Last Signal: 3/24/00, SELL Dow: 11,112.72 OTC: 4963.68
The ratio slipped back ever so slightly again last week but not enough to go below the low of two weeks ago, making the rest of this week (5/8 - 5/12) a potential pivotal one. A move lower will imply continued weakness, while a move up would confirm a continued "short term" bounce. You’ll know a week from today, but that will also be on the day of the next FOMC meeting.
TUESDAY, May 9, 2000: The markets have remained split and divergent, with rally days continuing on diminishing volume and sell off days on higher volume. This continues to suggest that the greater interest is to sell into the rallies that develop. If there is anything to be impressed with, it is that there are many less popular stocks that seem to have stopped falling. These are among the "average" stocks that we and others have thoroughly discussed as being in bear markets since the A/D Line had topped in 4/98. Typically. These are much cheaper than the fully exploited popular stocks in terms of earnings and dividends. While not feeling too compelled at this time to be fully invested, these are what we would advise buying for those who must own stocks.
Friday’s rally on a suspiciously light, 801 million shares was followed by an even lighter volume, spit market yesterday, with the Dow up 25 and the OTC Composite down 147 points. NYSE volume was the lightest of the year, according to CNBC, and OTC volume was also non-committal with only 1.2 billion shares traded. We don’t know how the markets could sustain a rise without a dramatic pickup in cash inflows. Before this happens, I suspect another decline is likely to wash out the last of the sellers that precede a summer rally (still within the ongoing bear market). This may remain characterized by persistently low volume and relatively poor breadth (A/D Line). Again, we are looking for the emergence of new leadership from among many issues that the popular averages left behind. Short term resistance is at 10,940, 11,200 and 11,420. A decline below 10,200 should usher in selling to next support near 9730 - 50.
Mentioned on Friday, we thought the OTC Composite was "VERY near the completion of a 3 wave rally, indicating that the larger trend remains DOWN". Selling emerged yesterday right at our sighted initial resistance at 3980, the exact .618 Fibonnacci resistance of the minor wave "3" decline. A drop below support at 3695 would break initial support, with more at 3515 and 3350. We remain bearish the OTC Composite against this recent high at 3980.
TREASURIES
Treasury yields continued to lose ground with the yield pushing to its highest level since February, closing at 6.25% yesterday. The markets have renewed their fear of the what the Fed has in store at their May 16 FOMC meeting. We agree with the street that they will indeed tighten a more aggressive 50 basis points, and they will probably also raise the discount rate. It is too soon to know how much of this news is already reflected, but a good deal of it probably is. It is quite amazing how little the 5 rate hikes have done to slow the economy down over the past 11 months. If anything, there are more signs that the economy "accelerating" further versus slowing. This will not be tolerated, either by the Fed or by the markets, so the Fed will have to become even more vigilant. Next support is at the 6.32% and then 6.40%. Resistance begins at broken support near 6.20%, then at 6.10 - 6.075%, 6.00%, 5.85%, 5.72% and at the recent 5.65% low.
GOLD
The XAU & Gold are hopefully just giving back a portion of last weeks upside reversal, consolidating before resuming the rally that seemed to have begun. We think that the one material thing holding it back has been the relentless surge of the US Dollar. If you look at gold in literally any other currency, you will find that it is doing exactly what it is supposed to do, preserve value in the local currency. We expect this to happen in the US too, just as soon as the US Dollar begins to reverse lower, which should begin at ANY time now. Dollar sentiment reached a 97% bullish record extreme, while sentiment for gold is at just 20%, not too far from its record 15% low reached last August. If we are correct, a reversal in the dollar should be long lasting enough to support an equally long rally in gold, especially since gold is under owned by such an incredibly large margin in the US. It would only take about a 1% outflow from US equities to gold stocks to double their value. Imagine what this will mean when 5 or 6% of the outflow from stocks seeks gold as an alternative! With much of the central bank supply news already well publicized and discounted by the market, a little good news may also take prices a long way. We are bullish the XAU against support at the April 13, 54.24 low, with initial support at 57. Resistance is at Thursday’s 63.26 high. A move above 64 will turn the short term trend bullish and break out above the downtrend line that had defined the bearish trend since last September’s 92.72 high. Above that, resistance is at 69, 72 -3 and 81.
PORTFOLIO CHANGES
Tuesday, May
9, 2000: NONE
Article contributed by Mitch Harris: President, Market Trend Realities & Editor,
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