Last Signal: 3/24/00, SELL Dow: 11,112.72 OTC: 4963.68
The ratio managed to bounce slightly last week after declining to the neutral reading of the weeks before that. We do not think that a rally phase should gain much strength before attracting new selling, but we have set parameters in the event that we are wrong. While this is always possible, with the seasonally bullish period ending after retirement plan contribution season has ended, a tight Fed, percolating inflation pressures, record margin levels being set back by record margin calls, loads of IPO’s in the pipeline, record insider selling of recent IPO’s as their "lock up" periods end, and dangerously low mutual fund cash levels, we have a difficult time figuring out how a rally can be sustained for long. With this said, a "short term trading rally/upturn" has been confirmed. It may lead to a good "selling" opportunity.
FRIDAY, May 5, 2000: Renewed selling pressure has developed this week with each attempt to rally the markets. While many smaller, out of favor stocks continue to show improving "relative performance" by holding up well against the recently more popular names, we think it will become even more increasingly difficult to make money in what HAD worked for Wall Street, as the presidential election approaches. In particular, this is due to the seasonality which is now bearish until late October, combined with the dominant 39 month cycle that has influenced literally every major market decline since the early 70’s, including the ’87 crash, ’90 mini bear market and the ’94 correction. This is due to bottom as the BULLISH seasonality begins in November.
The markets have finally noticed that the Fed actually knew all along that the task before them would not go away by simply reversing their last three easings of 1997, to help calm the Asian Contagion. It is now widely expected that they will finally take a more aggressive action when they meet on May 16. This has been something we have been predicting for months now. They WILL ultimately prevail and bring the economy and markets down with their determination. And it seems that the markets have finally decided to take this seriously. Of course, there are still many that think the "tech" sectors are immune from an economic slowdown, but they’ll simply have to learn the hard way that if anything, many tech businesses are actually as sensitive to the economy as banks and retailers. After all, they must sell their products to their customers and in a slowdown, many tech purchases are canceled and postponed as in many other businesses as business activity stops supporting further capital spending.
Our Wave interpretation continues to suggest that the recent high at 11,410 completed intermediate wave (2) of the bear market, as it exceeded our upper Fibonnacci resistance of 11,319 by less than 1% before turning lower again. We remain bearish against this resistance and expect prices to accelerate to the downside. To confirm this, the Dow needs to beak below support at 10,300. As indicated on Tuesday, this would confirm that the short term trend has turned bearish and that a test of the 9732 March low was imminent. Also stated on Tuesday, "the OTC Composite appears to be VERY near the completion of a 3 wave rally, indicating that the larger trend remains DOWN". The rally challenged and had so far failed to move beyond the exact .618 Fibonnacci resistance of the minor wave "3" decline at 3980. The rally from the 3350 low came in a double zigzag corrective rally, a 3 wave [corrective] rally and another strong indication that the main trend indeed is DOWN!! Here, we can now remain bearish the OTC Composite against this recent high at 3980. This was lowered from Tuesday’s bearishness against the next higher price resistance at 4180 and Fib. resistance at the 50% retracement of the "entire" decline at. Higher resistance is just beneath 4400, 4600 and then at the March high near 5120. One other point worth mentioning, volume has become very light on both, up and down days. This is a clearly bearish phenomena as BUYERS generate the higher volume needed to sustain a rally. Selling on light volume simply indicates that it is not near capitulation or the panic levels that indicate selling pressure is ending.
TREASURIES
Treasury yields surged higher this week, accelerating investors and traders fears that the economy has indeed continued at a fever pitched level that will force the Fed to accelerate their efforts to slow the economy. Economic reports this week continued to reinforce our long held belief that the economy has BEEN overheated, not just overheating now. New Home sales continued at a faster pace than expected, even with higher mortgage rates. The only reason existing home sales has slowed down is because there aren’t enough houses available. This is evident in the higher median home prices. Prices are accelerating inflationary pressures all over the place. Wednesday’s NAPM report showed that purchasing managers are paying more for raw materials. The Fed’s Beige Book of economic activity in its 12 districts showed "robust" expansion in 10 of the 12, with the other 2 slowing slightly. Yesterday’s Q1 Productivity gain of 2.4% was well below the 3.5% expected, with wage costs accelerating by 1.8% against only a 1% expectation. In more simple terms, slowing productivity growth and rising wage pressures are NOT what one would have expected after 5 quarter point rate hikes!!
Professionals were disappointed that the Treasury has not accelerated their buyback program of longer dated Treasury maturities, but they have already bought back $8 of the $30 billion bonds that were originally authorized. The yield is becoming VERY oversold and I expect to see a rally develop from close to current levels. Our sighted support at 6.20% is being challenged on this morning’s strong employment report. While bearish, we should allow for a rally attempt to develop that pushes lower to test the just broken 6 - 6.05% support. We will have to reassess if the yield manages to move below this. A push above 6.20% would indicate that the trend is even more bearish than thought, with higher support at 6.32% and then 6.40%.
On Tuesday I commented on the CRB Index and decided to leave this up because it is my "Point & Figure Chart of the Week Analysis". This can be found by going to: www.stockcharts.com. Tuesday’s Comments: "Another indication that inflation is rising is yesterday’s Point & Figure (P&F) buy signal on the CRB Index (Commodity Research Bureau). This powered higher by 4.81 to 215.84 yesterday, and has reached 216 in this morning’s early trading. Crossing 215 gave a new buy confirmation after it had been consolidating since February. A push above resistance at the 217 March high will clear the way for the next major challenge at resistance between 225 and 231. While their was "no inflation", the CRB Index has climbed from a 183 low last July to 217 so far. This represents a general commodity price rise of 18.57% in less than 1 year!!"
GOLD
The XAU & Gold has acted very well this week, appearing to have bottomed on the news that the Swiss Government will begin their already expected gold sales this month. With all of the allocated EU gold sales accounted for based on last September’s "Washington Agreement" that limits total sales and loans to 2000 tonnes over the next five years, the markets may finally be recognizing that these sales are already completely factored in, that much if not all of it will simply exchange central bank hands privately, and that worldwide demand is still at a record pace. Additionally, the "industrialized" world may have finally awakened to the fact that inflation is NOT dead and even in "this" particular new era, economic forces have not been revoked or reputed.
The XAU tested broke out above initial resistance at 59 in the past few days, testing the next lower level at 63 yesterday. A move above 64 would confirm that the short term trend has turned bullish. While this hasn’t happened yet, we recently turned bullish the XAU from the 56-7 level and remain so. Our XAU/gold ratio indicator plunged to its lowest reading I have on record this week at .158. This means that a share of XAU stock is much cheaper than 1 ounce of gold in relative terms. Clearly to me, this weeks low is at a virtual give away level, especially when combined with this weeks Market Vane survey that shows the bulls down to just 20%, and the recent Commitment of Traders (COT) data showing the large speculators are again very heavily short gold futures. These are clear signs that the market is excessively bearish, so, we are BULLISH!!
Several other very bullish factors remain the US Dollar, which is incredibly and unsustainably extended and virtually destined to top out in the near future. Sentiment here is at 96%, implying that EVERYONE is bullish and already fully mattress stuffed with greenbacks. From extremities of this magnitude, "unforeseen" accidents often materialize! Also, Lehman Brothers analyst, Peter Ward issued a very bearish report downgrading Newmont, Homestake Mining, Kinross and Battle Mountain Gold this week. Brokerage firm analysts are notorious for this exact type of ill-timed report as a great contrarian sign of a pending bottom. Support is now at 57-9, 54 and then at the 48.73, 8/31/98 low. Resistance is at 63-4, 69, 72 and so on….We are greatly heartened by this week’s action and HOPE that it isn’t another of the many false starts that have been so frustrating.
PORTFOLIO CHANGES
Friday, May 5, 2000: 5/4: Yep, I’m trying it again, shorted Circuit City Stores (CC) at 58 � yesterday. It has a triple top with each a bit lower, leaving plenty of resistance above current prices, lots of insider sales and an unrealistic P/E ratio in light of the Fed’s determination to slow the economy and consumer spending. 66 is the current stop. Also, I am averaging down in several gold issues, Placer Dome (PDG) was added yesterday at 9 �, & Hecla Mines (HL) at 1 7/16.
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
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