After a 14-session decline (during January and into February) that had erased all of the upside progress made since September 10th, 2009—and taken the FXI (China) a full 21% below its TOP—the stock Indexes have now moved back to the upside, taking many averages to slightly higher highs for 2010.
But technically, all is not well.
Let’s focus on two US stock sectors that led the advance into the 2007 bubble TOP—the XBD Index and the XOI Index–as well as the ultimate “tell” according to our work–China.
Do you all remember when finance and energy were the two “can’t lose” investment themes for the next ten years?
Even after the catastrophic crash, analysts continued to hype these sectors with chatter about China and India growth rates driving peak energy prices at the same time that globalization would fuel demand for sophisticated US financial products.
But if that thesis is correct, why aren’t these two popular indexes leading the market to new highs?
Have you noticed that these two sectors topped back in October when the BAM Model started to turn extremely negative the major averages?
The XBD topped on October 14, 2009 and the XOI topped on October 21, 2009 and if these two indexes roll-over and break the year’s lows, that will be a great indication that the other averages will be playing “catch up.” (or catch down if you prefer)
Now let’s focus on CHINA as their market looks most likely to crack the years lows ahead of the other indexes.
Back in November of 2008, the $DJSH (DJ Shanghai Index) bottomed and turned higher a full 4 months before the SPX bottomed in March of 2009.
Now, it appears that the same dynamic is occurring again (China leading the world’s markets) as the DJSH looks like it TOPPED back on November 24, 2009.
The confirmation of this idea will come soon IF and when the DJSH breaks the 2-3-2010 low and once that happens, we should see sell programs reign around the world as markets begin the acceleration phase of the expected crash.
Velocity remains in crash mode on a monthly and weekly basis but we need a bounce to properly align the daily and 60 minute models.
Remember, as the markets roll-over, we’re going to see a massive number of BAM Model sell signals triggered (cascade sell signal) so even if the velocity model is not perfectly aligned, we can still see multi-hundred point down days, we just won’t see the 700-1000 point swings we saw during 2008.
We continue to favor the long side of the FXP (Ultra-short China Xinhua) and we are long that ETF in personal accounts as well as the BMP (BAM Model Portfolio).
If you missed the Jim Chanos interview on the Charlie Rose show, it is worth watching.
Chanos talks about arguably the biggest bubble in the history of mankind.