Last Signal: 01/12/01, TRADING SELL
Dow: 10,525.38 OTC: 2626.50
The ratio turned down from neutral, by just enough to move through the shorter term moving average for a trading sell signal. What makes this more difficult to interpret than usual is that the ratio line itself hasn’t been able to move above +.20, a neutral level since early last August. This by no means suggests that it can’t turn higher to push above this level, but has turned down for the second time now after moving from relatively oversold to neutral. In a sustained bear market, this is typical of many indicators, as they behave opposite of the way they act during a bull market. During the bull market, indicators typically get overbought quickly and stay that way for a while before turning down quickly and moving back up. In a bear market, we anticipate the opposite behavior, where they get oversold and stay that way before turning up "briefly" to relieve the oversold condition. Perhaps downturns after reaching neutral is all that can be expected of the rallies, at least until higher levels can be achieved. We are prepared to live with whipsaws in the near term, as our theory can easily be tested.
TUESDAY, January 16, 2001: The earnings warnings and downgrades continue, with Hewlett Packard, Gateway, Cisco, AMD, Intel, Texas Instruments, Analog Devices, Rambus, Doubleclick, Nokia, Delta Airlines, and Outback Steakhouses just a few of the latest causalities. Corporate earnings estimates have plunged from 16% to just 4%, according to 1st Call, and we suspect that they will go into the red before they rebound! There may be no recession according to "official government figures" (an oxymoron in itself), but you won’t know it by how consumers and investors feel!
The problems stated on Friday won’t disappear for some time to come. Corporate earnings shortfalls continue, as does the contraction in credit worthiness on a grand scale, an economy that is no longer well enough to be easily re-stimulated, and investor sentiment that has never yet soured on the market’s prospects. These are not yet the conditions we would expect to see near the economy’s or market’s ultimate bottoms. What’s missing? In a word:
DESPAIR!!
The NASDAQ has been holding its own relative to the Dow in recent days, but it still does not appear to have completed its short term decline yet, in Elliott Wave terms. While it may continue to outperform the S&P and Dow in relative terms, it should follow their lead, which we think is turning down again now. To negate our immediately bearish view, the Dow will need to CLOSE above its 1/4/01, 11,028 high. The S&P would need to close above its 1/4, 1350.24 high. This is our short term line in the sand.
Our Elliott Wave interpretation suggests that the 11,019 - 28 high completed the wave (2) corrective rally that began from the 10/19, 9654 low. Prices continue to lose the fight to hold above our sighted initial support near 10,600, after dropping to an intraday low of 10472 on Wednesday and a low of 10,468 on Friday before closing at 10,525. We are therefore lowering initial support to this newly established 10,470 level, and initial resistance at 10,640, the level that has contained bounces since last Wednesday. Prices are closing in on the more critical 10,330-292 support level, which, if violated would confirm that primary degree wave (3) is underway. This would ultimately take prices below their December lows! 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 rally was developing, and with the now higher Transports, a new Dow Theory BUY signal.
TREASURIES
Treasury yields got hammered in the past two days, with the yield quickly moving back above 5.60%, confirming a short term top on our "short term P&F yield chart. A move to 5.65% would also be a High Pole Top (HPT) on our longer term P&F Chart, and provide more evidence that higher rates were on their way. Of course, this will defy the conventional thinking that the Fed’s new directive toward lower "short term" rates should be good for long term bonds, but we think that has already been factored into the yield. After all, it had moved from a high of 6.75% last January to a 5.35% low on 1/2/01, the first trading day of the year, and this was during the Fed’s "tight" money policy.
Perhaps some of the recent losses were related to the flight to safety money finding its way back into equities. If so, further losses in equities would likely draw these fickle dollars back, helping Treasuries to stabilize to consolidate their recent losses. We also see great potential for trouble looming among the masses of foreign money holding US Treasuries, as foreigners become less confident in holding dollar denominated assets with our crumbing economy, markets and our new, unproven political leadership.
Our work continues to suggest that the next big move for bond yields from the recent 5.35% low has started, and that this may well have been the end of the countertrend, wave (2) bear market rally that began from last January’s 6.75% high. If correct, we anticipate that what would be considered by many to be a modest "correction" will develop into much higher yields than thought.
Sentiment among futures traders remains very high, reflecting what we consider to be close to universal optimism. This implies that whoever wanted bonds already has them, making the bulls dependent on "others" if prices are to continue to rise (and yields are to continue to fall). The Fed’s concern for 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 Bush Administration and our markets this year. We still regard the risk as too great to justify the potential returns that bonds currently offer, especially as we see some disturbing bearish divergences that indicate a sudden loss of momentum. Initial resistance is up to 5.475%, then near the 1/2/01, 5.35% low, 5.25%, and then 5.00%. The yield is closing in on next support at 5.65%, then 5.725%, 5.85%, and 5.925%. We are now BEARISH!
GOLD
Gold & the XAU have yet to shake off even the most recent round of selling, but interestingly, the daily chart for silver shows a rare "island reversal" by opening lower one day last week before opening higher for the day on Friday, leaving "gap’s" on both sides of last weeks price lows. Perhaps this will lead gold higher, but its at least a good sign for part of our heavy exposure to the metals. There is little else to add here, so we’ll leave up the still applicable recent comments.
We think that if we remain correct on the US Dollar, that eventually, gold and gold stocks will reap great benefits that will reverse the pressure that was endured by the dollar’s strength of recent years. It has been better than two years since the last significant rally began, and while another push lower has developed (as we thought it might), we remain confident that better times lie ahead in 2001. This area remains very under owned, and the contempt is so great that their potential cannot be ignored. This least exploited of any asset class is just as likely to become exploited as was the case before prices soared from depressed levels in energy, utilities, and lately the Transports. In recent years, investors have latched on to a theme, driving it to great extremes before giving up on it. We see no reason why gold should not have its turn as the crowd searches for and creates the next investment boom.
We think that one last decline may be emerging to complete the entire decline AT LEAST from the 9/99, 92.72 high. If so, lower prices should be relatively short lived and lead to the best gold rally in years. Initial support was raised slightly to 47 from 45, with the 41.64 low now key, and lower support between 40 - 37, should the low fail to hold. A push to 54 on our(2 X 3) P&F chart has come close, but is still needed for a longer term "Low Pole" (LP) buy alert. Should this occur, it would indicate that more immediate upside potential exists. A rally above the 55-6 level of resistance would confirm that the short term trend has turned bullish. Higher resistance is at 59, then at 64, and 69.
PORTFOLIO CHANGES
Tuesday, January 9, 2001: --NONE TODAY -- [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
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