen and outperform. And central banks slowly increase short-term interest rates to keep the fledgling economy in-check. However, when specific signs of weakness remain after over a year of economic expansion, investors should take note.

Industrial metals are one of the 'fuels' during a business cycle and often act as a 'barometer' on the economy. The utilization of lead, zinc, copper and nickel is primary in housing, manufacturing, construction and consumer goods. Metal prices typically show stable strength in the first phase of the cycle particularly during a period of secular $US decline (2000 to present).

After roaring upward in 2009, base metal prices appear to have stalled in 2010 and started to roll over (Chart 1). Some of the reason can be contributed to the recent bounce in the US dollar. Nevertheless, the weakness in price support does indicates an underlining pullback in buying pressure and a mistrust from traders about the continued recovery.

The yield curve (Chart 2) is a reflection on economic strength. During a typical recovery, upward pressure brings to build on short-term rates as the economy slowly gathers momentum. Within the first year of a new bull market, growth expands to the point where central banks begin to raise interest rates to keep the new economy from overheating too early. As short-term rates advance, the yield curve gradually begins the often long-term process of flattening. Under a 'normal' business cycle, the yield curve usually starts to decline within the first year. In the case of the present cycle, the curve has continued to steepen. This means that the standard economically-driven pressure on shorter one and two bond yields have not yet developed. And this is after over a year of an economic recovery. Demand remains firm for bonds across the curve.

The Volatility Index or VIX is a measure of risk on the S&P 500 (Chart 3). The understanding of this long established gauge can be best read by partitioning the index into zones. A reading of 18 or under represents a low risk period. This level is usually associated with the long upward advance of bull markets and steadily expanding economies. The zone of 18 to 33 normally corresponds to bear market declines and stock market crests and bottoms. The high risk zone of over 33 is usually entered for only a brief period as equity markets are reaching their final bear lows.

The elevated range in April and May 2010 illustrates a moderate to borderline high risk level that is typically not seen during a standard market correction. Pullbacks during the last bull market (2003 to 2007), only generated a risk level on the VIX of 20 to 22. The swift decline of stocks in May drove the VIX to over 40.

Bottom line: There are many economic areas of improvement and signs of investor confidence returning. However, the presence of weak industrial metal prices, a prolonged steep yield curve plus a continued overly high level of risk, translates into a heightened range of concern from investors about the strength of the economic recovery. None of these actions should normally occur after 15 months of a new bull market.

Investment approach: Models have implied that the markets move in approximately four month (16-week) trading cycles. With the completion of the last cycle in late May to early June, the next expected trough should arrive in September. This month has a 73% probability of negative returns based on 50 years of data. The signs of weakness in industrial metals, the prolonged steepness in the yield curve and the unusually high level of the VIX suggests investors may wish to take a more defensive stance during the next four months. These conditions maybe short lived but some additional protection is likely warranted now.

An easy method of providing extra protection in portfolios is to hold a higher cash position, a lower equity percentage or increased fixed income holdings.

More research will be in the upcoming July newsletter.

Your comments are always welcomed.

By Donald W. Dony, FCSI, MFTA

COPYRIGHT © 2010 Donald W. Dony
Donald W. Dony, FCSI, MFTA has been in the investment profession for over 20 years, first as a stock broker in the mid 1980's and then as the principal of D. W. Dony and Associates Inc., a financial consulting firm to present.  He is the editor and publisher of the Technical Speculator, a monthly international investment newsletter, which specializes in major world equity markets, currencies, bonds and interest rates as well as the precious metals markets.   

Donald is also an instructor for the Canadian Securities Institute (CSI). He is often called upon to design technical analysis training programs and to provide teaching to industry professionals on technical analysis at many of Canada's leading brokerage firms.  He is a respected specialist in the area of intermarket and cycle analysis and a frequent speaker at investment conferences.

Mr. Dony is a member of the Canadian Society of Technical Analysts (CSTA) and the International Federation of Technical Analysts (IFTA).

Donald W. Dony Archive

© 2005-2019 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules