|
Co-brand
Partnerships
| |
|
|
|
REALITY
CHECK UPDATE
Published Every Tuesday
and Friday |
| ARCHIVE:
APRIL
2000-MAY
2001 |
|
Contributed by
Mitch Harris
President: Market
Trend Realities,
Editor: The Reality Check
Newsletter |
|
May 15, 2001 |
| STOCKS |
| REALITY RATIO: +0.226
|
Last Signal: 04/20/01, TRADING SELL
Dow: 10,579.85 OTC: 2163.18
The Reality Ratio turned down through both of its moving averages last week, confirming the slow to move trading sell signal of 4/20. It has worked better for the turn in the OTC than Dow, as the rally remained in force but has narrowed considerably (in itself a sign of a turn). It is not clear to us that this downturn is poised to send the averages back to new lows, as their is a greater probability that prices consolidate to relieve the market s overbought condition before again mounting an attack on key resistance near 11,000. We still look for lower prices before this begins.
|
TUESDAY, May 15, 2001: The markets have become the most narrow that they have been for the entire year, with such little interest that daily volume has contracted to its lowest level of the year, on both, the Dow and OTC averages. As stated above, at the minimum, this is a sign the rally needs a rest. Potentially, it is a sign that sellers will re-emerge. The news has been that no one wants to do much ahead of today s FOMC meeting, when it is expected that they will cut rates by yet another 50 basis points (bp). Anything short of this may send the markets for a tumble, and there are growing signs that 50 bp s may be too much to ask for, after their last surprise cut was made just a few weeks back, on April 17. We have no pre-disposition on this.
As stated last week, we think it likely that the Fed will disappoint regardless of what they do. A 25 bp cut would signal that they may be at the end of their most aggressive easy money campaign in their history, while a 50 bp cut may find a bit of relief, the markets will quickly assess ANY move by asking, might this finally be it? As far as the "markets" are concerned, we see today s action as fully reflective in prices. Their aggressive 200 bp cut YTD is more than a 30% drop in just 5 � months for the overnight cost of money, at least for the banks. In essence, another Fed engineered bailout for the already flourishing banking industry, already debt-saturated consumers (as the lower rates at least give many some relief in how much they are paying in "maintenance" to the credit card shylocks), and to the stock markets, which overall, continue to appear way overvalued to us. In other words, we see their efforts to re-stimulate as less than an optimal solution to the problems they are trying to solve. Effectively, this may lead to the re-popularization of the term, "pushing on a string", if it is found that their solution fails to work. Also, even if it does, the economic dislocation may very well be the undeniable re-emergence of either "in, or stag"-flation!!! Their actions cannot come without at least "some" cost(s).
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 market s respond to the Fed. 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. A close below 10,000 would be a strong indication the overall bear market has NOT finished taking its toll, while a close above 11,000 would be significantly bullish for the near to intermediate term. 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.
|
|
TREASURIES
|
Treasury yields surged to their highest level since last November, reaching a high of 5.889% on Friday. This is consistent with our analysis for yields to have bottomed, and that our ultimate expectation is for a rise to well above the 6.75% high that was reached in 1/00. With such a significant collapse of the long end of the market in the face of the Fed s most aggressive easing of the "short end", we have drawn several conclusions. While we continue to see the greatest denial of inflation ever, inflation is not only a "potential" problem, it is rising NOW, and by much more than we are being lead to believe. April PPI rose by an annualized rate of 3.6% and money supply (MZM) is surging at a VERY inflationary 23% annual pace (the "easy money" we often discuss and hear about!). The short supply of qualified workers is also keeping employment costs rising at a relatively steep rate, with unit labor costs up 5.2% in the first quarter. If this is NO inflation, then I must wonder why we would ever worry about it in the first place. It is clearly a dramatic case of DENIAL, especially as we have been told that "non-inflationary" growth would continue as long as we saw productivity growth. Well, that too has not lasted forever as we were told it would, FALLING by -.1% in Q1!
While it appears that the intermediate wave "3" rise may have begun, the daily Treasury Yield chart has become very oversold in moving to a new high in the past few days. We do not rule out a pretty significant technical rally to emerge. Within this, resistance is at what we are considering the wave "2" low, at 5.56%. A move below this level would quickly change this interpretation slightly. We ll re-asses it if need be. The important thing to know is that the major trend for bond yields is UP, and that cannot ultimately be good for stocks. It also implies that the Fed s rate cutting campaign may indeed be coming to an end. This too would not be particularly good for stocks.
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. 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). Next support is targeted at 5.925%, 6.00-6.05%. Our long term assessment suggests that the long end will ultimately push well above the 1/00, 6.75% high. |
|
GOLD
|
Gold & the XAU have again been consolidating their recent gains with the XAU holding near 58 and HSBC cash gold near $269 per ounce. While the market s attention is focused on the Fed, the Bank of England will also make news today, auctioning the first in their new series of six new 20 ton auctions. If nothing else, their fire sale will continue to add to the market s much needed liquidity as aide to the speculators who have been finding it increasingly difficult to find the much needed physical metal, in order to roll old short sale positions, or deliver the gold they borrowed that was then sold short into the market. 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. The question remains "when"?
While the XAU recently broke out above the key intermediate resistance from the 3/9, 57.42 high, it has quickly lost some of its upside momentum and is becoming increasingly vulnerable to a downturn. We remain concerned that before a sustainable bull move gets going, we will AT LEAST see a correction that draws prices toward its lower levels. In the near term, we see only modest further upside potential, with the risk of a downturn growing. Generally, unless the demand for past BOE auctions has been surprisingly strong, they have lead to selloffs, fairly consistently. We feel it is responsible to be aware of this and prepared in the event of its re-occurrence.
Gold prices continue to show the "potential" for a double bottom, but need to clear resistance between $273-4 to confirm it. The Investors Intelligence, precious metals Bullish Percentage is at 42% and rising, and this remains bullish in the near term. Our "early warning indicator", the XAU/gold ratio remains on a buy signal from 4/25. It also shows a 5 wave rise, and "may" be near the end of a larger "double zig zag" corrective rally [a-b-c-x-a-b-c], for a "heads up" warning. We had remained bearish the XAU against resistance from the last high at 57.42. With this resolved, our parameters remain bullish. As we ve said consistently, "we think that great opportunity lies ahead"! This will remain true even in the event of one last leg of decline. 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!
| | |
|
PORTFOLIO CHANGES |
Tuesday, May 15, 2001: 5/14: We added Baker Hughes (BHI) to our short sales at 37.50, as mentioned on Friday, as it pushed 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). |
|
|
|
