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How a Canary Can Protect Your Portfolio

By Jeff Clark
Thursday, December 14, 2006

If the bird dies, you have to get out of the shaft. That’s what they tell everyone.
 
Though low-tech, one of coal mining’s earliest warning systems for the presence of methane gas – the canary – was extremely effective and rather easy to read.
 
When it comes to warning of a stock-market correction, the shares of Merrill Lynch (MER) play the role of the canary. And, right now, the canary is coughing.
 
I’ve written about this before, and I know I run the risk of being labeled a “perma-bear.” But the action in MER is so amazingly similar to what happened just before the S&P 500 dropped 8% in May, I owe it to you to repeat myself.
 
Take a look at this chart...
 
 
Back in April, MER broke to the downside of a “bearish rising-wedge” pattern. It then rallied back up to retest the breakdown level – and dropped 18% as the market gave back all the gains on the year.
 
Today, we have a similar situation. Two weeks ago, MER broke to the downside of a “bearish rising-wedge” pattern. It has since rallied back up to retest the breakdown level.
 
Guess what comes next?
 
Now, I know all about the Santa Claus rally. I know that the final two weeks of the year are strongly biased in favor of the bulls. I know that institutional money managers will try to goose the market higher in order to secure larger bonuses for themselves.
 
But the canary doesn’t know that.
 
All the canary knows is that there’s something in the air. And it’s just about time to get out of the shaft.
 
Best regards and good trading,
 
Jeff Clark




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Market Notes
Widespread list of stocks at new highs: Diageo (alcohol), Bayer (drugs), Chevron (oil), Akamai (networks), Syngenta (agriculture), Telstra (telecom), and Time Warner (entertainment).
 
Widespread list of European ETFs at new highs: Sweden, Germany, Italy, Belgium, Switzerland, Netherlands, Spain, France, and UK.
Market Watch
Symbol Price
Change
52-Wk
S&P 500 1221.53 +1.3% +10.1%
Oil 38.31 +1.4% -0.6%
Gold 138.07 +2.1% +16.3%
Silver 28.60 +2.4% +53.6%
US-Dollar 80.67 -0.8% +8.1%
Euro 1.32 +0.6% -12.1%
Volatility 18.01 -7.1% -19.8%
Gold Stocks 581.56 +3.0% +17.0%
10-Year Yield 3.02 +0.7% -10.7%

World ETFs
Symbol Price
Change
52-Wk
USA 122.89 +0.3% +11.3%
Canada 30.50 +0.2% +16.2%
Russia 21.94 +1.4% +18.1%
India 37.85 +0.3% +22.3%
Israel 16.69 +1.3% +10.8%
Japan 10.64 +0.6% +6.5%
Singapore 13.73 -1.1% +18.8%
Taiwan 14.78 +0.4% +19.2%
S. Korea 57.31 +1.3% +23.4%
S. Africa 71.87 +1.4% +28.2%
China 44.42 -1.4% -0.6%
Lat.America 53.17 +0.7% +8.4%

Sector ETFs
Symbol Price
Change
52-Wk
Oil Service 137.59 +1.0% +18.9%
Big Pharma 64.14 +0.0% -3.2%
Internet 72.07 -0.1% +23.4%
Semis 16.22 +1.2% +29.4%
Utilities 31.28 +0.2% +1.5%
Defense 18.52 +0.1% +10.6%
Nanotech 10.03 +0.4% +1.6%
Alt. Energy 10.08 +1.3% -3.3%
Water 18.49 +1.0% +14.5%
Insurance 16.14 +0.4% +21.1%
Biotech 20.54 -0.2% +28.1%
Retail 19.70 +0.3% +30.2%
Software 24.79 +0.8% +25.9%
Big Tech 53.87 +0.3% +22.7%
Construction 13.10 +0.9% +15.7%
Media 13.64 +0.5% +26.0%
Consumer Svcs 67.39 +0.2% +24.5%
Financials 55.04 +0.3% +7.4%
Health Care 64.30 +0.1% +2.0%
Industrials 63.54 +0.5% +21.0%
Basic Mat 74.35 +1.1% +25.3%
Real Estate 55.32 +0.1% +25.0%
Transportation 91.77 +0.7% +26.9%
Telecom 22.59 +0.5% +17.8%