Last Signal: 7/14/00, SELL
Dow: 10,806.74 OTC: 4243.02
After bouncing back since late in July, the Ratio reversed down again completing what appears to be a divergent lower top. This is clearly a bad sign and what we had been expecting all along as the ratio had recovered, especially as we are now in the most seasonally bearish period of the year.
TUESDAY, September 12, 2000: Prices have turned sharply lower, especially in the volatile OTC averages and others that are dominated by the absurdly over-owned tech issues. The theory has been that these companies could withstand the pressures of higher energy prices, six rate hikes and consumer over-indebtedness, forever. Perhaps that is not so, but admittedly, these stocks have only been declining for a few days so far. We think that overall, we have entered the devastating cycle degree wave (3) decline of the bear market that’s been with us for well over a year now. If correct, the bearish cyclical forces will drag prices much lower than many foresee, finally showing how bear markets sneak up on the uninitiated in order to keep the greatest majority believing the worst is over long before it even gets started. We think the worst is yet to come, but for the prepared, it will offer great trading opportunities on both sides of the market. These opportunities mean that we not only have to step up to the plate, but will have to take a few swings too. Of course, this is easier said than done!
At least some of the current weakness is related to both, this week’s triple expiration of options and futures, and the approaching end of quarter portfolio “re-adjustments”. Perhaps by the end of the month there will be even more “adjusting”. The fully complacent environment seen by the VIX and other measures that we have discussed recently will not just go away. They will only find relief with a lot more selling than what we’ve seen so far.
The markets remain plenty confused and confounded and for good reason. Tech leaders, multi-nationals and retailers have started leading the market lower, as financials, brokers banks, utilities, and energy issues have been showing leadership on the upside. This seems unusual, that financials and energy issues are moving higher together as the economy is slowing. The higher oil prices would reasonably have already discounted the strong demand and started receding on the prospects for a slowing economy. The interest sensitive financials would normally have been vulnerable to higher oil prices (inflationary) and six rate hikes. Instead, they consolidated before strengthening again as the markets felt the Fed has finished tightening. We think the higher oil prices are BAD for the economy, imposing higher prices on consumers that effectively act as either more rate hikes or even a tax increase, as it takes spendable income out of almost everyone’s pockets. The imbalances created by higher oil prices will show up somewhere and the impact cannot be “factored” out of government data forever. That is, not unless the government can convince all of us that these imbalance never really existed to begin with.
The Dow broke and closed below initial support near 11,200 yesterday for an early warning that the trend is turning down. A close below the next level of support at 10,980 would confirm this on a short term basis, but key support remains between 10,500 - 464, from the 7/28 low. A break would signal the larger trend reversal that we see coming, and should lead to a test of critical intermediate support at the 6/30, 10,336 low. The rally reached a high of 11,401 last Wednesday, just 24 points from the key 11,425 resistance before turning lower. A break above this level is still needed to force a change of our overall bearish view, keeping us bearish against it. A strong close above this would make a test of the January, 11,750 all time high likely, but this is becoming less likely.
TREASURIES
Treasury yields continue to consolidate their gains while they at least try to work off the overbought created suggested by many trading oscillators. We continue to hope for one last push toward our lower yield objective near 5.50%, at the Fibonnacci .618 retracement level, but the rally has continuously met resistance near 5.65%. This has already satisfied quite a typical bear market rally, as 5.72% was the Fibonnacci 50% retracement of the entire rise[from the 4.69% low of September of 1998 to the 6.75% high reached this past January]. Perhaps the needed push through the 5.65% barrier will be on a renewed flight to safety if we are correct about a steep decline in the equity markets. This may be the last piece of the puzzle to fulfill our expectations.
On the positive side, our long term, Dow 20 Bond Indicator remains firmly bullish, the economy shows growing signs that it is slowing, and the Treasury continues to support the market with their long maturity buyback program. On the bearish side, heavy corporate supplies are scheduled to be issued, taking away from the demand for Treasuries, sentiment has become pretty optimistic, and the rally has quickly lost its momentum. We think this makes the market’s future path a toss up for now, with the odds slightly favoring the ongoing bullish trend.
We continue to reiterate our intentions to become progressively less bullish with any further progress toward our goal. Initial support remains 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%.
GOLD
The XAU & Gold have continued to show positive signs without actually doing much. Investors Intelligence reported that the precious metals mutual fund bullish percentage just moved up to 34% and a “buy alert”. We also see the overall group bullish percentage capable of turning bullish from a deeply oversold level with just one or two good days, as many of the charts that we follow are close to a new P&F buy signal. We have also been noting that the XAU has shown better relative performance over gold itself, a bullish divergence that typically precedes an upturn. Sentiment remains deeply bearish overall as there is literally NO confidence that a sustainable rally can be forthcoming. Of course, this is a very bullish omen! We have also seen a continued steady flow of insider buying of various mining issues, a vote of confidence from their respective management’s.
A push above 55-6 is still required to turn the short term trend bullish on our 1 X 3 P&F chart, which will not take much effort. A close above 56 would signal the potential for a more sustained upturn than many may be prepared for. Higher resistance is at 59, then at 64, and 69. Support is at the recent 49.55 low and then at the critical bear market low reached on 8/31/98 at 48.73. We await something (else) of analytical value to emerge, which we think is coming.
PORTFOLIO CHANGES
Monday, September 12, 2000: - none today -
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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