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 | Subject: How to Take the Economy's Pulse  Wed Nov 07, 2007 12:39 pm | |
| Technical AnalysisHow to Take the Economy's Pulse
By Mark Manning
RealMoney.com Contributor
7/3/2007 12:45 PM EDTURL: http://www.thestreet.com/p/rmoney/technicalanalysis/10366121.html
As investors, we want to have as much of a leading edge as possible
when managing our portfolios. In order to do that, we need to look for
clues in the underlying markets about changes in what institutions
might be doing. Those changes can come either from a lack of
sponsorship for the market's leading stocks or from a rotation into
other growth sectors.
Today, let's examine a few other indices and indicators that can add to our evaluation of the market's health.
The Dollar Index
This week, the U.S. dollar index took another sharp drop,
sliding more than 1% on Monday and Tuesday. Many market commentators
are predicting further weakness in the greenback over the long term. As
you can see on the chart below, the steep slide from 2001 to the end of
2004 ended with a year-long bounce in 2005. The dollar then went into
another year-and-a-half decline.
Many professional traders view the dollar as a flawed currency,
and its steady decline has continually brought out the perma-bears. The
weakness has also benefited commodities and some large international
companies. However, with all of the negativity surrounding the dollar,
a good contrarian bet could be on a possible intermediate-term
double-bottom forming here.
Source: TC2000
If that does happen and we get a bounce, it could cause some weakness
in the large-cap and commodity names. Even with that possibility, the
dollar is still in a long-term decline, and any bounce may only be
short term.
The CBOE 10-Year Treasury Yield Index
There's quite a bit of talk about the Federal Reserve
and its need to cut short-term rates. That action would help many
brokerages and banks get out of the mess related to the housing market
and subprime lending.
No one knows what the Fed will do, but investors can keep an eye on the CBOE 10-Year Treasury Yield Index.
It's also a very good indicator of inflationary pressures that exist in the market. If
we see higher rates, it means that the bond traders are factoring in
higher costs that are being passed on to the consumer (inflation).
As the chart shows, rates' major long-term downtrend ended in 2006.
Those rates have since tested the breakout level that provided support and moved higher.
The next level of resistance is around 5.5%, and the market will be watching to see if it ends up breaching that level.
Source: TC2000
T2108 Indicator
I often use the percentage of stocks above the 40-day moving
average, as measured by the T2108, as an oversold/overbought indicator.
When the green line moves up toward 75, it usually signals that the
market is extended and is in for some type of corrective action. The
extreme levels that you see from 2004 to 2006 have often signaled
important bottoms.
Source: TC2000
Right now, the indicator has bounced off a slightly oversold condition.
That may be signaling that the indices have more upside room to move
over the short term.
PHLX Gold & Silver Sector Index
Gold and silver have also bounced off their current support with
the help of weakness in the U.S. dollar. This longer-term chart shows
that the PHLX Gold & Silver Sector Index (XAU) broke out into the new uptrend in 2005.
Source: TC2000
Over the past year and a half, it has been consolidating those gains
and is now wedging down into a pennant formation. A break above or
below the red trend lines should give us a strong hint about the
longer-term direction of gold and silver.
These indices and indicators are just a few more tools that
investors can use to keep a finger on the pulse of the economy. If we
continue to see higher interest rates, rising commodity prices, a lower
dollar and a breakout in gold and silver, it will be a strong signal
that inflationary pressures are increasing, and that usually doesn't
benefit the overall market. | |
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