Black and White Brothers Week...

Markets closed sideways today (Friday) again amidst all the chaos created by the quadruple witching, consumer confidence numbers dropping to 6 months low and CPI rising 0.2%. All these numbers continue to tell one tale... that the Fed will not be cutting rates anytime soon. In fact, some analysts are saying that fundamentals do not matter anymore but what the Feds are likely to do. Even though I would agree to that for the short term, fundamental economy strength still matters in the long run.

Some readers may ask, "Obviously stocks were down today, why would you say the markets closed sideways?". Well, simply if the Dow closed within the range of the day before, it is essentially a sideways day as it has merely vibrated within where it did the day before.

Looking at the weekly charts, we see that the Dow and the Nasdaq composite is once again forming "Black and White Brothers" formation atop their respective 30MA. (Please read my post on 21 Dec 2006 for explanations... http://sharemarketcomments.blogspot.com/2006/12/daily-us-market-comments-21-dec-2006-by.html ) There is something different about the black and white brothers formation this time round... a typical strong B&W brothers formation is a closed candle followed by an open candle. This time round, it is an open candle followed by a closed candle. Such a formation is still bullish but it may form a down candle next before rebounding to new highs. This signal is further supported by the fact that the Dow has made a perfect double bottom setup since the dragon tail formation appeared 3 days ago. A double bottom setup, or what is commonly known as a "W" setup, has historically preceded many important rebounds.

The bears certainly look like it is going to sleep with a glitter of conciousness still remaining.


DJIA Technical Chart By Worden Brothers TC2007 Charting Software
Voted Best Software By Readers Of Stocks & Commodity Magazine Since 1993!

How Deep A Trouble Is The US Economy In?

2006 current account deficit has soared from $791.5 billion in 2005 to $856.7 billion. What does that mean to the commoner on the street? In an over-simplistic explanation, a trade deficit happens when a country imports more than it exports. This results in more money flowing out of the importing country into the exporting country. With less money in the economy but more products, everything cost more per product resulting in inflation. Inflation is a natural occurance in the growth of every economy but an uncontrolled inflation leads to hyper inflation and eventually depression as we have witnessed both in early China and some parts of Africa.

Trade deficit in the US is now a little like a drug addiction. Knowing that purchasing cheap, imported products and services hurts the economy but no one can resist the temptation of living on cheaper and cheaper products and services in a credit society. This forms a vicious cycle.

This problem is further compounded by the fact that on 10.4% of all investments to the USA in 2006 from abroad was in productive assets. The rest of the money has gone into US treasury, bonds and other such paper assets which in effect, makes the USA pay an interest to foreign countries for the corresponding amount of production resulting from these new debt.

The result of all these will be lower productivity and a shift of labour from high productivity industries to low productivity industries like the service and R&D sector. Consequently, wages might stagnant or even start to drop in order to cut costs and remain competitive. It has been estimated that the US economy is $1.5trillion smaller than 10 years ago and that worked out to be about $10,000 per worker.

There is no simple solution to this issue unless hard fist policies are made against many principles of free trade. Already the administration has started to increase import tax on China imports which will help flow some money back into the economy for every product imported and also help to reduce overall imports. I see the administration already taking small, diplomatic moves to repair the damage that has been accumulated over the decade and we will see how well these highly paid individuals do in these critical times.

(For today's market fundamental and technical analysis, please refer to the article below)