Last Signal: 6/2/00, BUY Dow: 10,794.76 OTC: 3813.33
FRIDAY, June 16, 2000: Today is the triple expiration of options and futures. It is likely that much of the past week’s trading has been related to this, although prices have remained a mixed bag. We see a continued trend toward an earnings squeeze developing as higher interest rates and the extended strength of the US Dollar have had an adverse impact on the earnings of many large cap, multi-nationals. Smaller, domestically oriented companies are also feeling the pinch of higher rates and at least until recently, the squeeze on their bottom line from the lack of ability to pass on higher labor, healthcare, and raw material costs in order to maintain their market share. Indirectly, this too is the result of the strong dollar, as much of their competition has come from cheaper goods from across borders. This is the topic of this month’s issue of the Reality Check Newsletter, which will be issue this weekend. Email us at <
mtr@fuse.net > if you would like to receive a sample issue!!
Technically, unless the Dow can overcome its resistance at 10,960, 11,100 and 11,425 on rising volume, we are under the impression that the "summer rally" is in the process of rolling over to the summer selloff. Our trading indicators are very mixed, but trend indicators remain bullish for now. The problem is that they are not producing too much in the way of standouts when we look to find notably bullish groups or individual stocks, with the standard exceptions of the chips and energy service sectors, which look to us to be especially vulnerable. The Dow has so far managed to hold above initial support at 10,500 on Tuesday. A break of this level would be a bad sign, but support at the 10250 -200 level is where we have drawn our line in the sand as we see it as critical for several reasons. A break below this level will confirm that the trend has turned bearish, where we would expect a much deeper selloff to at least test the 9732 low.
TREASURIES
Treasury yields remain bullish, but overbought short term. With our long term bond indicator turning bullish last week, we see the yield moving lower, but with our short term trading oscillators over-extended and turning down, we think bonds will consolidate for perhaps a week or so. If this turns out to be correct, it should soon offer an opportunity to reposition into 0-coupons as we hope for. The perceived slowing of the economy and the Treasury Department’s ongoing "reverse auction" program to retire older, longer dated securities, combined with less issuance of new long term paper, makes for very simple economics, that demand will remain greater than supply, especially if the economy continues to show signs of slowing and Wall Street acts as we expect as we move into the fourth quarter.
We think the yield has a good chance to retest its April, 6.65% low and perhaps extend itself to our next objective, to resistance at 5.50% before completing what we consider a entire bear market rally. This would be a 61.8% Fibonnacci retracement of the entire rise from 4.69% (10/98) to the 6.75% high of this past January. 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’s rally appears to remain intact, up sharply one day and down a bit the next, as perma-bears seem to be running out of selling power. They do not seem to have the stamina to fully reverse the buy side demand that is developing. The most significant news for gold fundamentally is the newly imposed "derivatives accounting standards" that were put into effect by the Financial Accounting Standards Board on June 15, on "all" derivatives. This will force public corporations to change their reporting of the value of "all" 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 and other types of carry trades. This manipulation has kept gold prices artificially low for years now. Companies holding huge derivatives losses are suddenly scrambling to close tons of bad trades, transferring huge paper losses to realized ones now that the new reporting standard is in effect. Perhaps the day has come where "the jig is up", as they used to say in the movies!
Also helping gold’s prospects immensely is the new perception that the dollar has topped out, as a weakening dollar is bullish for gold, as has been the case for gold priced in other currencies. It was reported yesterday that the Chinese central bank has entered into an agreement with South Africa to purchase 15 tonnes of gold per year from them alone. According to USA Gold’s (www.usagold.com) columnist, Michael Kosares, China has "ballooning dollar reserves" and they "can take proper advantage of the weak dollar to quickly build its gold reserves." He also compared China’s current gold reserves of only 375 tonnes to Europe’s approximate 12,500 tonnes, the US’s 8000 tonnes and Japan’s 750 tonnes. This shows that both China AND Japan have a very low "gold/dollar ratio", affording them huge potential to increase their reserves (in exchange for dollars).
Even in light of these and other bullish developments, the XAU has yet to confirm a bullish reversal by breaking out above key resistance at 64. Obviously, before we can get more excited, this must happen. We remain bullish against the 4/13, 54.24 low and remain confident that the bullish confirmation will occur shortly. A break of this level would suggest a test of the 8/31/98, 48.73 all time low. A move above 64 would also resolve the current "high pole at the bearish resistance" (HPBr) short term chart formation. We think it will be bullishly resolved. Higher resistance is at 69, 72 -3, and then 82. We plan to watch the market walk before it can run. Have a great weekend!
PORTFOLIO CHANGES
FRIDAY, June 16, 2000: 6/15: We re-added Conseco (CNC) (6 3/8) to our low priced portfolio yesterday, after it reversed up on huge volume. There are rumors that they are about to get a new CEO and also that they are about to receive a takeover bid. The stock is deeply depressed on "accounting irregularities", but we think the selling is way overdone, and so do the insiders. They also have a HUGE amount of short interest, so, if they aren’t going bankrupt, they will have an awful lot of short covering, especially if they get a buyout offer. We also must reason this as a great possibility after the recent repeal of the Glass - Steagall Act that allows banks, brokers and insurance companies to merge. Also on 6/15, we re-added Chase Manhattan Bank (CMB) (78 3/8) to our shorts, after the stock bounced back from a large high pole at the bearish resistance line (HPBr), our favorite short selling formation. They also have a large number of insider sales.
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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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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