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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 4, 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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FRIDAY, May 4, 2001: Happy Cinco De Mayo (one day early). The "Fifth of May" honors the day in 1862 that General Ignacio Zaragoza led the Mexican army to defeat the French in Puebla. It has become increasingly popular in U.S. towns on the Mexican border and other cities with large Mexican populations. Festivities always include a big dose of Mexican culture-food and drink, mariachi bands, parades, folk dancing, and other activities. We enjoy going to our favorite "Authentic" Mexican restaurant to help them celebrate (as they help us FILL UP!)
The rally has shown signs of topping over the past few days, as the release of the latest economic reports are forcing those that believe the economies "Recovery" is just around the corner to reassess this possibly premature conclusion. Tuesday s NAPM report was essentially flat, but below the key 50 level for the 9th straight month. US auto sales plunged -16% on average, showing that not even lower rates may stimulate a renewal of consumer credit expansion for big ticket items. While March factory orders increased by a better than expected 1.8%, the NAPM "non-manufacturing" index plunged to 47.1 in April vs 50.3. This was the lowest reading in its 4 year history and indicates that the "US SERVICE" sector is now contracting, as the weakness has spread from the manufacturing side of the economy. Yesterday s "initial unemployment claims" data was alarming to the markets as it reached its highest level in better than 5 years, indicating that the economy has NOT necessarily turned around on a dime as some had hoped. Many have hoped that because the US has become more of a service than industrial based society, that the service sector would remain immune from the weakness. The evidence now shows that this too was unfounded rationalizing. We don t think the US economy can take too many job cuts because of the incredibly over-leveraged nature of our entire economic base. While the Government may be banking a surplus, the average citizen remains in debt ABOVE its collective eyeballs, and cannot afford to lose their ability to service their high debts. We ve warned about this many times, and it may be taking place before our eyes, just not so fast as to make it obvious, yet. Rising unemployment is the greatest risk that increases the prospects for recession.
Some of our volume and momentum indicators have been rolling over in the past few days, indicating to us that the rally is indeed ending. While the media keeps talking as if the rally was just beginning, the Dow bottomed at 9106 on 3/22, and the OTC Composite bottomed on 4/4 at 1619. The rally since cannot be considered something NEW at this point, even if we were in a new bull market, which we hold as very unlikely. We continue to look for the downside reversal that may have started on Monday to follow through before a new downtrend is confirmed. The Dow reached a high of 10,939 on Wednesday before sellers emerged. Initial Dow support is at the 10,740 - 00 level that was last week s resistance. A close below this level would add to the technical evidence that the sellers are re-emerging, but to confirm the overall downturn, we are using the more critical support level at 10,450. There is also support near the Dow s 200 Day moving average, still right at 10,600. The OTC Composite remains far below its own 200 Day MA, so even within the context of its spectacular month or so rally, we still classify it as a rally that is well within its bear market. Lower Dow support is near 10,200, while higher resistance is at 11,000, 11,100 and then at last September s 11,4010-25 high.
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TREASURIES
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Treasury yields finally managed to get the bounce going that we were expecting, within its overall longer term bearish trend, as the economic news of the past few days became disheartening for the equity bulls, but encouraging to bond bulls as they have reassessed their thinking that the Fed may be through cutting rates for a while, now thinking they ll do it again, by another 50 basis points at their May 15, FOMC meeting. Money has found its way back to the relative safety of Treasuries. We cannot yet say how long this will last, but ideally, we do not think the Long Bond yield should fall below resistance near the 5.40% level, the original key support point at which the higher rate trend was confirmed.
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 to warn of an economic slowdown, and perhaps a recession. It did its job again!
Next resistance is near 5.55-50%, then the key 5.40%, 5.37-30%, and the 5.24-.217% low(s). Support now begins at 5.725%, where it would be a bearish "high pole" sell alert on our short term P&F yield chart. Higher support at the recent high near 5.80%, then 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, keeping our near term expectation for weakness in question. That said, the XAU tested resistance by reaching 57 yesterday before it backed off. Cash gold itself was 80 cents higher yesterday. With the XAU reversing to close LOWER for the day, we see this as a very short term bearish price divergence, allowing for the XAU to lead the cash market. While this in itself is not nearly enough to draw any strong conclusions, follow through would quickly increase the short term bearish potential, still well within our analysis that one last downturn may still remain ahead. To at least temporarily change this, a strong breakout above the 3/9, 57.42 high is needed. 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 is at the 57.42 high, 59, 63-4, & 69-73. Support now begins between 50-53, then at the 2/14, 45.64 low, the 7/14, 41.61 low, and 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, May 4, 2001: 5/3: KLA Instruments (KLAC) was removed at the closing price of 51.06 (+38.94%). While it didn t reach our higher target, it reversed down after appearing to have completed a 5 way rally; Conseco (CNC) reached or 20+ target yesterday (+213.73%) & while we think this will work its way even higher, we cannot risk losing this SPECTATUCLAR GAIN. We would consider re-purchasing this one on a retracement. We also added 2 new short sales yesterday, Xilinx (XLNX) at 47, with a 54 stop, after it had a "High Pole @ the Bearish Resistance Line" (HPBr), after a 5 wave rally from its low near 30. We think those gains can at least be retraced. Also, we added to our shorts, Biotech company, Chiron (CHIR) at 46 3/8 after it reversed for a "Spread Bull Trap" (SpdBlTrp) short selling formation. Here we would use a stop at 51, which would exceed its YTD high by 2 P&F Chart boxes. These changes reflect our expectation for a new downturn to emerge. [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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