The Return of Volatility

Interesting developments have occurred in the leading global stock market indices since we made our last market comments.

In Japan the Nikkei index has been wildly volatile in the past few weeks, and keeps threatening to break below its key support level of 15000. As of this writing, the Nikkei was hovering near 15350 and threatening to move lower. Robert Chapman, editor of the International Forecaster, called Japan's recent volatility a "dead cat bounce." Chapman sees the churning of the Nikkei between the 15300 and 16000 range as a sign of inherent weakness with no chance of a breakout to the upside. We tend to agree.

The ongoing trend of bank failures continues to seriously undermine the financial stability of this former economic powerhouse. When Japan finally falls below 15000 (and rest assured, this is imminent), the rest of Asia, and the entire global economy, will follow.

Meanwhile, in Hong Kong, the Hang Seng index continues on the losing side of the battle with the "Asian flu." This sore spot is leading Asia's economic woes at the moment and will—along with the Nikkei—serve as the catalyst in taking Asia and its trading partners to a new level of socio-economic misery. This index currently hovers near 8550.

On the domestic scene, the Dow Jones Industrial Average continues to surprise with its amazing fortitude and resilience to bearish pressure. We anticipated the fall of this index two weeks ago, yet it still hovers near its all-time high. Nevertheless, we are certain the Dow has registered its final top and is merely awaiting confirmation for its inevitable fall. Of special interest, Bob Prechter in the June Elliott Wave Theorist, pointed out that the Dow registered its all-time closing high of 9212 on May 13—a number that has tremendous significance in both the Fibonacci sequence and Biblical mathematics. This number, he explained, is equal to 962. Prechter also pointed out the May 4 all-time print high of 9261.91 is 213—also a significant Fibonacci ratio. He points out that the Dow often turns at squares and cubes.

Cycle theorist Eric Hadik, editor of the fascinating INSIIDE Track newsletter, predicted several months ago that May would be an extremely significant month for the world's stock markets and political arenas. He further predicted the Dow would register its final top during May, which to this point, has held. Hadik contends we are entering into a "19-month trial" period between May and January 2000. Was it then surprising that the month of May culminated with two countries unabashedly testing nuclear weapons in anticipation of a future showdown?

R.E. McMaster, editor of The Reaper, based on his cycle analysis, also agrees with Hadik that spring of 1998 holds special significance to global stock market indices and world affairs. He said it marks the beginning of what he calls a "violence and revolution cycle" that should rock the economies of the world over the next several months-to-years.

Returning to our analysis of the Dow, while our bearish scenario is still intact, it has been temporarily put on hold until it can find confirmation for its next near-term direction. The Dow has found strong support at 8800 and hasn't had a strong close below this level yet. Until it does, we remain near-term neutral. The Dow has recently been in a distribution phase and is reflecting the complete indecision of traders in deciding what the Dow's future holds. In Japanese candlestick parlance, the Dow has registered the equivalent of a "doji" formation, which in this case, would seem to portend a sharp break to the downside. Volume, breadth, and momentum indicators continue to show weakness, and until this changes, our bearish outlook should be maintained.

The NASDAQ also continues to show signs of weakness and may well be in the midst of its expected bear market fall. This index is approaching a major support level and if it fails to hold, the high-tech sector will be in for a rude awakening. The current U.S. economy depends almost exclusively on this sector - and any serious weakness manifest here will leave investors with little reason to continue to pump liquidity into the market. Finally, for an esoteric observation, we couldn't help but notice the correlation between the Bulls of Chicago and the bulls of Wall Street. The Chicago Bulls once again in the NBA playoffs, this time against the Utah Jazz, but are having difficulty maintaining their usual poise and perfection. They have struggled in each of their last few games in the playoffs, and seem ripe for the picking.

Since basketball is the quintessential bull market sport, and since the Bulls are the embodiment of the '90s bull market, is it any coincidence their successes and failures have precisely coincided with the successes and failures of the Dow throughout the '90s? When team leader Michael Jordan "retired" in 1994, the Dow took a temporary dive. When he returned, so did the Dow. When the Chicago Bulls blasted to their way to the NBA championships in '96 and '97, the Dow likewise blasted its way to new all-time highs. And now, with the Dow precariously close to sliding into a bear market, the Bulls of Chicago look tired and vulnerable and seem on the verge of ultimate defeat.

It will be extremely interesting to see how this drama folds out. As for us, however, we're placing our bets against both bulls.