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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 11, 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 11, 2001: The markets have not been able to penetrate the 11,000 level, holding within a narrow range below it for the past two weeks. We cannot be certain this is a consolidation ahead of greater gains, but the odds remain against it. The Nasdaq appears to be rolling over to the downside, perhaps remaining the overall leader. We have beefed up our shorts a bit and lightened up on some of our longs a bit, in anticipation of the next downturn. We are now in the seasonally UNfavorable period, between May 1 and September 30, when, back to 1952, literally NO gains were accumulated during this part of the year. If nothing else, this warns us that further gains are part of an old, maturing rally and NOT part of a new bull market trend!
The markets have been consolidating their recent gains while waiting to see the Fed s next move on rates when they meet again next Tuesday. We think it likely that the Fed will disappoint regardless of what they do. The markets are discounting another 50 basis point cut. Less than that would indicate they are becoming less considered over the economy s weakness, while more would indicate further panic. Naturally, NO rate cut at all would be horrible as it would imply the Fed isn t responding to the MARKET s demands. When we look at the first four rate cuts this year, the only one that really helped the markets was the last one, as they had indicated there would not be another inter-meeting action, and then there was. There will be NO surprises coming from next week s FOMC meeting.
Yesterday s release of the American Association of Individual Investors (AAII) showed that small investors are overly bullish again. The survey shows 53% who are bullish, 29% bearish and 18% undecided. This represents the small guy, who s opinions are the most fickle as they change on almost every week s news. This morning s release of April PPI and consumer sentiment will set the stage for the day s trading, as investor s attempt to interpret how the Fed will view the numbers. Yesterday, JP Morgan upgraded six chip equipment companies, sending them higher for MOST of the day, but none of them hold the bulk of their gains through the close. This is another sign that sellers are still out there in the shadows of this rally, and starting to show their presence. Trim Tabs also reported that equity fund inflows were a pitiful $400 million for the week, showing as it does every year, that the money flow dies after IRA funding season. This once lifeblood of the money flow junkie market continues to wean it off of its addiction, and like any recovering addict, we think there will be relapses and additional pain, especially if the Fed s efforts are ultimately as impotent as we think they might be.
Continued light volume of barely 1 billion shares, if that remain a concern. We do not see much potential for the markets to push through the strong resistance near 11,000, especially as the momentum is turning down. Prices have still not made any 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.
The Dow bottomed at 9106 on 3/22, and the OTC Composite bottomed on 4/4 at 1619. We continue to look for the downside reversal to emerge at any time, and there are preliminary signs that for the OTC, it already has turned down. The immediate question will be how prices handle the renewed fear of inflation and how the Fed responds next week. 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. Lower support is near 10,200, 10,000, 9654 and 9106. 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.
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TREASURIES
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Treasury yields short lived effort to rally this week was squashed yesterday, as the European Central Bank (ECB) tired their hand at surprising the markets with a rate cut of their own, albeit a smaller .25 basis point cut. This hurt US bonds as money flowed OUT. The 30 year yield surged from 5.66% at Wednesday s close to 5.75% yesterday, a pretty huge one day move. A push higher, to 5.825% incrementally, would indicate that the corrective bounce we had expected, quickly came and went. Until this level is reached we give the efforts to rally the benefit of the doubt. Any further efforts for the long end of the yield curve to narrow further will be interpreted to be minor wave "c" within primary wave "2" of the larger decline [within cycle degree wave (3) ]. This still allows for dramatically higher long term rates, regardless of the Fed s efforts.
We ve been talking about "stagflation" for a few months now, at least, and we continue to growing signs of this. The media will have you believing that it is all due to higher energy prices, which can be conveniently factored out, but the truth is, INFLATION IS NOT DEAD - OR - IT HAS EMERGED FROM ITS GRAVE!!!! Forgetting the governmentally engineered PPI & CPI reports (which also show an undeniably rising velocity), the pressures of rising wage demands are indeed a cause for concern, as is the power crises in California, higher energy, housing food and service prices. The message of the market is perhaps reflecting that regardless of the manipulation of the short end of the yield curve, long term rates are rising because pricing pressures are being ignored and that generally means they ll go even higher before they become a concern. That is certainly NOT while the Fed keeps pumping liquidity into the already saturated consumer markets!!
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!
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. 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 broke out above resistance this week on fund buying and short covering of the heavy net short interest that had accumulated among speculators in recent months. The XAU pushed above its resistance from the 3/9, 57.42 high, resolving the bearish chart pattern that had existed for many weeks before. Perhaps this short covering is ahead of next Tuesday s Bank of England (BOE) 20 ton gold auction, as speculators will have the opportunity to find new supplies to sell short then. Fundamentally, the demand for both, gold and silver continue to remain far ahead of the available supply, and eventually, this will have to lead prices higher.
Technically, the XAU bullishly resolved its bearish HP formation, lead higher by HSBC cash gold which turned bullish last Monday and shows a potential double bottom. The Investors Intelligence, precious metals Bullish Percentage is at 42% and rising, and this is very bullish for the near term. Our "early warning indicator", the XAU/gold ratio remains on a buy signal from 4/25. We had remained bearish the XAU against resistance from the last high at 57.42. With this now resolved, our parameters are now bullish. As we ve said consistently, "we think that great opportunity lies ahead"! XAU resistance is at 59, 63-4, & 69-73. Support now begins between 54 (53 = a new P&F high pole), 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: We are adding a new short sale on any strength in today s trading. Short Baker Hughes (BHI) above 37.25. The P&F Chart is on a "high pole at the bearish resistance line" (HPBr), and it had a buying climax back in December. In spite of all the bullish talk on oil and oil services, here s an oil service stock that topped out in March at 45. We would use 40-41 as a mental stop.
[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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