|The talking heads appearing on financial news channels have been telling us that the economy is rebounding and there are better days ahead. To support their position they point out that earnings are showing steady improvement, declining unemployment numbers, evidence of increasing capital expenditures by companies and growing consumer confidence. Up until recently, the market appeared to support this view.|
However a number of worries remain. The Fed has yet to see enough evidence of a rebound to raise short-term interest rates. Fears of deflation persist at the highest echelons of financial policy making. We currently enjoy the lowest interest rates in nearly fifty years but every benefit has a cost. One factor rarely discussed except in a hushed whisper is the alarming record levels of total credit market debt (see Working Money article "Are You Trading on Borrowed Time?").
An unexpected jump in the 10-year bond rate last month had a chilling effect on everything from homebuilders and mortgage lenders to tool manufacturers. According to the Wall Street Journal, the Mortgage Bankers Association expects large mortgage originations to drop from $3.185 trillion this year to $1.536 trillion in 2004. That's a drop of more than 50%! With that sort of decline in mortgages, can a similar drop in home and large ticket item purchases be far behind?
Applications for home purchases dropped nearly 11% for the week ending August 15 from the week earlier confirming the tenuous relationship between rates and the economy. At an all-time record of more than 300% of Gross Domestic Product (GDP) and growing, debt has the potential to hold the economy hostage to interest rates.
|Figure 1 – Daily Standard & Poor’s Deposits-Receipts (SPY) chart showing trading channel between June and August 2003. The chart pattern being exhibited is either a reversal triple top chart pattern or a consolidation flag. We will only know for sure when one or the other is confirmed on a breakout.|
|Graphic provided by: TradeStation.|
|Market charts are showing the same degree of ambiguity. To the pessimist, the Standard & Poor's Deposits/Receipts (SPY), a proxy for the overall market is showing a definitive triple top reversal chart pattern in the making. |
But optimists, no doubt, instead see a horizontal bullish flag pattern. Both are correct but it is going to take a breakout to identify the winner.
According to John Murphy, flags are generally short-term and should be completed within one to three weeks but this rule is not ironclad. However, this pattern is now more than eight weeks old. The longer it lasts, the greater the likelihood of a triple top.
Both patterns exhibit declining volume followed by a volume spike on the breakout.
This pattern is made all the more interesting due to the time of year. Historically, the day following Labor Day has the largest daily average increase of any post season holiday. But annual cycle lows generally occur in October or November. What happens in the opening weeks of September will be watched with great interest.
Bears are waiting eagerly for the market to continue dropping accompanied by a volume spike as prices collapse through the triple top neckline at 96 on the SPY.
Bulls await a reversal in prices and significant break above the flag top line at 102 on high volume.
In the meantime, the market watches and waits. Happy Labor Day! Traders positioned on both sides of the tape, at least, are eagerly awaiting its passing if only to see volumes return to normal.
Blackman, Matt , "Are You Trading On Borrowed Time?" Working Money, August 12
Schulte, Erin , "As Rates Rise, Building Stocks At Risk If Economic Pace Lags," Wall Street Journal, August 23
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