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Are Market Challenges Rising?

10/11/11 08:40:18 AM
by Matt Blackman

This market has been a little tougher than usual to trade. Bulls are claiming the bottom has been put in, while bears say there is worse to come. Based on these next indicators, the bears have probability on their side.

Security:   SPX, EEM, BID
Position:   N/A

In my last Advantage article, "Is This What A Capitulation Bottom Feels Like?" we looked at a pattern that looked like a promising sign that the bottom may be at hand. But since then, there have been some growing headwinds.

FIGURE 1: S&P 500 VS. BID VS. EEM. Since early July, the S&P 500 has been the strongest of any of the other proxies -- the iShares Emerging Market ETF (EEM), the Dow Jones Transports Index (DJ-20), and Sotheby’s Auction House (BID).
Graphic provided by:
The Standard & Poor's 500 has pretty much held its own since the early August low and the bulls are saying that the big drop on October 3 was a fake down. But the same cannot be said about emerging markets, transports, and another good market proxy, Sotheby's (BID), which have continued to put in lower lows. See Figure 1.

Since January 2000, the major indexes of industrialized nations around the world have performed abysmally. The DAX is off 16%, the FTSE and S&P 500 100 are down 20% and 21%, respectively, the CAC 40 has lost 48%, and the Nikkei 225 is off 55%, according to Figure 2. But the same can't be said about the two indexes -- the Shanghai Composite and the BSE Index -- which have been the only real performers, and in the process have helped prevent developed economies and markets from falling further.

But this updraft looks to have come to an end if the iShares Emerging Markets Exchange Traded Fund EEM is any indication. Ditto for transports, which usually lead in a recovery. Sotheby's (BID), which has been an accurate bubble proxy, also continues to head lower, which is also bearish.

Graphic provided by:
If US markets are to enjoy any sort of sustainable recovery, they will continue to need help from emerging countries. Transports will give us an early heads-up that this trend has begun. However, current weakness in these leading indicators spells more trouble ahead.

Matt Blackman

Matt Blackman is a full-time technical and financial writer and trader. He produces corporate and financial newsletters, and assists clients in getting published in the mainstream media. He is the host of Matt has earned the Chartered Market Technician (CMT) designation. Find out what stocks and futures Matt is watching on Twitter at

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