Markets due for correction

If the US Dow Jones Industrial Average and Australia's All Ordinaries Indices are any guide the market is due for a correction based on technicals.

Looking at the chart above we can see that the Dow is just off its previous highs, and seems somewhat reluctant to advance. The ASX below has already reached its previous all-time high, but it too seems to be marking time, as it waits for direction from the US market.

Based on these charts today was a good day to sell down your stocks until the market sets its direction. Of course such charts only provide an average guide of market direction, and one can expect the gold sector to respond better, although it will not be completely protected from any fall.

Another sell opportunity

The US market was up 113 points on Friday on news that the US government would provide support for loan defaulters with a good credit history. I think such support misses the point because:
1. Interest rates will rise further - squeezing even more households
2. Not all sellers will be defaulters - but investors
3. We are looking at a recession - which means job losses
4. No matter what is negotiated, you can be assured the government is going to give defaulters just enough security to retain their homes, but thats not going to give them the confidence to keep spending.
5. There are still alot of 'no doc' loans which will be resetting at higher (+30%) interest rates over the next 18 months.

Thats all depressing news for the market and the domestic sector accounts for 60% of US consumption expenditure, so expect these factors to be a significant drag on business spending. The global economy remains strong...but for how much longer?

I still remain negative. The Dow was up 113 points on Friday, but that is a daily move inspired by Bush's mortagee support and Bernacke's 'dovish' comments about monetary policy. I still think the Fed is not going to raise rates. I think they want asset prices to cool to take inflationary pressures out of the market. Paradoxically that only happens if debt is liquidated - whether by default (in the housing sector) or higher interest rates parring back business loans or leveraged investments.

Technically the charts are telling us the same. The Dow went as high as 13,428 pts before it fell back to 13,357 points on Friday. Importantly, although it breached the previous high of 13,387 points, the market closed below this important resistance. Given that half of the gains were parred back, and the Dow closed below its resistance, I think we can expect the market to fall off big time on Tuesday (after a Monday Labor Day Holiday). So today and tomorrow are sell opportunities.

For this reason, I favour sitting on cash...at least until we get confirmation of market direction from the Fed and US government. I can't quantify the extent of the falls on Tuesday, but I suspect the Dow will fall be over 350 points. Basically I think the market will come to regard Bernacke's lack of disclosure as a 'market risk', even though he is actually trying to give the market some hope of a cut. This supports his desire for a 'smooth ride' but I think the markets will gradually anticipate his position.

I will offer some stock selections after the market confirms a trend or as soon as I take a position.