TSX INDICES

The TSX Composite fell another 2.4 per cent this week. We now have an official sell signal on it. Nine of the 14 sub-indices have gone into sell mode or have been there for a while. Of the remaining five, only gold and energy remain either in up trends or within potentially bullish patterns. Materials to some extent are also in the same category but it is being held up by the gold sub-index, as the metals sub-index looks toppy and is closer to a sell signal.

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ETF’s

More get-out signals came from XIU, XIC and the QQQQ. XGD and XMA weakening but are a hold for the moment at least (although we have changed the classification to topping as the short-term trends have turned down). Only XSB and XBB remain buys.

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LONG PICKS (JUNIOR MINING STOCKS)

It was another lousy week for our remaining junior portfolio. We are going to do some cleaning up. BRX has been a major disappointment and continues in a downtrend. Enough already, particularly since it started printing new lows. JPN broke a support line. Let’s stand aside. ORA is threatening to break down and we have a nice profit so we will exit that one as well.

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The S&P 500 managed to eke out a gain this week, but not before putting in new lows for the most recent move down. Tuesday saw a huge up day, pumping up the bulls, but it was all for naught. We failed at the 200-day MA and then proceeded to fall once again. Last week we noted how we should fail in the range of 1,480 to 1,500; the high of the week was 1,492. The recent lows were around 1,440 and if that breaks again we are almost sure to test the August lows.

Indicators in many cases are oversold but we can remain oversold for some time. There is no sign here that we are making a low, so now is not the time to come in and buy dips. Strategy should be to sell rallies. Cycles are now pointed down into December. We expect to continue this downtrend until at least the second week of December before we might see the start of a possible year-end Santa Claus rally. We may or may not be at new lows by that time; new lows would not surprise us. Irrespective, we don’t believe it will last long but it could be dramatic.

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Technical Analysis 101 is Dow Theory. If one is to have any understanding of Technical Analysis one must understand Dow Theory. Dow Theory is the basic tenant. The Dow Jones Industrials and its predecessors have been around now for 123 years when the first Dow Jones market average was published on July 3, 1884. That average had 11 stocks of which 9 were railroad stocks. In 1897 the index was split into two an Industrial Index with 12 stocks and a Railway Index with 20 stocks. In 1928 the Dow Jones Industrials was expanded to 30 stocks and in 1929 a Utility Index was started. The old rail index is really today’s Transportation Index.

Dow never wrote the theory. Instead he made a number of journal publications in of course his newspaper the Wall Street Journal. In 1902 it was published into a book by S.A. Nelson called the ABC of Stock Speculation. Dow Theory was thus introduced. It took, however, until 1932 before a full book was written on appropriately called Dow Theory by Robert Rhea.

So what is Dow Theory? It has 6 basic tenants as follows:

1. The market has three trends – First an uptrend is defined as a series of higher highs and higher lows. A downtrend is defined as a series of lower highs and lower lows. Dow divided his trends into three distinct categories – the primary, the secondary and the minor. His main concern was the primary that often lasted more than a year and sometimes for several years. The intermediate trend lasted for months and sometimes longer while the minor trend was measured in days and weeks. When we base our models we base them off of the intermediate trend. If the primary trend can be thought of as one huge wave, the intermediate and minor trends are sub waves of the bigger wave.

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The write-offs just keep on coming. A table we saw from Agora Financial
(www.agorafinancial.com) showed the following in write-offs in the third and fourth quarters, in
billions of US$: Citigroup $11.3, Merrill Lynch $8.5, Morgan Stanley $4.7, Bank of America
$3.9, Barclays $2.7, Wachovia $2.5, Bear Stearns $2.0, J.P. Morgan Chase $1.7, Goldman Sachs
$1.6, Lehman Brothers $0.7.

We have also seen the following numbers from Canadian banks: CIBC $0.46, Royal Bank of
Canada $0.36, Bank of Nova Scotia $0.19 and Bank of Montreal $0.50. BMO’s losses followed
earlier ones (on natural gas futures) of some $0.6 billion. We still need to hear from Toronto
Dominion and National Bank of Canada.

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CREDIT CRUNCH RISING, DOLLAR CRASHING

The ugly part may be just beginning. Over the past week or two the announcements for write-offs have already become staggering. Merrill Lynch $8.5 billion, Citigroup (between $8 to $11 billion added to a $5.9 billion write down reported earlier) was just the most visible of the losses reported. Here in Canada CIBC wrote off $463 million and counting, while Royal Bank of Canada is purported to be writing off $600 million. Barclays Bank is prepared to write off
upwards of $21 billion. We could go on. Many have not reported, and even the ones that have will undoubtedly have more.

What is going on out there is truly staggering. The Federal Reserve, in an attempt to stem the growing crisis, has injected billions of dollars into the system to stop the bleeding but it has done little to stop the haemorrhaging. The potential for losses is truly unknown. And it is impacting the very financial institutions that are needed to provide the funds to the economy so that it may grow. Quite simply, without credit we die.

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For the first time in quite some time the S&P 500 has given us a significant sell signal. The breakdown this week under 1,480 we consider very dangerous. We also note some important developments on the weekly charts. The entire move from the March 2003 low now hangs in the balance. The trend line is at around 1,445; the August lows did take out that trendline with a low at 1,370 but it failed to hold. Another break now will be fatal. These long-term lines are very important. We must never break them if we are to maintain the trend of the market.

We saw what happened when the up trend line from the 1994 lows was broken. That triggered the 2000-02 collapse. It is also significant that that collapse broke the up trend line from the 1987 lows. The current market has been restrained on the upside by that same trend line. It took it out on occasion, but basically it could not maintain any sustained move through the line, and over the past few years we have traded continually on either side of the line.

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The TSX Composite fell 3.5 per cent this past week as most sub-indices were down on the week. The only exception was gold, which managed to eke out a small gain and maintain its up trend. Energy stocks fell, which was a bit of a surprise, although gas prices fell from their recent highs and oil closed off its highs. Elsewhere it is getting ugly, with fresh get-out signals coming from consumer discretionary, industrials and telecommunications. Health care and real estate are starting to look downright ugly. Financials look like they may well go into a free fall.

Officially neither the TSX Composite nor the TSX 60 has given a sell signal. As long as golds and energy hold up, it may not. But even the formerly good metals and mining chart is suggesting a topping pattern and materials of course would follow, but could be held back by gold stocks as long as they can remain up. But even gold stocks may be vulnerable to a correction, though not enough to send them into the kind of tank we are seeing elsewhere.

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Login to the members area for acccess to the weekend commentary featuring the following topics.

TABASCO FLOODING
JOBS, JOBS, JOBS!
TIME TO PROTECT YOURSELF: MUSINGS FROM JIM SINCLAIR
BUY THE BANKS – NOT!
PAKISTAN SUSPENDS ITS CONSTITUTION

You can also find the technical commentary and Chappy’s stock pics for November .