Equities Hanging in There
11/08/2005
Everyone is optimistic about a Q4 rally, and for good reason. According to Monday morning's Wall Street Journal article by E.S. Browning entitled, "A Year-End Rally? History Says Yes, But," the Dow Jones Industrial Average has suffered a fourth-quarter decline just once during the past 10 years in 1997.
On the other hand, according to the WSJ, "By the end of the third quarter, stock mutual funds as a group were holding just 3.8% of assets in cash, the lowest cash level in more than five years, according to the Investment Company Institute, a trade group. Since 2000, cash levels have averaged about 5%."
Who to believe? What to do? Well, if Q4 2005 is going to follow the bullish path of the past, then new money inflows will have to increase big time... for whatever reason, which is something we will have to keep an eye on. Otherwise, given the low level of mutual fund cash, where will the bullish fuel come from?
Technically, looking at the daily chart of the Dow, the DJIA shows remarkable relative strength despite its near vertical advance.
After resting on Thursday afternoon and on Friday, the DJIA popped to new recovery highs above 10,590 on Monday, nearing a confrontation with very significant resistance in the 10,610/20 area.
If that area is hurdled, it should trigger upside acceleration to test a series of "Summer Highs" between 10,720 and 10,770. If the Summer Highs are hurdled, then the Industrials will rocket to play catch-up with the Transports, which have established new all-time highs last week ahead of the DJIA.
At this juncture, only a break back below 10,470 will neutralize the increasingly bullish pattern.
Perhaps helping the equity prices consolidate at high levels and derive some staying power is the decline in crude oil prices. Crude oil made new reaction lows on Monday at $58.60, which happens to be BELOW the 200-day moving average ($58.94).
If crude prices sustain, then we should expect additional pressure into the $56 support area next, a positive scenario for equities.
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