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REALITY CHECK UPDATE
Published Every Tuesday and Friday

ARCHIVE:    APRIL-JANUARY 2001  

Contributed by Mitch Harris
President: Market Trend Realities,
Editor: The Reality Check Newsletter

February 2, 2001

STOCKS
REALITY RATIO: +0.032
Last Signal: 01/12/01, TRADING SELL
Dow: 10,525.38 OTC: 2626.50 

The ratio and the short term moving average turned down through the longer term moving average last week, confirming the 1/12/01 sell signal, after the ratio only reached its recent high at +.161. This is the second downturn after failing to move above a neutral reading, something we consider a bear market phenomena. The downturn should be a good signal that the next leg of decline has begun. 
TUESDAY, January 30, 2001: As stated on Tuesday, the higher January close above December’s of 10,788.75 on the Dow and 1320.50 on the S&P 500 is a bullish factor based the "January Barometer", which states that, "as January goes, so goes the market for the year". The Dow ended the month at 10,887.36 and the S&P closed at 1366.01. The Barometer has had a 100% perfect record in "odd" years since 1937!! This is quite the impressive record and cannot be taken lightly, especially in a year that began with the strongest commitment from the Fed since 1982, the last time they cut rates by a full 1% within just one month!! Does this mean we are turning bullish? Not a chance for the near term, although we do not need to have ANY opinion for the overall year in order to do well or to feel good about what our work suggests in the coming months. 

The FOMC met, discussed the continued economic implosion, and concluded with another sharp 1/ 2% rate cut off the Fed Funds and Discount rates. This time, their moves came without surprise to investors who had fully expected this, and perhaps even a 3/ 4% shaving. This came after another broadly disappointing announcement from the Conference Board, who announced that Consumer Confidence plunged again, to 114.4 from 128.3 in December, to a four year low. Then, Q4 GDP was reported ahead of the Fed, at just a +1.4% gain, the slowest growth since Q2, ‘95, giving them even more justification for their alarm. This has "ended the hope for a ‘soft landing’", according to the headline writers of Investor’s Business Daily and others. It appears that the Fed has re-opened the spigot full blast, but the impact should not be expected to show signs of helping too much for at least the next few months. Some say it takes six months, but we disagree because of the already surging new home sales and mortgage re-financing activity. Many are beginning to question whether lowering interest rates will work, sighting its failure to re-stimulate the boon enjoyed in Japan through the 1980s. We’ll discuss this in greater detail in the upcoming February Reality Check Issue.
Along with this well expected news, the markets continued pushing generally higher, but along the way, earnings disappointments and warnings also continued. 

The rally has managed to ignore this in favor of the Fed, but on slowing momentum, lower volume on strong days, and generally unimpressive breadth. The A/D Line has been above its 10 day moving average for 38 days with just one day where it turned negative by our count. We’ve seen closing "tick" sell signals in 3 out of the last 4 trading days, warning of peaking optimism, as investor’s rush to the buy side into the close to beat the next day’s "assumed" higher open. This optimism is also very visible in Investors Intelligence’s (914-632-0422) Advisors Sentiment Survey, which now shows 61% bulls. This is back to the highest level 61.6% that was reached on 6/4/99, according to I.I. We also note that daily Stochastics are very overbought and some of our daily momentum indicators are NOT confirming the recent gains on the Dow, for bearish divergences. We also see the recent gains helped along by the month end related position squaring, more commonly called "window dressing". This should end as soon as today. Overall, our indicators are bullish, but many have become too overbought which makes them very vulnerable to the next downturn. A strong close into the week end, with a strong opening on Monday could set the stage for a downside reversal next week and many buying climaxes along with it. 

The Dow continues to be tracing out what appears to be a double zig zag corrective rally since its 10,470 low of 1/12/01. Next resistance is at the key 11,028 high from the Fed’s 1/ 4 rate cut. We remain bearish against this level and see its penetration as unlikely, although it is quickly being approached once again. Initial support begins near 10,840 with more near 10,700, 10,620 and 10,470-500. A break of this level would now give strong evidence that the elusive wave 3 of (3) decline has started. Lower support remains near 10340-280, and then its down to the 9654, October low! In the event that the Dow pushes through the 11,019 - 28 barrier, higher resistance remains near 11,120, 11,250 and 11,400-25. A close above 11,450 would indicate a more complex bear market rally had developed.

TREASURIES

Treasury yields abruptly turned higher on the Fed, as if their actions or the ongoing economic downgrade is coming as a surprise. Perhaps what is surprising is the rate of descent being endured, but even so, the expectation of a slower economy than consensus should really not be a surprise after such an extended period of expansion. Indeed, this morning’s January Employment report shows unemployment rose from 4% to 4.2% in January, supporting the view that the economy is slipping. The only thing that the bond market’s bullish reversal can be discounting for now is that the economy is even WORSE than has been thought, as money finds its way back to the relative safety they offer. 

We had expected a bounce to develop but it has come VERY quickly from the 5.687% yield high reached on Monday, already plunging back to close at 5.45% yesterday. This took a tremendous rally over the past few days, and makes it unclear whether it is a typical retracement within the new uptrend for yields, or a continuation of the rally. The only way the ladder can be confirmed will be with its continuation "below" the recent 5.35% low. The Fed’s easing is, as expected, coming at the expense of the US Dollar’s strength, providing more evidence that the new administration is willing to make this the sacrificial lamb over the effort to re-stimulate the economy. This can at some point backfire as foreign investor’s increasingly move their assets out of the US in fear of an even weaker dollar, as well as away from the support they’ve provided for our monthly record Merchandise Trade Deficit. A rush to issue new corporate bond debt is another sign that corporate Treasurers are acting quickly to lock in the low rates for their companies while they can. This has historically been a sign that the market is relatively close to its low. 

Our work continues to suggest that primary degree wave (2) of the longer term bear market rally has ended or will very soon, again, against resistance from the last low at 5.35%. The Fed’s work to re-stimulate the economy risks igniting higher inflation, a lower dollar, and again, the withdrawal of foreign funds from our markets. A repatriation of foreign capital has the potential to become an overwhelming challenge for the US and the new Bush Administration. In itself, this is perhaps Greenspan’s biggest concern, especially as they lower the interest rate bar. Our dependence on foreign capital is America’s "Achilles Heal" in our view. Support begins at the most recent 5.689% high that was reached on Monday, and then at 5.725%. Higher levels remain the same, at 5.85%, 5.925%.& 6.00-6.05%. lower resistance is at the key, 1/2/01, 5.35% low, 5.25%, near 5.13% (78.6% Fibonnacci retracement of 9/98, 4.69% low to 1/00, 6.75% high) and then 5.00%. Again, we remain BEARISH! 

GOLD

Gold & the XAU are also attempting to respond to the Fed’s latest action, as it pressures the dollar and lowers the cost to buy gold on margin lower, a bullish factor for the futures traders. While neither have quite advanced enough to confirm that a new bullish move has started, yesterday brought our cash gold P&F chart very close. A bullish "Low Pole" (LP) would be reached on our (1X3) P&F chart if it can reach 270 (basis Republic/HSBC cash gold). If reached, it would project an initial move to at least the vicinity of $284, which is also close to resistance from the downtrend line drawn from the 1/00, $315 high. This potential would be negated with a decline back below the recent $263 January low. Longer term, a close above $276 would confirm a longer lasting bottom. With the I.I., Precious Metals Bullish Percentage indicator recently moving to "bull confirmed" status, the ingredients remain in place for a dynamic price rise. A rally above the 55-6 level of resistance (on the XAU) would confirm that the short term trend has turned bullish. Higher resistance is at 59, 64, and 69. 
 

PORTFOLIO CHANGES

Friday, February 2, 2001: We plan to add Pennzoil (PZL) to our Income Portfolio on a dip below 11.75, perhaps as soon as today. The stock has been basing well and offers a yield of better than 6.25% for good total return potential. It also has a VERY low price/sales ratio and had 3 moderate insider purchases in the last 6 months. [Part of our offensive is to have a good defense! That means limiting losses and protecting gains]!
Article contributed by Mitch Harris: President, Market Trend Realities & Editor, The Reality Check Newsletter, and reprinted here with permission. 

Market Trend Realities (MTR) is a Registered Investment Advisory which manages personal, corporate, Trust, and retirement accounts on a fee only basis. Several low cost, flexible management fee arrangements are available. Investment Advisor, Mitch Harris has studied the Point & Figure Charting Method under the direct supervision of Michael Burke, Editor of the prestigious Investors Intelligence research organization. Management is based on a unique combination of technical analysis methods and tools which include, The Point & Figure charting method, Elliott Wave Analysis & techniques, industry group analysis, cycle analysis, Relative Strength Analysis, Stochastics, and investor sentiment studies. MTR offers a very uniquely structured managed mutual fund program using the RYDEX family of mutual funds, which offer outperformance potential whether equity markets are rising OR falling! Inquiries are welcome by calling us at
(513) 421-8737,  Fax: (513) 421-8733 ,  or by email at: mtr@fuse.net

MTR also publishes a monthly investment newsletter called "Reality Check", which offers technical commentary on the stock & bond markets, the Dollar Index, gold & gold stocks (XAU), Treasury yields, utilities, investor sentiment, and Federal Reserve policy. It also offers stock trading recommendations each month with price targets, stop loss points and insider activity. There are 4 trading portfolios, including a short selling account (we are very proud that our short sale recommendations have averaged 12.5% "compounded" during the roaring bull market of the last 5 years). Short term market commentaries are updated on Tuesday and Friday mornings, along with portfolio changes on this web page. They are also emailed for free to anyone who provides us with their email address. The regular subscription rate is $200 (US) per year. Samples are available upon request. MTR will be happy to send information on any of the above mentioned services. Please email us your home or business address along with your daytime phone number and specify your interest(s). 

 
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Last modified: April 01, 2001

Published By Tulips and Bears LLC