Technical Analysis by Walter Murphy

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There was a point in time when I mistakenly believed market reversals from the peak were caused by selling.  Although it may seem counter-intuitive, such events are actually caused by buyer exhaustion.  It is what Walter Murphy describes in this video as "everyone being in the pool".  Once the maximum number of buyers is reached, there is insufficient new money to keep stocks at lofty levels.  As the chart in the video shows, we are pretty close to such a point in time.

Murphy gives three reasons he thinks markets are overbought.  First, the uptrend is now in its six month.  Second, momentum indicators are "starting to show signs of deterioration."  Third, sentiment is "excessively optimistic."  He says the trend is up, but is also unsustainable.  Longer term he is still bullish, especially for oil and gold to go higher.

That does not mean the markets can't go higher from here.  It does mean the risk of going lower is greater than going much higher in the shorter term.

What are your expectations for the next few months?

Economic Update.

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The original economic forecast from Craig Alexander at TD Bank that I blogged about generated a bit of interest, so I thought when I saw him give an update on BNN that I would include it here. 

He says it is not a question whether Greece will default, but a question of when, and that sovereign debt is the number one issue for the global economic outlook, at the moment.  Second would be the political unrest in the middle east, if oil prices get too high.

In Canada, he sees a major correction in oil prices as being bad for Canada's economy.  Another potential issue would be reduced commodity demand from China.  Currently he sees the Canadian GDP slowing to 2 to 2 and one half percent in the second half of 2011.

Personally, I still think the U.S. has a long way to go before they will see any real, lasting, economic growth.  As long as that is the case, I think our economy will suffer since we are so closely tied to them.  The government stimulus has been very good for the stock markets, but it remains a major question as to how long they might be willing to throw good money after bad.