Checking OUT from the DOW!

Introduction
A rapidly falling dollar against the Euro and the Yen, an overconfident stock market (with a low VIX index), we ask us:

• Is it the right time to short the Dow, sell the large caps stocks or -mutual funds?

Analysis

Figure 1: The Dow breaks to the downside

What we can see of the figure above is that the Dow have broken to the downside, its trend line support starting in the middle of July ("Wall Street has worst day in 4 months"). A follow through to the downside today (Tuesday, November 28, 2006) could confirm the short-term sell signal.

To the downside we have following support levels: 11 950 which represent the 50 days moving average, the next one lies around 11 650 which is the Fibonacci 38,2% retracement from mid-July lows to the last week highs (se figure 2).

Figure 2: The Dow has been in a bullish trend since the mid of July 2006

We can see in figure 2 anb 3 that nearly all the technical indicators lies in the overbought zone.

Figure 3: "Abnormal" high returns for the Dow this year compared to 2004 & 2005

The Dow has gone up +12% this year, this is significantly more than in 2004 and 2005 (Se the blue line in Figure 3).

We ask ourselves...

Has the US economy improved that much during the year 2006!? The stock market is said to be forward looking, this would imply an improvment of the US economy next year, well probably not... What about a soft/hard landing for the housing market, slower consumer spending (negative rate of savings), inverted Yield Curve (uses to be a bearish signal given from the bond market).

Figure 4: The Dow Jones Industrial Average is now at a low level of volatility

The ATR volatility of the Dow is currently low, looking to Figure 4, we note that the Dow use to hit a bottom (green arrows in figure 4) when the volatility is peaking (red circles in figure 4) and vice-versa. This is one more indicator, telling us that the Dow has peaked.

Conclusion

The Large Caps stocks have rallied during the last 4 months mainly due to a high momentum created by a flood of "hot money" to the sector. This small bubble seems ready to slowly deflate. We do not think it is the right moment to invest in the Large Cap indices or stocks. Right now, we doubt that the Dow will hit new nominal highs before the end of this year.

We are checking OUT from the DOW, what are you doing?

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