Charts Charts Charts — What Are They Telling Us?

While technical analysis shouldn’t be the sole factor in determining investment decisions in my view, it does provide clues as to how healthy the bull/bear market is as well as developing stories which could potentially impact the investment climate in the future.  Here are some charts that I’ve been watching recently. (All –except one– charts courtesy of freestockcharts.com)

First let’s look at the bullish end.

1.  You can’t help but marvel at how strong the consumer discretionary sector has been, despite the tepid labor environment. Looking at this chart objectively signals to me that investors are confident that job creation will continue. This view was confirmed with today’s jobs report which showed the private sector producing the most jobs in almost 5 years. According to this chart, the consumer will keep strengthening thus keeping the recovery sustainable.

2. Next on the list are the Dow Jones industrial and Transportation Averages. In the past two weeks, both have broken through their prior bull market highs.  According to the “Dow theory” this supports the belief that the US economy remains on firm footing and that stock market returns will remain positive. Looking directly at the Dow Jones Transports, they have hit a new all-time high! In my view, this supports my longer-term thesis that the future of global growth will come from China and that the US manufacturing sector will greatly benefit in the years ahead.

(Dow Jones Transports Weekly View: Below)

3.   Finally, let’s take a look at the Russell 2000. Once again you can see here that the index has hit a new all-time high. Small caps have rocketed higher and supports the idea that the economy is healthier than many believe. Small caps are usually the most sensitive to economic cycles. If you look at  the months leading up to the Great Recession, you can see that small caps topped out in July-2007, roughtly 3 months before the main indexes topped.

Now for the Bearish:

1.  Let’s start with this interesting chart which shows the DJ US Business Training & Employment Agencies Index.  I figure if the job recovery is to accelerate in the months ahead, this index would certainly show it. Unfortunately the index topped out in January and has steadily declined since then. What this tells me is that while job gains may continue, a renewed surge in job creation doesn’t seem to be in the cards anytime soon. Note that the index topped out well in advance of the general indexes in mid 2007.  Also take a look at the plunge around April 2010 before it became evident that we were about to double-dip only to have Bernanke save the day at Jackson Hole.  This is a good index to track in my view.

2.  No one is really mentioning the action going on in the 10 year treasury market. Despite the impending completion of Quantitative Easing 2, yields have recently plunged and have substantially diverged from the equity indices. As I had forecast at the beginning of the year, treasuries have defied the odds and powered higher. I’m giving myself a pat on the back as I have been right and Bill Gross wrong. I jest!   But on a serious note,  treasury yields seem to have topped out and in the past, the bond market has been more right than equities.

3.  Finally, Copper’s chart is another big thorn on the bullish thesis. This chart clearly shows that the economic doctor isn’t agreeing with the recent bullishness of the main US indices. I could throw China’s Shanghai index in here as well. If you look at that index that shows that economic growth is increasingly coming into question. Usually, copper is a leading indicator for US equity indices. Is it different this time?

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