Last Signal: 6/2/00, BUY Dow: 10,794.76 OTC: 3813.33
TUESDAY, June 6, 2000: The markets launched what many see as a powerful rally and beginning of the next "bull" market leg, on a few preliminary signs that the economy may finally be yielding to the Fed’s six rate hikes in the past year. While we too had been looking for these signs to begin emerging, we are not as confident as many perma-bulls, not that the economy could be easing, but because labor cost pressures have NOT been eased a bit by last week’s data. Just this weekend, while enjoying the good weather riding our motorcycle through the countryside in both, southern Indiana and Ohio, I noticed one "NOW HIRING" sign after another. Many were large banners stretched across entire store fronts, stating $8 - $10 per hour. These were ALL for entry level jobs at gas stations or fast food businesses. We’re talking about $20,000 per year jobs for unskilled burger servers here. Something to think about, with all these typically high school kids making this kind of money at the "low end" of the labor pool, it’s no wonder consumers remain confident enough to keep spending. We would point out again that even if the economy begins to slow, this alone does not guarantee that pricing pressures on inflation will ease with it, and one ignored report last Tuesday was the Conference Boards, May Consumer Confidence report that surprisingly jumped from 137.7 to 144.4, the 2nd highest reading ever, just below the 144.7 that was reached in January. I see this as a major driving force of the economic boom, and even after 6 rate hike consumers remain confident that the good times will not end.
With Wall Street’s perception that the "correction" is over and the summer rally will lead its followers back to the promised land of prosperity, we continue to question the market’s overall integrity. With the exception of last Friday, daily volume has remained well below the YTD average of 1.1 billion shares per day. In fact, many were too impressed by the 1.165 billion shares traded then, even though it was only back to the "average". More impressive, the daily A/D Line was undeniably impressive at better than 2:1 on three days last week, and our 10 day A/D Line indicator turned bullish. What has us most concerned is that while buyers seem to be willing to come in and support the market, our short term trading oscillators and sentiment indicators are very overbought and will likely need to back down even if the market holds up. This indicates that at best, a consolidation is due, and if investors are being duped by a "bull trap", buying into another bear market rally, it has reached a level that indicates a reversal is due.
Currently, I see too many potential Elliott Wave patterns to draw any conclusions that offer great confidence, so while keeping what is seen as the highest probability pattern, that of a complex "corrective flat" within primary degree wave (2), we are keeping an open mind to changing this if it is called for. Upper resistance remains between 10,950 and 11,100. A push beyond this will suggest that it is something else (probably an even more complex double zigzag corrective rally), and not necessarily change our overall bearish view. Initial support is at 10,760, but it is much more critical at 10,550, where it would be a bearish high pole at the bearish resistance line (HPBr) on our longest term Dow chart. An hourly decline 10,200 is still what is considered critical support. A close below this level would suggest new lows were ahead.
TREASURIES
Treasury yields had follow through buying on the perception that the economy is finally beginning to slow, and that this would allow the Fed to refrain from another tightening when they next meet on June 27. We aren’t quite as confident, but we have been looking for the same signs that are starting to emerge that their work is beginning to put a drag on the economy. We still think the Fed’s greater concerns are "wages and confidence", neither of which have shown signs of slowing. This leaves their continued policy debate open.
The yield has managed to push and stay below the 6.00% level, making it probable that a larger degree bear market rally is underway. We had hoped for this back in April when we turned short term bearish (April 7), stating we "will reassess once we see enough of an upside retracement to offer new bullish potential. This may come from the .20 - .40% level". The current bullish reversal developed after reaching 6.25%. We think this rally will likely push below the 6.65% level reached in April, perhaps stretching to the 61.8% Fibonnacci resistance at 5.50%. This would potentially complete the entire bear market rally, retracing the entire yield rise from 4.69% (10/98) to the 6.75% high of this past January. This would likely take the shape of a "double zigzag" corrective rally, within a larger magnitude bear market. Next resistance is at 5.85%, 5.72% and at the 5.65% April low. Support is at 6.00 - .05%, 6.20 - .25%, 6.32% and 6.40%. We are hoping to reposition in 0-Coupons on a pullback above 6%.
GOLD
The XAU & Gold finally responded to the bullish divergence that we had been pointing to, as well as to the sharply weaker US Dollar. Low and Behold, a sharp bullish reversal for both the bullion and the gold stocks! We had strongly suspected that a weakening dollar would remove a huge drag on gold for US investors, and it certainly has been the case. But something that carries even greater significance may also be taking place. Our friend Michael Kosares, at USA GOLD (www.usagold.com) pointed out yesterday that the rally was likely boosted by the new accounting rules on derivatives that will go into effect on June 15. The new rule forces public corporations to effectively change their reporting of the value of derivatives holdings from a simple footnote in their financial statement to disclosing the current market value of derivative positions, making them open to public scrutiny (and honest book keeping). The old accounting practice allowed a company to simply bury their losses without having to declare them. This practice had largely been responsible for the huge forward selling shell game that had perpetuated the gold carry trade and kept gold prices artificially low for years now. Companies holding huge derivatives losses are suddenly scrambling to close tons of bad trades. They are transferring the huge paper losses to realized ones, ahead of the changes that will force these losses to be disclosed. Kosares pointed out that in particular, "mining companies are not going to want to be exposed as the primary enemy of the very product on which they depend for a profit….and, no management team will have wanted to show that the company balance sheet has suffered a serious hit" (this is especially true in the gold market but NOT limited to it).
Prices moved through initial resistance at 59 but still need to push above 64 to confirm the bullish reversal we’ve been waiting for. We think we are finally seeing the beginning of the next great rally that we stated on Friday would develop from the current extreme of investor apathy. We continue to remain bullish against XAU support from its 4/13, 54.24 low. A break of this level would suggest a test of the 8/31/98, 48.73 all time low. Next resistance remains at 64 which is needed to confirm the bullish reversal and to resolve the current "high pole at the bearish resistance (HPBr) bearish chart formation. We pay less attention to this chart pattern when prices become so oversold and think it will be bullishly resolved.
PORTFOLIO CHANGES
Tuesday, June 6, 2000: We are adding to our large Cap portfolio, Anglogold (AU) 21 9/16, yesterday’s closing price. This South African gold producer is one of the world’s largest and it has a 7.65% yield. It is appropriate for more speculative accounts.
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).
Copyright � 1998-2002 Tulips and Bears LLC.
All Rights Reserved. Republication of this material,
including posting to message boards or news groups,
without the prior written consent of Tulips and Bears LLC
is strictly prohibited. 'Tulips and Bears' is a registered trademark of
Tulips and Bears LLC
Last modified: April 02, 2001
Published By Tulips and Bears
LLC
