Thursday, November 12, 2009

Summation Index Fails to Confirm Highs

While the Dow Jones Industrial Average has made new yearly highs this week, other indicators have fallen short of confirming the breakout. One such indicator is the Summation Index. The index number is generated by adding the net gains or losses in advancing issues over declining issues. My index uses some 200+ stocks representing different industries in the US economy. The index may be a better indicator of market momentum. As advancing issues outpace declining issues, the resulting number can only increase each day. Even though the market advanced for six days in a row, ending today, one can see how the indicator failed to take out recent highs.

The topping process can be a long and drawn out affair. Observing high and low points in the chart over the last few months, we see that the chart pattern rose gradually over time, setting higher highs and lower lows. Should the market be rolling over, one might expect a mirror pattern of the trip up, with the index making moderate new lows but then rallying up, only to fall back to make new lows.

One can never predict a market collapse. After all, there is little good news in the economy. Sure companies are starting to make money but it's only a result of reduced labor costs as businesses continue to cut back on the workforce. Banks only need to borrow at the Fed window for 0% to 0.25% and buy treasuries at 3% to 4%. Sign me up for a $billion on this trade. But the trade COULD BACKFIRE, depending on the level of greed the banks choose. For example, if a bank borrows at the current low rate at near zero from the Fed and buys a 10 year note paying 3.5%, there is always the danger that the Fed could begin raising rates. This would be a double whammy for the banks and other organizations taking advantage of this trade. First of all, the Fed lends overnight, the shortest of terms, so financing would need to continue on a daily basis. The Fed has, in the past, raised interest rates swiftly in the past. In addition to their costs to carry the investment go up, the value of the 10 year treasury would fall as interest rates rise. It wouldn't take long before an institution, if they are required to mark-to-market their investments, would be underwater. The Fed's plan would fail and banks again would be going bankrupt.

Again, ANOTHER FEDERAL RESERVE CREATED BUBBLE COLLAPSES. The next time, there will be no options left. Start growing the bananas guys!

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