Last Signal: 7/14/00, SELL
Dow: 10,806.74 OTC: 4243.02
The Ratio managed to bounce slightly, but relatively unimpressively last week after the markets rallied each day. It may bounce further this week but would have to change quite significantly to turn our indicators bullish again.
FRIDAY, August 11, 2000: For another month, we see strong prospects for a top within a week prior to the next option expiration, as even “better than expected” earnings and evidence of a slowing economy are falling short of impressing the street. While the Dow pushed a little higher than we thought it should have within the bearish case, it has so far failed to get through the stated resistance at 10,960. Of course, we don’t know if it will, but we can say that we see plenty of reasons why the rally is failing without doing so.
The last strong up day, Monday, was on noticeably light volume of less than 900M NYSE shares traded. As the market has become overbought, it would take a lot more bullish conviction than that to keep the buy side momentum going. The Option Volatility Index (VIX) dropped to a very complacent reading below 21, near the level it generally reaches ahead of a downturn, as option traders become less and less concerned that they will be incorrectly bullish.
An important divergence that is developing against the prospects that the Fed has engineered a soft landing for the economy is seen within the utilities and the retail sectors. The Dow Utility Average has been making new all time highs and remains the best performing sector of the year, up 25% YTD “before” adding in their higher than average dividends. To me, this clearly reflects enough concerns among investors that they have been diversifying toward more stable and defensive alternatives. In contrast, the weakness of the retail sector, lead lower by the Gap, Walmart and Home Depot is a strong that forewarns of a harder than expected landing for the economy and that the US is beyond the days of wine and roses. We have thought all along that ultimately, the Fed would go too far, restraining the economy more than they desired, as their rate hikes could not reflect the impact soon enough to know their impact ahead of their next decisions. While we do not even know if they are through tightening yet, the imbalances that they have warned about are showing themselves as rising prices as the economy slows.
Initial support remains at 10,500 - 464 from the 7/28 low. A break of this level would signal the end of the rally with the Dow poised to test critical intermediate support at the 6/30, 10,336 low. An eventual break below this level would likely usher in a cascade of selling to a test of the 9732 March low. The Dow pushed briefly through key resistance at the recent 10,874 high before settling just below it yesterday. While we still think that (much) lower prices remain ahead [as calculated in the June issue of Reality Check], they may be put off until the summer rally that we had thought ended already finally runs its course. Resistance is near 10,960, 11,140, 11,220 and 11,420. Any push above this would make it likely that the January high at 11,750 will be approached and tested, but we still see this as unlikely.
TREASURIES
Treasury yields managed to carve further gains, also on the prospects for the slowing economy as the yield closed at 5.674% yesterday, the lowest close since April 10, when the yield reached 5.70%. This brings us closer toward are objective of 5.50% as fears are growing over the potential for a hard landing and troubles in “equity” paradise. With the Treasury still supporting the market with only $17. 5 billion of their $30 billion buyback program completed, we think the market remains constructive. Perhaps our target will be reached if another flight to safety arises that draws money to bonds from the flight away from equities. Our only real concerns for the moment are that our trading indicators have become VERY extended, making them vulnerable to a set back, and that bullish sentiment is rising rapidly. Again, if flight to safety buying develops to drive the yield lower, we would begin to react by getting much more cautious.
The markets are now fully convinced that the Fed will refrain from a seventh rate hike when they meet on August 22. We think the markets may too confident as we see it as a 50/50 proposition as it would be the last opportunity to act ahead of the November election. So, as we remain bullish on bonds, we will begin to get progressively less so if the market moves closer to our 5.50% yield objective. A move to this level would complete a .618 Fibonnacci retracement of the entire rise, from the 4.69% low of September of 1998 to the 6.75% high reached this past January. Another rate hike on August 22 may be perceived as the last of them and could be a bullish factor for the market. If this is the case, we would like to be prepared to take advantage of it by becoming sellers. Initial support is just beneath 5.95%, with more at 6.05%. A move above this would confirm a short term bearish reversal, with next support at 6.20 - .25%, 6.32% and 6.40%. Our longer term bond indicator, the Dow 20 Bond Average remains bullish and the Treasury Department’s buyback program should remain supportive through August. Resistance is at 5.72%, 5.65% and then or targeted 5.50% level.
GOLD
The XAU & Gold continued its effort to make a stand just above their more critical levels of long term support, but have still not shown enough evidence to draw any bullish conclusions yet. With bearish sentiment fully entrenched, the potential for a sharp rally on any further breakdown is growing, as the lower prices are likely being discounted by the markets now. At some point, this selling would attract short covering and other related buying (of course, this is just a hunch at this point).
We stated last week that "the potential for testing major support at the 8/31/98, 48.73 all time low remains close at hand, and the selling climaxes (on the XAU & Newmont Mining the previous week) were not in themselves enough to rule it out." This potential remains close at hand. A new P&F buy signal would be given with a rally through initial resistance to 56, which would now suggest the bottom was in. Next resistance is at 59 and then at 64. This would be significantly bullish. Higher resistance is at 69.
PORTFOLIO CHANGES
Friday, August 11, 2000: 8/8: We added Eastman Kodak (EK) to our large Cap portfolio at 59 3/8 after it has had 4 selling climaxes (SC) below 57 and a Low Pole (LP) buy alert on positive comments by Salomon Bros.; 8/9: we added Adobe Systems (ADBE) back to our shorts at 123 5/8, after its third buying climax (BC), an initial selloff and bounce back to its bearish downtrend line. Also on 8/9, we added re-added the Nasdaq 100 trust Units (QQQ) to the shorts at 93, as we think that wave 3 of larger degree wave (3) of the OTC’s bear market is beginning; 8/10: We added Tricon Global Restaurants (YUM), the Pepsico spinnoff of Pizza Hut, Taco Bell and KFC, at 29, after it has had 2 selling climaxes (SC) below 30, appears to have fallen in a 5 wave decline, has had lots of insider buying, and rose enough for a bullish low pole (LP) buy alert yesterday. .
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 .
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