Last Signal: 01/12/01, TRADING SELL
Dow: 10,525.38 OTC: 2626.50
Dow, the markets and the ratio managed to close higher for the week. As for the ratio, while the basic line was higher, it fell short of pushing through the 2 moving averages which were still falling, and because the upturn was not from below the -.40 or lower oversold level, it was not quite enough to change anything, based on our interpretation. Our analysis still allowed for another drop toward oversold before we are willing to call for some sort of meaningful bounce. One thing we d like to see, is a rally that is "not believed" by the parade of wishful thinkers that have to date, called every bounce "the" bottom.
FRIDAY, March 16, 2001: The blood continued flowing, leading into today s first triple expiration of the year, as the quarterly earnings warning season is just beginning, and already we are seeing them coming from many of the most visible companies. These include Delta Air, UAL, McDonald s, Cisco, Oracle, Charles sch, and Compaq. Surely there will be more! Experts continue to say they see no capitulation, but we aren t quite as certain, with two days this week of better than 10 times the downside over upside volume, on better than 3 times the number of issues that declined over those that advanced.
The daily CBOE put/call ratio has also been near 1 for the last four trading sessions, a rare sign that put buying has picked up, indicating a sharp increase in pessimism among the nations fastest speculators, the option traders. While this has been ineffective, basically for the past 2-3 years as option traders stayed bullish regardless of the market or the news, it has finally responded from this January s trading high, by rising sharply with the pickup in selling, and the immediacy to sell that has come with it. While the 5 day CBOE P/C Ratio still has room to go before it reaches its historic level of pessimism that would indicate a bottom, it has reached its most pessimistic level since the 10/98 market bottom, at a reading of .837 (8 puts bought for every 10 calls). This is a far cry from the bullish extreme reached last March, when there were fewer than 3.5 puts being bought for each call option (as the OTC peaked above 5000!). In general, we can derive from this sentiment indicator that the unbreakable optimism over the market s bullish future is finally breaking, as bullish investors can no longer deny the reality that the bull market did indeed end long ago. This shift from extreme denial must be viewed as at least an initial step toward the opposite extreme that we ve always said would be necessary before a bear market can even find temporary relief let alone go back into hibernation. While this and our other sentiment indicators are still not even close to that extreme, the noticeable reversal is a sign that reality has finally arrived on Wall Street!
At least a portion of this week s meltdown was attributed to Japan s Reality Check, as Fitch Investor Services downgraded the debt of 17 Japanese Banks, with Goldman Sachs downgrading seven. This is hurting the US market due to the US bank exposure to some of Japan s bad debts, but we don t see why this came as a surprise, as we ve been calling for them to face up to their overwhelming debt problems for years now. Never-the-less, the reality of it bites! Another reason for the fear here, is that the likelihood that they will liquidate at least a portion of their $3-400 billion of US Treasury Securities casts a new spell of risk over that US market too, perhaps the next boot to kick here at home!
The markets cut through their respective support levels as easily as if it were virgin territory this week. Capitulation or not, the damage was done and the widely discussed levels of support will now very likely prove to be tough barriers of resistance in the event that trading rallies do emerge. We see strong initial resistance at the broken 10,292 level, with more at 10,480, 10,600, 10,840 and 11,028. We do not think the market has any chance of recovery beyond the 10,840 level, which is not only a solid level of price resistance, but is also at the .786 Fibonnacci retracement resistance from the 11,035 high to the 9980 low. This is now considered key resistance. Next support is at the 10/18, 9654 low, which we still think will be taken out before the current reign of terror ends. Beneath this level, support is found at 8695, and then down to 7400. I d also like to point out that this level was last reached at the 10/8/98 low, which was not at all long ago and seems PLENTY reachable to us.
Our Elliott Wave analysis of the Nasdaq 100 (NDX) remains basically unchanged, as we think intermediate wave 5, within the larger primary wave (3) decline is ending. If this is correct, this allows for the best rally effort since the initial decline from the 5000 high, and should bring the average back up at least to 2500 with the potential to retrace the entire decline from early in February, to 28-900. This was our reason for taking a stab at the QQQ s in the mid 40 s. Any rebound should still remain within primary degree wave (4) of the OTC bear market, leaving one last 5 wave decline ahead to complete the entire primary wave "(5)" decline. In contrast, the New York averages still have a way to go before catching up to the NASDAQ on the downside. We reiterate our recent comments that because the NAZ is further ahead of the other averages, we think it will begin to outperform, at least in relative terms against the Dow, NYSE, and S&P.
TREASURIES
Treasury yields remain the last bastion of perceived safety for money seeking sanction from the free fall. We don t know how much longer this will last, but we suspect that it is in its final days, as here too, investors are already asking, "where else can I move some money to find safety?" Our advice, money market funds still pay near 5% and remain liquid, and 5% isn t so bad these days!
Our analysis allowed for a final thrust lower to end the current rally, and we think that happened with this week s 5.24% trading low. This has discounted the plunge in equities, and at least a 50 basis point rate cut when the Fed meets next Tuesday to discuss their rate policy. Anything short of this will likely cause the markets further concern that the Fed sees more economic strength/signs of recovery than the public does. Some even think the markets are demanding an even more aggressive .75 rate cut, but we doubt they ll get it. Further, that too would send a signal, that the Fed is REALLY panicking.
As stated in recent weeks, we think the lower long bond rates achieved this week are simply an extension of the 5th wave within the larger, intermediate wave "C", of the primary degree wave (2) low." The long term bond offers a poor risk/reward at this time in our opinion, and we remain BEARISH even against lower yields.." A move above 5.40% would turn our short term P&F chart bearish, with a move above 5.70% needed to confirm a longer term bearish reversal, with higher support at 5.725%, 5.85%, 5.925%.& 6.00-6.05%. Next lower resistance remains at 5.25%, 5.175% and then 5.00%.
GOLD
The Gold & the XAU rally came to an abrupt end with this week s second Bank of England (BOE) auction for the year. This new supply relieved the short sellers panic to find some of the tight supply of gold needed to renew their short sales and carry trades that had turned into a short squeeze, as several central bank lenders decided not to renew their gold loans. This had forced many short sellers that had borrowed heavily from them to find other sources to replace the borrowed gold that was demanded for delivery. With this gold provided thanks to the BOE, the speculators were bailed out once again, and their lease rates (the rate paid for the gold they borrow) have come back down to a still relatively high 2% from Monday s 7 �% high.
The relief has sent gold prices lower about as quickly as it had surged, with HSBC cash gold closing yesterday at $260.55, from a Monday s $272.50 high. This was more than enough for a High Pole at the Bearish Resistance line (HPBr), bear alert formation on our short term gold P&F chart. We stated on Tuesday that "regardless of whether or not this is the beginning of the new, long term "secular" bull market that we have discussed on many occasions, what is important is that for now, the trend has turned bullish! We will look for levels that would indicate the end of this short term strength in the near future." We see this as that indication. The silver lining is that we hope after one last sell-off, the bear market WILL be over.
The XAU also reversed enough for a bearish HP formation. While gold itself falls back, we would consider it a very bullish sign IF the XAU managed to hold above its previous low(s), as typically the XAU begins to firm up ahead of the metal and would be taken as a very bullish sign. Of course, this is only conjecture for now, and overall, we do think the XAU looks better than the metal itself, at least in relative terms.
XAU resistance now begins at the recent 57.42 high, with more at 59, 63-4, & 69-73. Initial support was raised to 50 on Friday, but should have actually been at 51 where it would be a bearish High Pole (HP) on our shorter term, (1X3) P&F Chart. Lower support remains at the 2/15, 45.64 low, the 7/14, 41.61 low and then 37-40. In contrast to the poor risk/reward we see for bonds, we still see the exact opposite here!
PORTFOLIO CHANGES
Friday, March 16, 2001: 3/14: Lyondell Chemical (LYO) was removed from our income portfolio at 16.10 (+19.26% + about 9% from the dividends) after reversing lower for a "Bull Trap" (BLTrp) bearish reversal. Instead of going for Pennzoil, 3/15: we replaced LYO with US Steel (X) 15 5/8 in our Income Portfolio. It has a 6.35% yield, a book value of $21.59, a price to sales ratio (P/SR) of just .23 and insiders have been buying it since it had fallen to $23 per share. [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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Last modified: April 01, 2001
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