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Global Markets Continue Fall; U.S. Showing Signs of Weakness

May 19, 1998

We commented last week on the renewed turmoil in Asian markets, and that turmoil shows no sign of abating anytime soon. Markets across the board in Pacific Rim countries were down last week, accompanied by the continued slide in Indonesia's rupiah, which fell from last Wednesday's (May 14) currency value of 11450 to 11050 per U.S. dollar.

We also made commentary on the rioting and violence that have racked Indonesia in recent weeks, and the problems continue to exacerbate. Today (May 15), riots in the Indonesia capital of Jakarta made front page headlines of nearly every U.S. newspaper. We see this as a harbinger of what will soon suffuse throughout greater Asia as one stock market and currency after another topples in domino fashion. The most conclusive blow, of course, will be dealt by Japan's Nikkei when it inevitably breaks below 15,000. For now, though, Indonesia has taken center stage in the way of socio-economic woes.

Following closely on the heels of Indonesia is South Korea, which faces a serious risk of repeating its economic decline of last year. South Korea's composite stock exchange index continues its fall of last summer after a three-month rally leading into March. The South Korean market has now met its low of December and shows every indication of breaking those lows in continuation of its bearish decline. It is expected that the impact of the country's $58.35 billion International Monetary Fund-led bailout in December will severely weaken the country's banks and force the government to inject significant amounts of liquidity into the financial system to prevent further collapse. A research director at a major securities firm in Seoul predicts that Korea will have to nationalize its banking system to forestall total collapse.

In the grand scheme of things, Asian markets have merely enjoyed a four month bear market "correction," which gave the appearance to the unsophisticated observer of a market recovery and bullish comeback. Asia is now experiencing a recrudescence of the "contagion" which caused their ills last year. It now appears that the
"Asian contagion" will indeed spread to other parts of the globe.

Which leads us to our analysis of the U.S. stock market. Our summation of last week still stands. Breadth in the Dow Jones and NYSE indices continues to deteriorate and has been negative now for the better part of May. Volume is also beginning to slacken. These are basic but very significant signs of a slowdown in the market, and generally portend a bearish reversal in the near future.

Already, signs of that reversal are evident. The tech-laden NASDAQ market index has fallen off considerably in the past few days. Leading tech stocks have suffered price declines, and today alone (May 15), several leading computer company stocks experienced steep drops in share price. Since it is the high-tech sector that is keeping the U.S. economy rolling along, we believe a bear market and subsequent economic turndown will begin here. This sector is showing preliminary signs of a downturn. Ultra-cheap Asian imports coming into the U.S. (due to their glutted technology sector and economic crisis), will only serve to exacerbate this trend.

We will now assert with authority that the Dow Jones Transportation index has indeed topped out and is in the early stages of its bearish decline. As stated previously, the Transports topped out in late April and are now trading in a clearly delineated downward trend channel. Near-term support is at 3400, which it continues to flirt with, and the next closest support is at 3200. Look for the Transports to break below 3400 by next week.

The Dow Jones Utilities have also topped, culminating with a "head-and-shoulders" top formation between the months of March and April. The "neckline" was broken in April and the bearish trend is becoming established. The Utilities are generally regarded as a leading indicator, and typically precede the DJ Industrials by a few months. Both the Transports and the Utilities are sending a strong bearish signal for the Industrials, and in turn, the entire U.S. equities market.

"Asian contagion" will
indeed spread to other
parts of the globe.

And finally, we will go out on a limb for our near-term forecast of the DJ Industrial index. It may be a moot point by the time you read this analysis, but we tend to favor a bearish scenario. There are two ways of interpreting the DJIA's most recent technical formation. The Industrials broke out of a three month "contracting triangle" formation to zoom nearly 1,500 points in a three month period. The market lost momentum in late April and suffered a minor decline earlier this month before bouncing back and again declining. This period of consolidation portends one of two things. The bullish scenario sees this formation as another (but smaller) contracting triangle, which, upon culmination, would lead to another dramatic rise to approximately DOW 9400. The bearish interpretation sees this as an ascending triangle which would lead, upon culmination, to a sharp decline in the average, kicking off a bear market. As previously stated, we favor the latter interpretation and believe we are even now witnessing the early stages of what should transpire into a precipitous decline.

To further bolster our conviction, we note that this relatively bearish market of the past two weeks was kicked off by what is known in Japanese candlestick analysis as a "three black crows" formation, usually a very bearish indicator. Of course, if we are wrong with this assessment, we will certainly be eating a lot of crow in the near future.

Clif Droke is the editor of the three times weekly Momentum Strategies Report newsletter, published since 1997, which covers U.S. equity markets and various stock sectors, natural resources, money supply and bank credit trends, the dollar and the U.S. economy.  The forecasts are made using a unique proprietary blend of analytical methods involving cycles, internal momentum and moving average systems, as well as investor sentiment.  He is also the author of numerous books, including “2014: America’s Date With Destiny.” You can view all of Clif's books here. For more information visit www.clifdroke.com.


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