DAX in line

Germany’s DAX formed a narrow line (or consolidation) between 10200 and 10800 over the last quarter, in line with its earlier April/May highs. Declining Twiggs Money Flow is typical during a consolidation and does not have much significance unless it crosses below zero. Breakout above 10800 would signal a primary advance with a target of 11500*. Reversal below 10200, however, should not be ruled out before then.


* Target calculation: 10500 + ( 10500 – 9500 ) = 11500

Footsie dull rally

The Footsie (FTSE 100) found support at 6700 but short candlestick bodies and declining Twiggs Money Flow indicate a dull rally, without much enthusiasm from buyers. Breach of 6700 is likely and would warn of a correction to 6500.

FTSE 100

It’s a bull market

Dow Jones Industrial Average successfully tested the new support level at 18000 and has now broken resistance at 19000, confirming the target of 20000*. Rising Twiggs Money Flow indicates selling pressure has ended. Expect a brief retracement to test support at 19000 but respect is likely.

Dow Jones Industrial Average

* Target medium-term: 18000 + ( 18000 – 16000 ) = 20000

Charles Dow, founder of Dow Theory more than a century ago, always waited for confirmation from the Rail Average. Nowadays, railways have diminished in importance and we use the broader Transport Average which currently signals a primary up-trend after a lengthy “line” or narrow consolidation over the last 3 months.

Dow Jones Transport Average

It is also advisable to look for confirmation from the broader S&P 500 and the tech-heavy Nasdaq 100 index.

The S&P 500 broke resistance at 2200, signaling a primary advance with a target of 2300*. Rising Twiggs Money Flow again indicates that selling pressure has ended.

S&P 500 Index

* Target medium-term: 2200 + ( 2200 – 2100 ) = 2300

The Nasdaq 100 recently set an all-time high after breaking resistance at its March 2000 high of 4700. Retracement twice respected the new support level and follow-through above 4900 would confirm another primary advance.

Nasdaq 100

ASX 200 threatens a bear trap

The ASX 200 broke through short-term resistance, a bullish sign, and is testing long-term resistance at 5500. In terms of classic Dow Theory, the primary down-trend is intact until there is a breakout above 5500. Today’s small doji candle indicates hesitancy but bullish divergence on 21-day Twiggs Money Flow signals medium-term buying pressure. Breakout above 5500 would also complete a bear trap, where breach of support is quickly reversed and followed by breakout to a new high. This is a powerful bull signal and would offer a target of 5800* for the primary advance.

ASX 200

* Target medium-term: 5500 + ( 5500 – 5200 ) = 5800

Source: Trump To Offer Mattis, Romney, Mnuchin Cabinet Jobs | The Daily Caller

Donald Trump wants Gen. James Mattis to run the Department of Defense, Gov. Mitt Romney to run the State Department, and Steven Mnuchin to run the Treasury Department.

That’s according to a source with intimate knowledge of Trump’s thinking.

By Friday, Trump had narrowed down cabinet roles for Mattis to either Defense or State, but prefers Romney to take the latter job, the source tells The Daily Caller….

Source: Source: Trump To Offer Mattis, Romney, Mnuchin Cabinet Jobs | The Daily Caller

ASX 200 runs into a hammer

The ASX 200 is again running into resistance, signaled by a hammer after the recent rally. In terms of Dow Theory, the primary down-trend is intact but retracement that respects the former primary support level of 5200 would suggest a bear trap. Recovery above 5500 is still in doubt but would offer a bull signal.

ASX 200

ASX 300 Banks Index broke out above 8000 but this week’s short candlestick body warns of hesitancy. Expect retracement to test the new support level. Failure of support would warn of a bull trap. Respect of support is as likely, however, and would confirm a primary up-trend with a target of 8800*. Recovery of Twiggs Money Flow above zero is still tentative at this stage.

ASX 300 Banks

* Target medium-term: 8000 + ( 8000 – 7200 ) = 8800

Fedex surges

Bellwether transport stock Fedex surged to a new high this week, signaling an expected rise in economic activity in the US. A Twiggs Money Flow trough above zero also indicates strong buying pressure.


Dow Jones Industrial Average is testing resistance at 19000. The doji star indicates indecision rather than a reversal. Declining Twiggs Money Flow indicates long-term selling pressure but completion of a trough above zero would negate this. A fall below 18500 would warn of a correction. Follow-through above 19000 is less likely but would indicate a fresh advance.

Dow Jones Industrial Average

* Target medium-term: 18000 + ( 18500 – 17000 ) = 19500

The S&P 500 is testing resistance at 2200. The evening star pattern again indicates indecision rather than reversal. Breakout would complete a bullish inverted scallop pattern, which commenced in early July, signaling an advance to 2300. Declining Twiggs Money Flow remains bearish, favoring another retracement.

S&P 500 Index

* Target medium-term: 2100 + ( 2200 – 2000 ) = 2300

Shanghai rally runs out of steam

Shanghai Composite Index ran into resistance at 3200 after its recent breakout. Expect retracement to test the new support level at 3100. Respect would confirm the target of 3400* for the advance.

Shanghai Composite Index

* Target medium-term: 3100 + ( 3100 – 2800 ) = 3400

DAX hesitates

Germany’s DAX is consolidating below 10800 but Twiggs Money Flow still reflects selling pressure. Breakout above 10800 would signal a primary advance with a target of 11500* but another test of 10200 looks equally likely.


* Target calculation: 10500 + ( 10500 – 9500 ) = 11500

Footsie under selling pressure

The Footsie (FTSE 100) is testing support at 6700. Narrow candlestick bodies for the last two weeks signal indecision, while declining Twiggs Money Flow warns of medium-term selling pressure. Breach of 6700 would warn of a correction to 6500. Respect of support is less likely but would indicate another test of 7100.

FTSE 100

India: Sensex rally overwhelmed by selling pressure

Last week’s rally exhausted itself and India’s Sensex is again testing support at 26000. Decline of Money Flow below zero reflects selling pressure. Breach of 26000 is likely and would indicate a test of 25000. Support levels are fairly weak all the way down to 23000 because of the absence of strong corrections during the March to September 2016 advance.

Sensex Index

China: Choosing More Debt, More Unemployment, Or Transfers | Michael Pettis

From Michael Pettis:

I have often written in this blog and elsewhere about the three policy choices Beijing faces as it tries to manage through the adjustment process. My argument is that subject to two very plausible assumptions, every economic policy Beijing implements ultimately can be abstracted to one choice among three options. These two assumptions are:

  1. China has overinvested in infrastructure and manufacturing capacity to such an extent that in the aggregate the cost of additional public sector investment exceeds the present value of future increases in productivity generated by the investment. China’s public-sector investment, in other words, is value destroying, and because it is funded by debt, additional investment causes China’s real debt servicing costs to rise faster than its real debt servicing capacity.
  2. China’s long-term sustainable growth rate is substantially below the economy’s current GDP growth target, and so the economy is only able to meet the growth target by increasing its debt burden.

…..any policy Beijing chooses must involve, usually implicitly, some combination of three outcomes. In every case, in other words, we will see as a consequence of the policy one or more of the following:

  • Higher unemployment, the limit of which is largely a political issue involving social instability, with the added wrinkle that certain types of unemployment are likely to be perceived as more politically costly than others – e.g. because returning to family farms acts as a kind of safety valve, even though a significant fall in living standards, unemployment among migrant workers is likely to be less costly, or because university graduates are presumably more communicative and have higher expectations, their unemployment might be more costly.
  • Higher debt, by which I really mean a higher debt burden, or an increase in debt relative to debt-servicing capacity, and this can rise until credit growth can no longer be forced up to the point where it can be used to roll over existing debt with enough margin fully to fund as much new economic activity that Beijing targets.
  • Higher wealth transfers, in which governments – and because the Xi administration is seeking to centralize power this is most likely to involve local governments rather than central government entities – must liquidate assets and use the proceeds directly or indirectly either to increase household wealth or to pay down debt, with the main constraint on Beijing’s ability to direct this process likely to be the tremendous political opposition of the so-called “vested interests”, for whom government control of these assets is an important source of power, patronage, and wealth.

The trade-offs between a higher debt burden, higher unemployment and greater wealth transfers to the household sector may come into sharper relief in 2016 because although unemployment still seems to be fairly low, in spite of much lower growth in the past three years, there is now reason to worry that any additional reduction in growth may begin to show up in the unemployment numbers…..

Centrally-planned economies inevitably get weighed down by cronyism and inefficiencies. Economist Thomas Sowell describes how he used to be a Marxist but working for the federal government cured him of the notion that centralized government could successfully manage anything, let alone the entire economy.

Source: China: Choosing More Debt, More Unemployment, Or Transfers | Michael Pettis’ CHINA FINANCIAL MARKETS

Thinking Historically: A Guide for Strategy and Statecraft

From Francis J. Gavin, Frank Stanton Professor in Nuclear Security Policy Studies at MIT and author of Nuclear Statecraft: History and Strategy in America’s Atomic Age:

It is not always clear in real-time what matters most, though a historical sensibility can sensitize us to look for real-world consequences in unusual places. Will the recent U.S. presidential election seem like the key issue we faced 30 or 40 years from now, when perhaps some deeper, more fundamental shifts (the climate or demographics, for example) or a completely unexpected event shapes the realities of that future world? We don’t know, but it is worth considering.

Relatedly, history conditions decision-makers to understand that policy decisions made in world capitals are often far less important in shaping what matters in the world that other, often less visible historical forces. Culture, technology, demographics, and geography, for example — all are critical forces that are less pliable to policy than we often think.

My favorite examples are three events that took place within a very short period of time: the sale of the early Apple personal computer, the release of Star Wars — the highest grossing motion picture of all time, and the famous 1976 “judgment of Paris” in which previously unknown wines from Napa Valley bested established French wines in a blind taste test. In other words, policymakers in Washington in the mid-1970s who were pouring over economic data, looking at crime statistics and urban crisis, witnessing political chaos abroad, and fearing a Soviet military behemoth that appeared to be winning the arms race had little reason to be optimistic about the future.

But the future was being made elsewhere and in different ways than policymakers understood in places like California, where deep and often obscure historical forces were working to transform the U.S. economy, society, technological base, and culture in ways that would have profound effects on American power and world history.

A deep historical perspective should also allow the decision-maker to avoid outcome or retrospective bias, or fall into the trap of what I call “understanding the Third Balkan War.” As former National Security Advisor Sandy Berger pointed out: “History is written through a rear-view mirror but it unfolds through a foggy windshield.” If the past is to be of use to policymakers, it must be exploited in a way that avoids what economists call “the curse of knowledge,” or that cognitive bias that emerges that in hindsight, the outcome of a historical event was more predictable than was likely the case. Since we know how past events have turned out, we can easily assume that the causal path that led to the event was inevitable. But most complex and difficult policy choices involve what former Secretary of State Henry Kissinger has called “51/49” decisions: In other words, it is very difficult to know, a priori, whether a difficult policy choice will turn out correctly, even if in retrospect it seemed obvious. This is true for good policies as well as bad, which an immersion in history and an understanding of the past should tell us…..

Investors are in a way historians too. They study past events and extrapolate them into the future. They also suffer from the same challenge: the outcome of past events appears abundantly clear while the future is murky and obscure. Most investments are “51/49 Decisions”, hopefully with better probabilities, but still uncertain outcomes.

As with leaders of state, we face an uncertain future. Most important is often broad-based policy, or strategy, rather than specific actions. To use a farming analogy: investors need to till and feed the soil, creating fertile ground to sow seeds and wait for opportunities to grow. All the while exercising discipline to eliminate weeds and pests before they can spread and hurt your portfolio.

Source: Thinking Historically: A Guide for Strategy and Statecraft

I’m beginning to sound like Chauncey Gardiner, the slow-witted gardener played by Peter Sellers in the 1979 motion picture Being There (1979), who through a case of mistaken identity becomes a close advisor to the US president.

India: Sensex finds support

India’s Sensex corrected sharply but found support at 26000. Descending Money Flow still signals selling pressure but a trough at the zero line would reverse this. Recovery above 28200 would suggest another advance, confirmed if we see a breakout above 29000.

Sensex Index

China: Shanghai breakout

Shanghai Composite Index broke through resistance at 3100, signaling a primary up-trend. Rising Twiggs Money Flow confirms strong buying pressure. Target for the advance is 3400*.

Shanghai Composite Index

* Target medium-term: 3100 + ( 3100 – 2800 ) = 3400

Europe quietly strengthens

Dow Jones Euro Stoxx 50 remains trapped below resistance at 3100, ranging between 2900 and 3100 for most of the year. Rising Twiggs Money Flow indicates buying pressure, however, and breakout above 3100 would suggest the start of a primary up-trend.

Dow Jones Euro Stoxx 50

Equity Prices Falter in Advance of the Elections | Bob Doll

From Bob Doll at Nuveen:

….we think it is more likely than not that Hillary Clinton will be elected president. Regardless of voters’ opinions, Clinton’s policies would be more predictable than those of Donald Trump, and if there is one thing that financial markets like, it is predictability. If we are wrong in our forecast, and Donald Trump does win the election, we expect additional volatility and a likely sell-off in risk assets. In this case, we would maintain positions in equities and other risk assets until there is greater clarity about Trump’s policies.

Secondly, and more importantly, we expect markets will again focus on fundamentals after the election. And fundamentals point to an environment that should be conducive to better performance for risk assets….

The market seems to be betting on a Clinton win, judging from today’s rally, but this is still a close race.

Source: Weekly Investment Commentary from Bob Doll | Nuveen

ASX 200 about to fall

The ASX 200 is testing primary support at 5200. Decline of Twiggs Money Flow below zero, following a large bearish divergence, warns of strong long-term selling pressure. Breach of support would signal a primary down-trend with an immediate target of 4750.

ASX 200