Last Signal: 3/24/00, SELL Dow: 11,112.72 OTC: 4963.68
This week's recovery will undoubtedly turn the ratio up and bullish as stated
in Tuesday's update, "The ratio continued lower toward its oversold zone, beneath -.40, but it is not quite there yet. It wouldn’t take too much of an improvement this week in our indicators to turn the ratio bullish. A move back toward -.20 would be enough for this to happen, but we’ll wait and see."
FRIDAY, June 2, 2000: After one day of consolidating Tuesday’s spectacular gains the markets resumed their panic buying as money managers feared being left behind as the "correction" has ended, and as the economy is slowing down. The perception is that the Fed may be able to let its guard down and either tighten one last time by a less aggressive 25 basis points, or they won’t have to tighten at all. We think the markets may be getting way ahead of themselves, because the Fed is not just looking at the pace of growth, but at the rate of price increases, and the two DO NOT necessarily work together.
While we’ve have been expecting the selling to give way to a summer rally, we thought it would come from lower prices and some sort of sign of climactic selling and capitulation. This did not materialize and the continued relatively low volume on the rally is a reason for our suspicion. As stated above, much of this week’s rally was related to the fear of "professionals" that they would be left behind during the monthly portfolio window dressing period. Some of the rally can also be attributed to short covering, as our Short Interest indicator gave its first Point & Figure (P&F) buy signal since last June, almost a full year ago. Further gains going forward will have to be based on something other than these two pagan like rituals, and they will have to generate much greater volume before the gains will appear more sustainable.
Some signs that remain a concern are that both, the NYSE A/D Line and the OTC Composite made new lows last week, and some of our key short term trading indicators are already becoming overbought. A strong opening this morning should attract sellers by the end of the day. My reason for thinking so is that we can see short term 5 wave patterns on many, many charts for key stocks and market averages. The question going forward, has the widely expected summer rally started or is this a bounce in an ongoing bear market. In a word, the answer may be, both. Many stocks are rallying from deeply oversold levels, but remain within very well defined downtrends on their P&F charts. This alone suggests that sellers will re-emerge long before new highs are reached. These things alone do not guarantee a bearish reversal, but we must continue to believe we are in a bear market and if correct, the surprises will remain on the DOWNSIDE. On the bullish side, our Reality Ratio will most likely turn up for a trading buy signal that can last for 4 to 8 weeks. We’ll just play it the way we see it.
The developing Elliott Wave pattern seems to be developing into a complex "corrective flat" within primary degree wave (2), with resistance between 10,950 and 11,100. A push beyond this would suggest that it is something else (probably a complex double zigzag corrective rally), not changing the overall perception that we remain within a bear market rally. Prices closed yesterday right at the resistance sighted at 10,650. Support is 10,500, 10,360 and at 10,250 - 200. A close below this level would suggest new lows.
TREASURIES
Treasury yields found technical buying this week, also related to month end portfolio adjustments, combined with encouragement that the economy is showing some signs that it is beginning to slow down. Keep in mind that the reports that are giving this perception are coming off some VERY strong reports last month, and while below expectations, they can hardly be considered "weak". For instance, April New Home sales fell by 5.8% for the month, but this only reversed the 5.8% jump in March which was the 2nd highest reading ever. Same store (retail) sales remained strong overall, and this is to be expected going into the summer, ahead of back to school retail strength.
Technically, the bond rally pushed through resistance at 6.00% yesterday to reach a low at 6.914% before closing at 5.95%. Our next level of resistance is at 5.85%, and then 5.72% and the recent low at 5.65%. Unless new overall fears develop that generate new flight to safety buying, we do not think this level (5.85%) will be overcome. Support is at 6.00 - .05%, 6.20% - .25%, 6.32% 6.40%, 6.65% and at the 6.75% January high.
GOLD
The XAU & Gold continue to show a clear bullish divergence’s , but so far, nothing more. Prices remain flat and show no signs of either short covering or investor interest. Perhaps this apathy is what we should be expecting ahead of the beginning of the next great rally. If so, the next rally should be a whopper. Market Vane’s sentiment survey among futures trader shows just 18% who are bullish. This is again approaching the record 15% extreme that was reached ahead of the close to 70% rally from early last September to mid October. This should ultimately happen again. As long as the XAU remains above its 4/13 low at 54.24, the bullish price divergence will remain and suggest that a rally should be close to beginning. We remain optimistic against this support. Support remains at 54.24 and then at the 8/31/98, 48.73 low. Resistance begins at 59, but a CLOSE above 63 - 4 is needed to confirm a short term bullish reversal.
PORTFOLIO CHANGES
Friday, June 2, 2000: 5/31: American Express (AXP) short hit the 54 stop & was covered (-5.21%); It was replaced with another try with oil service issue,Smith International (SII) 79 5/8, with a stop at 82 �; Also on 5/31: We added Novellus Systems (NVLS) to our large cap portfolio at 46 � with an upside PO of 64 and with the stock already reaching 52, a protective stop at 47 (Note: this is a VERY volatile chip equipment company, and a trading vehicle only). 6/1: Circuit City Stores (CC) short was covered at 46, (+21.7%), which was our downside price objective (PO).
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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