Last Signal: 7/14/00, SELL
Dow: 10,806.74 OTC: 4243.02
The Ratio pushed modestly higher for the second week in a row but remains on an overall sell signal. It is still well below the .613 sell signal it gave on the week ending 7/14, for a bearish divergence against the higher market prices reached. We think the rally will run out of gas soon.
FRIDAY, August 18, 2000: The rally continued yesterday ahead of today’s double expiration of options and futures. Investors seem content buying into it as they show renewed signs of extreme confidence and bullish complacency that generally appears just ahead of the next downturn. Volume remains light on otherwise what appear to be strong days, making their bullish conviction seem somewhat erroneous. Whether the market turns around now or continues a bit higher first, we expect that the summer rally will soon end along with its bullish seasonality. This would be consistent with our overall expectation that an autumn swoon will emerge to drive the markets lower into the forth quarter when bullish seasonality will again save the day. One indicator that argues strongly for this is the Option Volatility Index (VIX), which dropped to a very extreme reading of 19.81 yesterday. This measures the amount of option premium speculators are willing to pay for near the money OEX calls versus puts. Readings below 20 are considered an extreme level of bullish complacency that consistently goes unrewarded, as it indicates prices are near their upside extreme. The last time this fell below 20 was in late December, just ahead of the early January peak as the market had trouble throughout the first month of the year.
Yesterday’s rally allowed the Dow to recover most of its lost ground from Wednesday while the NASDAQ pushed higher, lead by the same old-same old, biotechs, chips and technology sectors. It was still left short of breaking above its 200 day moving average which may continue to contain further gains. Initial support for the Dow is up to 11,900, with key support now between 10,500 - 464 from the 7/28 low. A break of this level would signal a trend reversal that should lead to a test of critical intermediate support at the 6/30, 10,336 low. Dow resistance remains near 11,140, with 11,220 just above that before major resistance at 11,425. As stated in the past few updates, “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.” Any push above 11,425 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 are hanging on to much of their recent gains, but our short term trading indicators continue to look very vulnerable to a setback, as does the mounting bullish sentiment. The Treasury Department announced their next $1.5 billion repurchase of Treasuries to be retired, continuing as supportive for the market. We think the market has been discounting the end of the Fed’s tightening and an economic slowdown, perhaps prematurely. While we give another rate hike a 50/50 chance when the Fed meets next week (8/22), the confidence over such odds seems like more of a gamble than a reasonable trade. We plan to use further gains to become progressively less bullish, particularly if the yield proceeds toward 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. If the Fed does act again on August 22 it would most definitely be perceived as the last of them and be a bullish factor. Initial support is just beneath 5.85%, 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 managed another day or so of gains before yesterday’s consolidation. As stated in the Tuesday update, our early warning indicator, the XAU/gold ratio turned bullish from a deeply depressed level, indicating that there is plenty of room for the rally to get moving, of course if buyers don’t get shot in the foot by the manipulators, as has been the case so many times now. Our ratio indicator is a measure of how much gold stock you can buy in relation to the price of an ounce of gold itself on any given day. It dropped to a low of .18 on 7/25 and has since been rising. Readings of below .20 have consistently been a good time to buy gold stocks in the past.
Stated last Friday, 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. While the potential for a test of major support at the 8/31/98, 48.73 all time low remains fully possible, the recent selling climaxes (on the XAU & Newmont Mining the previous week), along with the XAU/gold ratio upturn and many other favorable factors offer the potential for a powerful rally to begin at any time. 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, then at 64, and 69.
PORTFOLIO CHANGES
Friday, August 18, 2000: 8/15: Home Depot (HD) 55 1/8, was added to our short sales on Tuesday after it gapped lower on the opening after reporting “strong” earnings. This reversal was also a bearish “bull trap” that is one of the potential short selling formations we look for.
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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