Last Signal: 6/2/00, BUY Dow: 10,794.76 OTC: 3813.33
Friday, June 9, 2000: This week’s volatility has failed to do much for either the bulls or the bears, at least ahead of this morning’s Producer Price report (PPI), which is expected to show another month of stable prices, gaining just +.2%/+.1% core rate. We do not think this or the CPI number is what the Fed is watching too closely. If it were, they would be easing, not tightening. They likely place little value in these reports, acknowledging that they are manipulated and do not accurately reflect the true inflationary changes of prices in the economy. Even so, the markets love to react to these two numbers, usually more on emotion than for any rational reasons. Unless a BIG change is reported, there is generally little reason to react with the herd.
Technically, little has changed my view that the big surprises will remain on the downside, like yesterday’s 2nd disappointing pre-announcement made by P&G in two quarters. Of course the media made this out to be the main reason the market sold off yesterday, when just a day earlier, IBM’s 9 point gain on an upgrade by perma-bull firm, Goldman Sachs was barely mentioned as accounting for almost the entire 76 point gain on the Dow. Several of the short term trading indicators mentioned as overbought on Tuesday have turned down to give a short term sell signal. While still too soon to know what type of a decline to expect, we would hold off on any new purchase until these and other indicators turn bullish again, and that should take a while at best. Even in the event that this is just a shallow consolidation, there will likely be a better chance to make new purchases. The wave structure has done literally nothing to indicate that a larger rally is in force. In fact, the pattern is more closely following what looks like a more complex minor wave "c" of larger degree wave "ii", within another larger degree wave "3" decline. If this proves correct, the market(s) will soon be accelerating to the downside, breaking sharply below the recent trading range support at 10,250 - 200. A close below this would confirm what we stated on Tuesday, that investors were being duped into a "bull trap", by buying into another bear market rally, and that the market "has reached a level that indicates a reversal is due". Above Monday’s 10,860 high, upper resistance remains between 10,950 and 11,100. A push beyond this will suggest that a more complex bear market correction was developing (probably a double zigzag corrective rally), and not necessarily change our overall bearish view. Initial support at 10,760 was broken yesterday to confirm a very short term top. Next support at 10,550 is much more important because it would still be a high pole at the bearish resistance line (HPBr) on our longest term Dow chart, and a very negative sign. Support at 10,200 is still considered critical and where we have drawn a line in the sand for the bullish case. A close below this level would suggest new lows were ahead.
TREASURIES
Treasury yields are reflecting the market’s expectations that the economy has turned the corner and begun to slow. While this view is likely to be pre-mature due to the freight train-like momentum of the economy, moderate slowing should not be too far off. Remaining objective for our readers, we continue to point out that as early signs are emerging that the Fed’s tightening is starting to put a drag on the economy, this does not yet assure us that they are finished. We still think the Fed’s greatest concerns are "wages and consumer confidence", neither of which have shown signs of slowing. This leaves their continued policy debate open.
Here too, short term trading indicators have become overbought and vulnerable to a downturn, but our long term indicator, the Dow 20 Bond Average, finally gave its first BUY signal since turning bearish in February of 1999. This adds confidence to our overall bullish opinion, but we have decided to wait on a pullback before repositioning in the 0-Coupons we hope to get. We hope the rally will push below the 6.65% level reached in April, perhaps stretching to resistance at 5.50% before completing the entire bear market rally. This would have retraced a Fibonnacci 61.8% of the entire rise from 4.69% (10/98) to the 6.75% high of this past January. 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%.
GOLD
The XAU & Gold have backed off after a sharp $16 surge on short covering in the past week. The rise was clearly related to the plunging US dollar as several weaker than expected US economic reports were released. This has added to the hope that the Fed is closer to the end of their tightening than previously thought, and international investors lost some of their interest in holding US Dollar denominated assets. We think that an even more important factor was the sudden realization last week that the new accounting rules imposed by the Financial Accounting Standards Board on "all" derivatives will go into effect on June 15. This will force public corporations to effectively change their reporting of the value of derivatives holdings from a simple footnote in their financial statement to fully 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 trades and kept gold prices artificially low for years now. It also allowed the other carry trades that drove huge hedge funds like LTCM and Tiger management into insolvency. Companies holding huge derivatives losses suddenly scrambled to close tons of bad trades, transferring huge paper losses to realized ones ahead of the changes that will force these losses to be disclosed. It is very hard to believe that all of these bad trades have already been cleared from their books, simply because there are way, way to many to have had a market impact for just 2 or 3 days. Perhaps gold’s pullback of the past few days was more related to the dollar becoming deeply oversold and due a bounce.
The XAU moved quickly through initial resistance at 59 but has failed (so far) to push through key resistance at 64 to confirm the bullish reversal we’ve been waiting for. We still remain confident that the next great rally has started and remain bullish against XAU support from its 4/13, 54.24 low. A break of this level would continue to suggest a test of the 8/31/98, 48.73 all time low. A move above 64 is needed to confirm the bullish reversal and to resolve the current "high pole at the bearish resistance" (HPBr) bearish chart formation. We think it will be bullishly resolved.
PORTFOLIO CHANGES
Friday, June 9, 2000: We will be attempting to establish a new short sale on Adobe Systems (ADBE) this morning on a rise above 120. The stock shows a bearish High Pole Top (HPT), as 14 insider sales in the past year and a very rich 59 P/E. We are also hoping to establish a long position in our low priced portfolio with Scios (SCIO) on a dip below 5.00. It just broke above a previous high, has a bullish short term pattern and modest insider buying. They just announced a continuation of their collaboration of research with Lilly in stopping the progression of Alzheimer’s, and are finding success in their research into heart disease using cDNA microarray technology.
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
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