Despite the Rally, Charts Are Flashing Warning Signs: Yamada
With the near-term economic future of Europe hanging on the whims of a loose cannon Greek Prime Minister, traditional fundamental market analysis is difficult, if not pointless. If the Euro Zone can't get it's act together, the continent will likely fall into recession. A recession in Europe will batter the economies of America and China, with the former hanging by a thread and the latter slowing dramatically for the first time in their brief experience with "capitalism."
Though some portfolio "pilots" are better than others, the truth is we're all flying blind with the possible exception of Mr. Papandreou's shrink and political advisors. With the future so murky it's a great time to seek the wisest practitioners of an array of disciplines to help us make the most rational possible decisions. For that reason Breakout welcomed back Louise Yamada of LY Technical Research Advisors. She's one of the best in the chartists world, not to mention a national treasure.
Louise is neither a perma-bull or bear but a realist. Right now she sees an opportunity to stand on the sidelines and spend some time with the family, reminding viewers that the "don't have to play" in this market. She has a couple reasons for not embracing the explosive rally of October, which despite the sell-offs of Monday and Tuesday has still taken U.S. stocks well off their lows.
Reason #1 is domestic stocks have broken out while their foreign counterparts seem to have only experienced "kickback rallies" (read: short-term spikes destined to fail). In a global trading world the U.S. may outperform but is unlikely to leave the EU in the dust.
Reason #2 is more harrowing still. "In 2008 we had a very similar pattern after the initial breakdown; rally into resistance and broke out of a little consolidation." In the ensuing 5 months stocks fell over 50% and have yet to recover to those 2008 levels. Louise says there are ample short and long-term similarities between now and 2008 to make her circumspect of further rallies here, should they occur.
To get off the sidelines Louise first wants to see the CBOE Volatility Index (^VIX) fall below 20 for an extended period. Calm markets are stable and bullish; markets with high vol are typically bearish; relief rallies or not. Louise also wants to see an expansion of NYSE stocks getting over their 200-day moving average. The recovery from recent lows was driven by a narrow group of beaten down stocks, not a recipe for a sustained recovery.
There you have it. My favorite technician says it's not just the fundamentals flashing caution, but the technicals as well.
What's your inner traffic light telling you? Let us know in the space below.
