Market Showing Signs of Deterioration Comstock Partners, Inc. Thursday, April 13, 2006
As we move deeper into the second quarter the stock market is showing definitive signs of deterioration. Since early December stocks have been moving up in fits and starts, with the S&P 500 rising only about 1% in the last four months. Each successive new high in the index has barely exceeded the old high before selling off again. Furthermore, for some time now the number of new daily highs on the NYSE has been diminishing with each new high in the averages. The ten-day average of new daily highs reached about 480 January 2004, 320 in November 2004, 290 in July 2005, 260 in early February 2006, and only 200 on last week’s highs.
Not only has daily transaction volume has tended to increase on down days and decrease on up days, but the market has tended to open strongly in the morning and then sell off during the rest of the day. In fact the two most recent multi-year highs in the S&P 500 were made soon after the opening on days where the index finished far below the prior day’s close. As if this weren’t enough the DJ Utilities average topped out six months ago on October 4, and is now 13% below that level today. All of this is typical of a market in the process of making a cyclical high prior to turning down.
The weakening technical situation is a reflection of the declining fundamentals typically seen prior to bear markets and recessions. The ten-year bond rate has now crossed over 5% for the first time since mid-2002, and the Fed has probably not finished hiking short-term rates. Oil prices remain high while gasoline prices are headed higher for the important summer driving season. Housing is weakening as is indicated by declining sales, soaring inventories, substantially lower levels of affordability and a drop in plans to buy homes. These are the forward-looking indicators that investors must watch. The coincident or lagging indicators such as GDP, industrial production, consumer spending and unemployment are still stable, but will not show weakness until it is far too late for investors to act. The last three market corrections bottomed at 1245, 1253 and 1268 successively. We think a break blow 1268 may well be the warning sign that the cyclical bull cycle is over and that the secular bear market has resumed.
Market Data 
Markets 
AI
