I don’t like walking (let alone running) on treadmills. The scenery doesn’t change and no matter how long you walk, you end up in the same place where you started.

For the past month, the financial markets have been on a treadmill. There have been some big up days and some big down days, but stocks have failed to make any real headway. For most of that time our indicators have shown that the next market move is likely going to be downward. It creates a frustrating situation for clients and for us when that move fails to occur when we think it should.

Below is a chart of the Dow Jones Industrial Average over the past six months. The blue line is a trend line I added to connect the most recent tops. Notice that the bear market rally that began in March seems to have been stopped right at the trend line. The middle portion of the chart is a moving average convergence divergence (MACD). This indicator has shown for several sessions that stocks are at overbought levels. It finally rolled over and is forecasting additional downward action.

The bottom portion of the chart is a relative strength index (RSI). It has also been hovering slightly above 50–the level that indicates the market has enough momentum to advance. But it appears on the verge of falling below that mark.

Seasonally the end of spring is a time of weakness for the markets and at this time in 2008 the chart pattern was very similar. The MACD did not quite reach the current oversold level but stocks experienced one of their better periods for the year with a rally in March and April followed by a sharp drop in May and June.

Of course there is no guarantee that this situation will turn out the same. But market risk remains high and those who jump in at these levels are taking unnecessary chances.
F.S.

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