-- Posted Friday, 6 July 2007 | Digg This Article
Fear has certainly been the dominant themes of the financial markets this year. One proof of that is the record short interest across many different market sectors (including the leading indicator semiconductors). Another proof is found in the headlines of newspapers all over the country as one pessimistic and fearful headline follows another. Last weekend millions around the world were given another reason to be afraid as a car bombing at an airport in Glasgow, Scotland, along with a failed bombing attempt in London. Just when you think it’s safe to go outside again, the fear that has plagued the headlines since 2004 resurfaces.
Here is what an A.P. article had to say of the Glasgow bombing today: “[D]espite the failures, the attacks did accomplish one goal: creating fear and havoc throughout Britain as police cordoned off streets to search 19 locations, stepped up stop-and-search procedures and banned cares from approaching terminals at many airports.”
Our concern here is not the political ramifications of these attacks, but the potential impact on financial markets. Some investors fear the worst and assume that an escalation of summertime terrorist episodes like these will create a selling panic in the stock market. As you probably know from our previous discussions on the correlation between global bombings and stock markets, nothing could be further from the truth: bombings typically create a strong underlying support beneath the market and lead to higher prices. In other words, when bombings increase it usually acts as a contrarian fear gauge and bolsters the market’s “Wall of Worry.”
That certainly seemed to be the case on Monday as the Dow Industrial index was up nearly 130 points while the NADSAQ was up 29 points. Granted, it was a typically low-volume, pre-holiday type of move but the psychological reaction was clearly in evidence. Bombings still produce fear, which in turn bolsters stock markets.
While reading the headline for the Glasgow bombing I was instantly reminded of an eerily similar episode that happened almost exactly two years ago to the date of the latest attacks. Back in July 7, 2005, the London subway was attacked when three bombs went off simultaneously, killing 52 commuters and the four suicide bombers and injuring 700. Then on July 21, four attempted bombings were made once again in the London subway system.
Could there be some special significance to early July since the latest rash of bombing attacks repeat the bombings of two years ago? Perhaps, but that’s not our speculation to make here. What I can observe is that in July 2005 an important equities cycle was bottoming, namely the 60-week cycle. In fact, the July 7, 2005 bombing occurred *on the exact calendar day* the cycle was supposed to bottom! Coincidence? (Personally, I think not!)
This time around the bombings occurred very close to the dominant interim cycle bottom and also closed to a short-term cycle peak; in fact, the bombings appear to be sandwiched in the middle of the two cycles. Whether this was done by design or not is impossible to tell and useless to speculate. What’s important to keep in mind is that the latest bombing attempts have bolstered the market’s “fear factor” which should give stocks a needed shot in the arm to make it through these sluggish days of July.
How did the S&P fare in the wake of the 2005 London bombings? It made a pivotal low above the 1185 level (200-day moving average) in early July on the day of the bombing, then rallied to a summer high of 1245 by the beginning of August. It then corrected into October and soared into December, making a high at 1275 before ending the year. From there the market never looked back and this proved to be a critical long-term support for the S&P. Over the years I’ve labeled this concept “bombing support” and have done an in-depth study to back-test the theory that when a major bombing occurs and the stock market find support and pivots higher off that support it is rarely broken for long periods of time (sometimes years).
The S&P 500 (SPX) should be able to make a new high in July, hopefully by mid-month, and if the experience of July 2005 is any guide we should get a worthwhile move in stocks this summer before the next correction. The market has been correcting itself internally for the past few weeks and has already succeeded in working off much of the previous excess: the 5/10/20-day price oscillators for the SPX have worked off the “overbought” signal from May. The oscillators are in a much healthier position right now and trend considerations for the SPX are still bullish: the 90-day dominant interim moving average is rising in linear fashion and this reflects a bullish intermediate-term bias for stocks.
The latest round of bombing attempts weren’t the only bearish or fear-laden headlines to cross the news wires this weekend. Just check out these beauties from the Financial Times: “Credit derivative fears continue to gather pace,” “Axed deals reflect concerns over credit,” “and “Global credit woes.” This last headline was the title of an editorial on Friday in the FT newspaper. When bearish headlines show up on the editorial page it heightens the significance of the fear and is always bullish for stocks.
Monday was also bullish for the NASDAQ 100 Index (NDX), a prime leading indicator for this bull market. When the NASDAQ is bullish it leads the way for the rest of the market and it’s always positive to see the NDX making a new high, even if the other major indices are lagging behind a bit. NDX did succeed in making a new high for the year on Monday, closing up 1% for the day at 1954. The QQQQ was up 0.86% to close at 48.01, also a new high for the year.
While we’re on the subject of tech, the following observation was made by a subscriber today: “82% of SMH shares are held short??? Is this a buy signal? I realize that longs hedge individual stocks by hedging, but is this ridiculous or what?” Yes, 82% short interest is significant no matter what the breakdown of the institutional positions and I do believe we’ll see continued out-performance by the semiconductor sector. As mentioned in a previous commentary, SMH remains on our buy list and made yet another new high on Friday, July 6, as of this writing. Along with the NDX, the SMH chart is one of the more bullish ones among the major sectors right now and the signal both are sending couldn’t be more positive for the broad market.
Another wrote, “To make your bullish case even stronger for technology, IBM has a 48 million share short. This is the greatest short position I have seen in IBM in over 7 years. So the bears are trying very hard to hold down tech.” Agreed, they are trying hard but history suggests they won’t succeed in this effort.
Clif Droke is the editor of the three times weekly Momentum Strategies Report newsletter, published since 1997, which covers U.S. equity markets and various stock sectors, natural resources, money supply and bank credit trends, the dollar and the U.S. economy. The forecasts are made using a unique proprietary blend of analytical methods involving internal momentum and moving average systems, as well as securities lending trends. He is also the author of numerous books, including "Moving Averages Simplified." For more information visit www.clifdroke.com
-- Posted Friday, 6 July 2007 | Digg This Article
