Last Signal: 01/12/01, TRADING SELL
Dow: 10,525.38 OTC: 2626.50
The ratio inched higher but essentially remained flat last week, and remains on the tentative sell signal given last week. A sharp upturn this week could turn it back up, while it shouldn’t take much market weakness to turn it lower for better confirmation that the downturn we suspect is underway. P state, we are prepared to live with whipsaws in the near term, as the recent up tick in volatility is generally associated with a trend reversal, which would be to the downside.
TUESDAY, January 23, 2001: The earnings warnings and downgrades continue, yesterday, the two standouts were DELL and one of our short sale positions, American Express (AXP), which hit their earnings but warned that this year would be challenging. Like many banks and consumer finance peers, AXP upped their loan loss reserves to account for the growing number of delinquent credit card payments. Of course, we have been quite concerned about this tremendous buildup in debt while the US savings rate has been negative! With the US economy in a hard descent, the strains due to this debt are quickly getting out of control and a contributing risk to the many other economic stress points! The markets can look "beyond" this if they choose to, but we are confident that it is a serious enough problem to cause the markets to back peddle when it doesn’t go away!
Prices have remained in their mid-air stall after reaching their Dow high of 11,028 on January 4, which remains our bearish line in the sand. This has built up significant price and Fibonnacci resistance and a push above it would be significant. With the markets already significantly overbought, we do not think there is much risk of this happening, at least without a bigger pause, if not an all out failure and renewed downturn.
11,028 is the EXACT Fibonnacci projection that we offered in the December issue of Reality Check, stating, "this barrier is likely to be a stiff one!" Until proven otherwise, we conclude that this either completed the Dow’s wave "(2)" corrective rally that began from the 10/19, 9654 low, or more likely, it completed the lesser degree wave "2" rally, already within the primary wave "(3)" decline (from the 9/00, 11,401 high). A decline below initial support at the 10,470 level would increase the odds that the rally has ended, with a decline below the more critical support at 10,330-292 would confirm that a selling acceleration within primary degree wave (3) is underway. If this is to occur, it would greatly increase the odds that the market was on its way to a new low, below the December 9654 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 rally was developing, and with the now higher Transports, a new Dow Theory BUY signal.
TREASURIES
Treasury yields backed off again on the unlikely news that the Conference Board’s "Leading Economic Indicator" (LEI) plunged for its third consecutive month, the biggest decline in four years, and another traditional sign that we may already be in a recession. Normally a bullish event for the bond "ghouls", traders dumped the long end, favoring the shorter end of the maturity spectrum in favor of another one half percent rate cut when the Fed meets for next Tuesday’s FOMC meeting. We think that whatever they do, it’s already baked in the cake and the long end has already discounted the entire move, or at least the majority of it. Whatever the ultimate case, we have turned bearish and do not think the reward potential is justified by the much greater risk that the next big move for yields is UP!
Our work continues to suggest that primary degree wave (2) of the longer term bear market rally is over, or will be relatively soon. 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 our markets, our tremendous, record trade imbalance due to its reliance on foreign capital to continue its funding, and for the Bush Administration. It (the market) also risks the full discounting of the Fed’s renewed easy money policy, as the potential for selling on the news remains high. The market is locked within a short term range, defined by 5.625% on the upside, and 5.40-.35% on the downside. Initial resistance is at 5.475%, then near the 1/2/01, 5.35% low, 5.25%, and then 5.00%. The yield so far held below next support at 5.65% before the rebound. Higher support is at 5.725%, 5.85%, and 5.925%. We are BEARISH!
GOLD
Gold & the XAU rallied yesterday ahead of this today’s first Bank of England (BOE) 25 ton gold reserve auction of the new year. It is expected to be oversubscribed and the markets are set to rally after the results, providing they’re not atrociously under subscribed. Silver’s strong upside breakout last week may indeed be leading the gold complex out of its DEEP rut, as discussed last week.
Republic cash gold rose by $2.10 yesterday, but remain well below short term resistance that we currently have at $270. A move to this level would be a VERY encouraging sign as a "Low Pole" (LP) on our short term chart, and the first strong sign of a rally since late last May!! Last Friday’s (January 19, 2001), the Commitments for gold futures showed the smart money commercial insiders net long by 59,488 contracts, while the speculators were net short by 57,160. This is the most bullish level since the record speculative shorts of late August of 1999, just ahead of a rally from just above $252 to an October high of better than $324 (The XAU stock index surged from a July low near 58 to the standing 92.72 high of late September)! The COT data strongly suggests that the bears risk a HUGE short covering rally, against their bearish holdings!
To "subjectively" answer last week’s questions for gold stock investors, how long will prices remain depressed? and what damage remains for this already greatly diminished industry? Prices may emerge from their depressed levels much sooner than even bulls (like us) think, as conditions are incredible for this to begin, and with that said, even while we still cannot yet rule out one final low before this begins, we also think it would be very short lived if it happens. Once investors see the need to pursue gold ownership, prices will have no place to go but through the roof, because demand has already exceeded supplies for years, and the depressed market has forced many gold producers out of existence, and others out of production, at least for their less productive mines. This has dramatically further reduced the supply of its availability. Even the scheduled central bank sales that continue go largely fought for by the shorts who must struggle and compete for the limited supplies they need if they are to close out their shorts. This alone is a major element that contributes to the continued strong demand! Not if, but when demand picks up along with this speculative short covering, there will be quite a scramble to find it. This is one of the main reasons why we have been so adamantly in favor of holding many of our biggest losing positions throughout their worst days. Once the bulls’ turn comes, we hope to quickly make up for much lost time!
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, 64, and 69.
PORTFOLIO CHANGES
Tuesday, January 23, 2001: 1/19/01: Hong Kong Webs (EWH) were removed from our shorts at 12 7/16 (+6.5%) as we think their market has just broken out to the upside; Wallace Computers (WCS) was also removed, from the income portfolio at 19 � (+79.7%) after a 5 wave rally that exceeded our upside price objective (PO) of 17 �! [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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