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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 8, 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 8, 2001: The markets have been holding up, perhaps consolidating their gains on low volume in recent trading sessions. The Dow is bumping up against the powerful resistance near the 11,000 level. It appears that investors have convinced themselves that the bear market has ended. We know from the experiences of the past few years that the majority can talk themselves into anything, a concern in itself. Friday, the Bush Administration declared that the Q1 2% GDP report was tainted. First, they announced it to get t he markets out of their doldrums, and once it was digested, the number will undoubtedly be "revised" down to its true reading. Is this the kind of behavior that can be trusted or believed by investors??? Combining this with the biggest jump in unemployment since 1991, and a serious .4% jump in the inflationary "average hourly earnings" rate, and the markets closed the day and week higher again on the renewed hope that the Fed would keep the ball rolling, cutting rates again when they meet on May 15. While they probably will, it is already being factored into prices. We think the undeniable rise in inflation pressures will not go ignored for too much longer, as it will become progressively more difficult for the Fed to cut rates further, as price, labor costs and money supply growth will make further market bailout efforts prohibitive.
Perhaps the biggest risk is still seen coming from the oil patch, as literally everything is affected by the persistently higher prices. Indeed, this is trickling through our entire economy, and without question is dampening recovery prospects no matter how you look at it. Effectively, $2.00 per gallon gasoline is crimping our ability and desire to drive and this is severely limiting spending. It is also taking the edge off of those discretionary dollars that consumers spend without a thought when confident they ll remain flush with petty cash. It must be pointed out that NO amount of oil surplus will bring prices down at the pumps if the oil cannot be processed at refineries into the gasoline that we buy at the pumps. This is the problem. US refining capacity is not sufficient in providing enough of the finished product. The higher prices this is producing is keeping a lid on the economy, layoffs in the US are quickly surging to the highest fastest velocity since the last recession (1990-91), and over-indebted consumers are going to find it increasingly difficult to make their loan payments. We think the spiral will continue, and STAGFLATION is NOT going to help. Indeed, this morning s Q1 Productivity report showed a DECLINE of -.1%, while Unit Labor Costs surged by 5.2%! We do not see this as the type of numbers that should lend confidence to the idea the economy has bottomed!!!!!
The rally continues to build negative divergences that indicate the momentum of the rally is ebbing. While we are told every day how this is the beginning of something, the truth (for us) is that the rally is getting VERY extended and vulnerable. Daily indicators like RSI, Stochastics, Rate of Change (ROC) and Momentum have not moved higher to confirm the higher prices, a clear warning. The Dow has gained better than 20% in just nine weeks from its 3/22 low. Investors have "hoped" themselves into the improbable likelihood that the economy is recovering. When our government changes their numbers at a whim, we don t know why anyone would take seriously the idea that all of the problems that have stopped the economy in its tracks have been resolved.
Yesterday s light volume of less than 1 billion shares traded suggests renewed indecision among investors. We do not see much potential for the markets to push through the strong resistance near 11,000, especially as the momentum is already peaking. This implies that sellers will re-emerge into any further strength. In spite of the markets holding up, they still haven t made much net progress in recent weeks. The NASDAQ Composite for instance, reached a high of 2202.86 on 4/20, and only at 2232 on last Wednesday s high, for a less than impressive 30 points in net progress.
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 to emerge at any time. In the unlikely event that the Dow sustains itself through the 11,000-35 resistance, more resistance lies between 11,140-200, and then at the 9/6, 11,401 high. 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 continued its effort to recover from the recent selling. Prices are trying to rally in a choppy, corrective manner which is an outstanding sign that it is corrective and within the larger context of the trend for higher yields. The growing potential for stagflation is not friendly for bonds. Perhaps this is why long term rates have surged higher as the Fed has brought short term rates down so dramatically, already easing the most aggressively in their entire history since the beginning of this year. As previously stated, 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 4.69% in 10/98. Combined with the growing possibility of stagflation, this may explain why 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 and resilient, keeping our near term expectation for weakness in question. It appears that the metals have bottomed in terms of many of the world s currencies, but I am still not convinced that is the case in terms of US Dollars. The XAU has yet to break out above its resistance from the 3/9, 57.42 high. 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 last 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 remains on a buy signal from 4/25, but has turned down. 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 |
| Tuesday, May 8, 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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