The Chart du Jour
We do not know what mutual funds like Janus are doing in the current environment given how lopsided and concentrated their tech holdings are. Perhaps the current wild divergence between the DJIA and the NASDAQ is some such fund manager desperately trying to do a reallocation, and being front-run by a courteous investment bank.
What we do know is that on a standalone basis, the current DJIA rally should shortly peter out. 11,390 should more or less do it based on the current Fibonacci rhythm of the advance. With an inverted yield curve, a massive trade deficit, and yet a strong dollar -- this is not exactly a great environment for corporate America to thrive. Behind us are most of the gains from restructuring and downsizing. Behind us are a whole host of accounting games and debt-financed stock buybacks. There is not too much more the average business can pull out of the hat to obscure the reality that corporate profits are under pressure.
From an Elliott perspective, we think the DJIA should finish an A of a II wave shortly. We think the Nasdaq may be entering a wave 3 of I down. The combination is not likely to be pretty. As the Nasdaq heads to at least 3,500 and possibly the 2,900 region longer term, the CNBC pundits and Wall Street analysts may keep trying to put a positive spin on current developments, but we feel it will ultimetely fall on deaf ears. When bonds started dropping in February 1994, few analysts really believed in the move at first. The fixed income buy recommendations continued to spew forth, but prices just kept moving lower. We'd look for something similar in the current environment. After all it's the kid's college savings at stake for most families. If these savings appear in any real jeopardy we think all those so-called "long term" investors will simply pull the plug. The Dow will not be a good safe-haven savior.
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