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.
FRIDAY, January 25, 2001: Greenspeak spanned, I mean Greenspan spoke, testifying before the Senate Banking Committee yesterday, saying, "we have had a very dramatic slowing down and indeed we are probably very close to zero (growth) at this particular moment," and that a full-blown recession was a low probability as it has of yet not "breached the fabric of consumer confidence." He certainly remained the master of stating the obvious!! The question remains, will this fabric be ripped and when? If our analysis remains correct, our answer is soon!! The Fed Chairman also discussed his "change of view" (to accommodate that of hailing to his new chief) regarding the tax cuts that he had not long ago opposed in favor of the concentrated efforts of paying down the debt. While admitting that the "art" of forecasting can barely be accurate even one month in advance let alone over the next 10 years, he now sees room for both!!
Equity markets stalled as he spoke, with the OTC accelerating their losses through the day’s close. It again seems likely that the markets cannot attract enough money to keep all boats afloat, as the Dow gained 85 points yesterday against a -104.82 point loss for the OTC Composite. Tech stocks were weak on more earnings disappointments, outweighing the encouragement gained for another 50 basis point rate cut when the Fed meets next week.
We think that another cut is already baked in the pie, as it was on January 4, at least for the Dow, which remains far below the 11,028 high (and our exact Fibonnacci retracement forecast!). The Transports have also pulled back substantially after reaching their 3150 high, testing the 2920 support level discussed in the January issue of Reality Check. We view the Dow’s lack to surpass its January 4 high against the NASDAQ’s push higher as a BEARISH divergence, versus the consensus who see the NASDAQ as retaking its leadership role. If correct, the next wave of decline will be lead by the Dow, and perhaps the small cap issues that have done so well in the recent selling when compared to the OTC markets. Perhaps this will have an impact on the rock solid bullish sentiment that the selling has failed to suppress (so far). If the popular NYSE related averages lead a decline, their greater visibility may have the power to turn sentiment bearish. As we’ve stated here repeatedly, until this happens, we see virtually no chance for the bear market to end, or for a new bull market to emerge!
We remain confident that the stiff resistance at the 1/4/01, 11,028 high completed either the wave "(2)" corrective rally 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 next leg down was beginning. A decline below the more critical support at 10,330-292 would make it even more probable, greatly increasing the odds that the market was on its way to a new low, below 9654! 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 had developed.
TREASURIES
Treasury yields bounced back from an earlier selloff that took the yield to 5.689%, ;after Greenspan spoke. This was its highest level since November 28. We are concerned that with the clear potential for another rate cut next week, that the market already has already discounted the potential here too. If there was a sense that the economy was as weak as stated, we think more money would be jumping on this bond wagon! The interest sensitive utilities show all the ingredients of a major top, and bank and financial issues also appear very vulnerable, especially as their fundamentals have soured as they have dramatically increased their loan loss reserves in anticipation of rising delinquencies. For whatever reason, something doesn’t seem right when looking at all the anecdotal signs that surround the Treasury market.
Perhaps the Fed will soon take all the measures needed to re-stimulate the once resilient economy, at least by enough to hold them in check for a while. Unless their tools have become impotent, we think that once they act again, they will become much more likely to settle back and wait to see how consumers and the economy respond. This is what we meant on Tuesday when stating, "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."
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 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 our markets, our tremendous, record trade imbalance due to its reliance on foreign capital to continue its funding, and for the Bush Administration. When asked about this by Senator Robert Byrd during yesterday’s testimony, Greenspan did indicate his concern for this matter. We see our dependence on this foreign capital as America’s "Achilles Heal". The market broke out above the top of its short term range at 5.625% yesterday to reach 5.689% before bouncing back. Follow through selling would lend credibility to our analysis that the yield has bottomed, with next support near 5.725%, 5.85%, 5.925%.& 6.00-6.05%. Resistance remains near the 1/2/01, 5.35% low, 5.25%, and then 5.00%. We remain BEARISH!
GOLD
Gold & the XAU are digesting Tuesday’s bullish reception to the Bank of England’s (BOE) first 25 ton gold auction of the new year. Investors Intelligence (I.I. - 914-632-0422) reported that their Precious Metals Bullish Percentage indicator rose to 32% and has turned to "bull confirmed status". We see this as a very good development, as the last up turn from below 10% was in September of 1998, just ahead of the XAU rally from a low of 48.73, to just over 87, or a gain of 78.5%! We think the ingredients are there now for at least that and potentially more.
While we still do not rule out another decline before finalizing the bear market of the past 20 years, we are confident that within the framework of history, that it is relatively close at hand. Initial support is at 47, 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 remained elusive and still needed for a longer term "Low Pole" (LP) buy alert signal. 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: 1/25: We are adding Merrill Lynch (MER) back to our short sale list at 75. The stock is on a high pole top and a close below 73 today and for the week will be a very major Buying Climax (BC). We’ve already seen other leaders in the various Financial Service industries turn down, and we think MER’s turn may be at hand. Virtually all of our trading indicators have turned down, including RSI, Stochastics, Rate of Change, MACD, On-balance volume, and etc. We will give it plenty of room, to prove us wrong, risking a potential 13.33% loss at 85. [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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