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REALITY
CHECK UPDATE
Published Every Tuesday
and Friday |
| ARCHIVE:
APRIL
2000-MAY
2001 |
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Contributed by
Mitch Harris
President: Market
Trend Realities,
Editor: The Reality Check
Newsletter |
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May 1, 2001 |
| STOCKS |
| REALITY RATIO: +0.419
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Last Signal: 04/20/01, TRADING SELL
Dow: 10,579.85 OTC: 2163.18
The Reality Ratio pushed into overbought territory last week, making our "judgment call", trading sell one week early at least. This only supports our opinion that the rally is getting very mature, and a downturn remains our expectation for the next market gyration.
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TUESDAY, May 1, 2001: HAPPY MAY DAY! The markets showed new resilience in April with the Dow recovering 9% and the NAZ up 15%, for the best single month gains in 10 years. Of course, the question remains whether a new bull market has begun, or this is a prolonged technical retracement rally, still within the bear market. Our sense is that we are still in a bear market. While the recovery has been impressive, we are not convinced that the Fed s efforts can stimulate new debt based consumer spending, which is the only kind of spending lower interest rates may be able to influence. The markets remained strong through the end of month "tape painting" as portfolio managers use the "last minute" to manipulate their portfolios ahead of their monthly reports.
Yesterday s trading began on a strong tone, but ended with a big, 150 point downside reversal for the Dow. New York averages followed the Dow, but the OTC managed to hold about half of its early day gains, remaining well within our analysis that the NAZ would outperform for a while, relative to the NY averages. The markets have found some relief in recent economic reports that the economy is trying to stabilize. We were surprised last week with the Q1 GDP up+2%, when only a 1.1% gain was expected. The question is whether the glass is half full or half empty. We think it is too soon to read much into the recent reports, where the markets are very quick to rejoice that the economy is on the cusp of rebounding.
We may have been a week early on our overall sell last week, but we still think the odds of a downturn are growing as prices are well into past, failed support levels that are now areas of resistance. When the markets become overbought, they have already expended much of their energy to generate these gains. Our view is that this makes it much less likely that the bulls have enough energy left to keep prices moving through these well established barriers, as it becomes more likely that sellers will re-emerge. We continue to look for the downside reversal that may have started with yesterday s key reversal.
While the Dow pushed above our next resistance, between 10,700-40, its gravitational pull brought the Dow quickly back toward the top of this range yesterday. The Fibonnacci resistance barrier identified last week at 10,740 was like a magnet, bringing prices back after they had reached a high of 10,906 [10,740 is 61.8% of the entire decline from the 1/14/00, 11,750 high (11,750 - 9106 = 2644 X .618 + 9106 = 10,740)]. Last Tuesday we had thought that "further gains would be limited at best". This may be what is happening. The Dow remains above its 200 day moving average (near 10,600), but the S&P 500 and the OTC remain well below theirs.
We are raising initial sup[port to 10,450. An hourly close below this would now indicate that a new decline was underway. Below that, support is down to 10,200. Our 20X60 P&F chart is on a high pole, sell alert, indicating that the next move should be lower. A move above 10,920 would negate this "sell alert" signal, making 11,000 the next barrier. We ll get into that more if and when we need to.
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TREASURIES
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Treasury yields haven t been able to bounce much, after becoming oversold near higher, 5.80% support. Stronger than expected GDP, Durable Goods, new and existing home sales, and inflation data, such as the Q1 Employment Cost Index (ECI) +1.1%, and the GDP Price Deflator, which rose by an alarming 3.2%, making the percolating inflation pressures a concern that will not go ignored forever. The slow economy with rising price pressures continue to suggest at least moderate "stagflation". Add to these the soaring money supply, and the Fed s ability to "ignore" these compelling inflation warnings may end abruptly. While many conveniently tell us that it is due only because of rising energy prices, the truth is that MANY prices are rising. Regarding rising energy prices, the argument to "factor" them out of the core rate may be an acceptable rationalization when energy prices rise temporarily, but their sustained higher prices can no longer go ignored, factored out, or simply rationalized out of the numbers. People in America are being forced to make choices of heating (or cooling) their homes, driving their cars, or eating, reducing the quality of the spending they can do. At SOME point this will NOT go ignored!
We continue to advise that anyone wanting to sell, or position ahead of what we are confident will be much higher rates in the months ahead, should do so into this retracement rally, provided it plays out accordingly. While their is nothing to prevent the entire 1st wave of rising rates to be retraced, but more likely, it remains unlikely, especially as the losses are being consolidated without much progress of retracement. It is not likely that the yield will be able to move below its original break down point, near 5.40%, if it can even reach that.
The bond rally from the 1/00 6.75% high has likely ended, and should ultimately lead to much higher rates. Our analysis labels the 3/22, 5.217% low as cycle degree wave "(2)" within the longer term bear that we think bonds have been in since the yield reached a 4.69% in 10/98. This may partially explain how the yield is rising against the Fed s aggressive short term rate cuts, as the yield curve reverts proportionately steeper, from its inversion of last year. We noted at that time that this was one of the best indicators of an economic slowdown, and perhaps a recession.
Resistance begins at 5.70% which was reached at the close yesterday, and then 5.55-50%, 5.40%, 5.37-30%, and the 5.24-.217% low(s). Higher support is near 5.85%, 5.925%.& 6.00-6.05%. Our long term analysis suggests that the long end will ultimately push above the 1/00, 6.75% high. |
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GOLD
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Gold & the XAU have remained suspiciously firm, calling our near term expectation for weakness further in question. The XAU remains close enough to resistance from the 3/9, 57.42 high that we are simply waiting for the market to point the next direction. A push above this would turn the chart bullish, resolving its "sell alert" P&F chart pattern status. Our analysis still continues to suggest that a last downturn is the most likely outcome, but this would be called into question with a push to 58. REGARDLESS of any short term disparity, we would only be buyers into weakness, and holders into strength. Perhaps this makes the other analysis less critical, as the market can do nothing either to surprise us or to change our overall game plan.
Technically, the XAU remains on a bearish HP formation, BUT, our shorter term HSBC cash gold chart turned bullish Monday and shows a potential double bottom. On "this" particular chart, a move to $274 per ounce is needed to confirm the upturn on our longer term 2X3 P&F chart. Until, or unless this happens, there is equal potential for the upturn to remain within the fifth wave of decline from the 2/00 $315 high. Our "early warning indicator", the XAU/gold ratio gave a buy signal last Wednesday. We remain bearish the XAU against resistance from the last high at 57.42. Regardless of whether prices fulfill our more immediately bearish stance, we think that great opportunity lies ahead! XAU resistance begins at 53-4, with more at the recent 57.42 high, 59, 63-4, & 69-73. Next support is at the 2/14, 45.64 low, the 7/14, 41.61 low, and then at 37-40. In contrast to the poor risk/reward we see for bonds, we see the exact opposite here, at least if we go out beyond the immediate future!
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PORTFOLIO CHANGES |
| Friday, April 27, 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
(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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