Last Signal: 01/12/01, TRADING SELL
Dow: 10,525.38 OTC: 2626.50
The ratio inched higher last week, but remained BELOW the recent high of .161, for a negative divergence against the higher prices reached by the averages. Another week or two should tell us whether this leads to another market downturn, but ahead of time, we see signs that the rally is ending or already has!
FRIDAY, February 9, 2001: As stated on Tuesday, "this indeed seems to have proven to be a critical week for the stock and bond markets." The Dow again tried and failed to overcome the difficult resistance at the 11,028, Fibonnacci resistance after touching 11,035 before turning lower once again [11,402 high - 9654 low = 1748 X .786 = 1374 + 9654 low = 11,028]. We are expecting prices to continue lower, still against this so far, impenetrable barrier.
This latest push came on lighter volume again, as has each successive push into this resistance. It has remained our biggest clue so far to suggest a lack of the needed conviction to move beyond it. The downturn was also helped along by Cisco Systems first earnings miss after 15 consecutive quarters of predictable and dramatically higher earnings surprises. Yesterday, earnings warnings in specialty retailers, Gap Stores and Ann Taylor took this sector down too, adding to the market’s lack of upside leaders as the group was holding at relatively high levels. Adding to the evidence that the economy is in decline, Q4 productivity growth continued to grow at a decelerating level from 3% last month to 2.4%. The more alarming news from this report was that unit labor costs rose by +4.1%, signaling that the productivity gains for the quarter are coming at a higher cost.
We have continued to warn that investor sentiment remained alarmingly optimistic throughout last year’s downturn. According to this week’s Investor’s Intelligence figures, the percentage of bullish investment advisors is up to 61.8%. This is the highest level since JANUARY of 1987!!! This was the month that the bond and utilities averages topped out, ahead of the NY A/D Line, which peaked in 5/87. We have noted in the past that one of the many observations made by Elliott was that investor sentiment becomes even more optimistic at the secondary peak as investors fail to adjust their attitudes from the bull market mentality that had prevailed. It is not the fault of sellers that small investors lose their shirts during a bear market, its their perpetually conditioned bullish psychosis. It would be just as easy for the average investor to recognize when the game was changing, but hope springs eternal!
The Dow is closing in on its initial resistance at 10,840. A close below this would confirm the short term top, with lower support near 10,700, 600 and 10,470-500. A break of this level would confirm 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 appreciably through the 11,019 - 35 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 are also following according to script, so far rallying to a 5.45% secondary low from the January 5.35% bottom, before reversing higher again in the past two trading days to reach 5.572% yesterday. The market backed up to absorb this week’s $32 billion in Treasury auctions that included $10 billion in 30 year maturities yesterday. The Bond Market Association, representing primary dealers are recommending that the Treasury Department should continue to issue 20 year paper to "minimize the short term cost of buying back older issues". They also favored the benefits of continuing the use of long term issues to reflect the long term use of the funds they raise.
Sentiment among bond investors is also very optimistic, as everyone expects the Fed to be the hero again. While we’ve all heard by everyone and anyone asked how the markets ALWAYS recover and do well when the Fed cuts rates, a very critical part of this explanation has gone with almost no explanation or discussion what-so-ever. That is, if our economy is undergoing a structural transition as we think it is, lower rates may not be enough to re-stimulate, due to the excessive debt burden that has now been built into this structure at the top of the longest economic cycle on record. Pushing short term rates lower is by no means a sure thing that long term rates will follow, as so far, it has only helped to reverse last year’s yield inversion that strongly had suggested that the risk of recession was growing. We now know why the warning developed! We’ll be discussing this in greater detail in our upcoming February Reality Check! Email us if you haven’t received a free sample yet at: mtr@fuse.net. Please include your name, address, phone and of course your email address.
The bond market is enduring a very heavy issuance of new corporate bonds, as savvy corporate Treasurers are rushing to take advantage of the lower rates to issue their debt while the costs have come down dramatically. In fact, new corporate debt issuance reached a one month record high in January, at $75 billion. In itself, this is often a strong implication that rates are near their lows, or at least low enough to take a bird in the hand. This has been our recent strategy lately as well, as once Long Bond rates declined below our long standing 5.48-.50% objective, we turned bearish sighting a poor risk/reward basis. While this doesn’t preclude the potential for the rally to take the yield even lower than the recent 5.35% low, we think that the majority of the move has already discounted the Fed’s efforts to man the economic life boats.
We had anticipated the technical bounce that may have ended this week, but it is still a bit premature to raise our confidence of this. A bit more upward progress to 5.575% would increase it, as this would be a "High Pole at the Bearish Resistance" (HPBr) on our short term P&F chart, and would suggest a move at least above next support, at 5.70%, and higher. Our longer term P&F chart is already on a bearish "High Pole Top" (HPT), and this continues to suggest a move to at least 5.75%, so the odds are increasing that for the long end of the yield curve, that the bond market is on the defensive. To negate this, a push below the 1/2/01, 5.35% top is needed, which would open the door to lower yield resistance at 5.25%, 5.13% (78.6% Fibonnacci retracement of 9/98, 4.69% low to 1/00, 6.75% high) and then 5.00%. Support begins at the most recent 5.689% high that was reached a week ago Monday, and then at 5.725%. Higher levels remain the same, at 5.85%, 5.925%.& 6.00-6.05%. Again, we remain BEARISH, even against lower yields!
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.
GOLD
Gold & the XAU have taken another tumble, remaining surprisingly weak after this month’s heavily over-subscribed Bank of England (BOE) gold auction of 25 metric tonnes of their reserves, by a margin of 5 to 1. While it makes little sense with such strong demand, it’s been almost all down hill since the 1/23 auction. This selling has negated the possibility for the bullish low poles we had hoped for, with the XAU dropping below 46 which hasn’t happened yet, and with HSBC cash gold falling below the January, $263 low yesterday. While the ingredients for dramatically higher prices continue to improve, prices continue to move against this potential in the immediate future.
We heard yesterday from a reliable source that there have been three VERY LARGE institutional BUYERS of gold under the guise of lower prices. The largest of the three is said to be GOLDMAN SACHS, the very firm that has been the most involved forward hedging speculators that have sold gold futures far into the future. This strongly suggests that they are attempting to remove much of this short interest that remains on their books and there can only be one reason for this; that they are preparing for a very significant turn of events that only they would know about according to the theory that they are among the most "hooked up" firms involved in the gold conspiracy theory. Before disclosing to readers who the other two firms might be, I am seeking further confirmation. If there is any truth to this, the potential for the next great market manipulation could very well be to the upside!
XAU resistance remains at the elusive 53-4 level and 55-6 level of resistance above that. Higher resistance is at 59, 64, and 69. Support is at 44, the 41.64 low and then 37-40. We still believe that any lower prices will be relatively short lived.
PORTFOLIO CHANGES
Friday, February 9, 2001: We still suggest buying Pennzoil (PZL) for our Income Portfolio, for its total return potential, on a dip BELOW 11.75. We also recommend shorting America Online/Time Warner (AOL) on a further bounce, but are adjusting our price effort to 50 or higher from the original "above 51" recommendation. It is on a "High Pole at the Bearish Resistance Line (HpBr), after a 5 wave rally into resistance above 55, and may fall immediately our give us our chance. If executed, we would give this plenty of room, with the initial stop/loss point at 59.25. 2/8: We also added to the shorts, Alaska Air (ALK) yesterday, at $32.90 with a $36 stop. This has been under consideration into its recent strength, and S&P downgraded it to AVOID in recent days. [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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