Last Signal: 7/14/00, SELL
Dow: 10,806.74 OTC: 4243.02
The ratio bounced “slightly” with last week’s recovery, but this was to be expected after so much selling. While the Dow continued higher yesterday, our best guess remains that the sellers will re-emerge, but it is a very difficult call, as our indicators remain very mixed. In any event, a follow-through rise in our basic Ratio line this week would be a very good sign. We do not plan to 2nd guess or jump the gun on this, hoping we’ll have plenty of time to benefit “after” we get more bullish confirmation. Since the Friday, July 14th sell signal, the Dow moved a bit higher but the OTC Composite topped at 4289 on Monday, just 1 trading day later! Our Reality Ratio could not have been more timely!!! Our advise has been to sell into rallies, but this is less clear cut than it was.
FRIDAY, November 3, 2000: Almost just in time for Halloween, last night the media shook a conveniently overlooked skeleton out of George Dubya’s cooler…I mean closet! Bush Jr. failed to disclose earlier in the campaign that he had a DUI when he was 30 years old, while drinking with friends in Kennebunkport, Maine (the Bush family’s summer home). He is trying to minimize this overlooked detail of his past by re-stating how long ago it was and that he no longer drinks. One of his MANY campaign PROMISES has been that electing him would “restore dignity, character and honor” to the White House. He can now add, “as long as I don’t get caught” or “as long as my past doesn’t catch up to me”. It’s not the actual event that bothers me. It is that he is already proving to be the same type of hypocrite who will seemingly do or say ANYTHING to “win”, exactly what he is saying we need a change from in the first place. On top of this news, his Vice Presidential running mate, Dick Cheney also confessed to having TWO DUIs when he was younger. Do we really need two admitted alcoholics running the most powerful country in the world? If it were Clinton or Gore who was “forced” to confess this, he’d be getting roasted on the Bush family BBQ pit by now!
The markets seem to be ignoring this revelation this morning, as the pre-opening futures indicate another higher opening. The markets love to talk themselves into “themes”, and this one is that the bottom is in and the bull market is alive and well. While the bottom may or may not be in, we still doubt that this is either the old or a new bull market. Conditions that created the old bull are long gone, and they haven’t reappeared to lead us to believe that a new bull market has started either. The Fed is no longer stimulating the market, credit conditions are no longer supportive and are deteriorating rapidly, and corporate earnings are decelerating and no longer justify the still lofty market multiple.
Regardless of the market’s outcome, these things did not turn on a dime just because we turned a page on our calendar. While the markets have turned bullish again as the seasonal weakness ending almost exactly as we had forecast, our short term indicators are very overbought and we expect the markets to turn lower again. It will be the depth of the first decline since the 10/18 Dow low that will allow us to determine whether the seasonal rally will continue, or whether the selling that we never felt was complete is resuming. If part of the recent strength was due to Bush’s questionable lead in the poles, it could easily be given back with this new information about his character.
Yesterday, the Dow trading in a very narrow range, never moving either above or below the range of the day before. This is known as an “inside” day and implies that traders are becoming indecisive. The heavy volume without further upside progress is also a form of churning, so the potential for at least a pullback remains likely. Supporting this, our shorter term trading indicators are pretty overbought and we see some other signs of a pending reversal, such as another closing “tick” sell on Wednesday, of +603 upticks. Also, the McClellan Oscillator closed at +137 yesterday, our 10 day Trin reading is overbought, as is our 5 day up volume indicator. While none of these tell us much about the overall trend, they do suggest that a downturn is due. We’ll evaluate beyond this as the market changes. On the positive side, our 10 Day A/D Line indicator is now bullish for the 3rd day after it was bearish for 31. My concern is that the last time it turned bullish it only lasted for a total of 9 days. This indicator alone gives the trend the benefit of the doubt.
Our Elliott Wave analysis still suggests that the rally remains within a larger bearish pattern. It seems to be stalling just below the next level of Fibonnacci resistance, at 11,046 [11425 - 9654 = 1771 X .786 = 1392 + 9654 = 11,046], reaching a high at 10,995.41 on Tuesday. Above this level, additional price resistance is at 11,100, 11,250 and 11,425. Any push beyond this would indicate that a test of the high was developing. Support begins 10,483, 10,324, 10,166, 9940 and at the 9654 low.
TREASURIES
Treasury yields have backed up on the renewed taste for equities, combined with the continued deterioration of credit quality, and the bounce in the depressed euro against the dollar. Also, additional evidence that the economy is slowing is viewed as bearish for bonds because instead of the Treasury continuing to buy down their long term debt, a sustained slow economy would make it more likely that they will eventually have to reissue long term bond issues. The high yield sector has remained in chaos as yield spreads have widened to better than 650 basis points, an even larger spread than they reached during the 1990 collapse, or the 5.50% spread that was reached during height of the 1998 Asian Contagion. This is clear evidence that there is a very deep contraction in credit quality going on. This will clearly have a negative impact on corporations as they will be forced to finance their needs at a much higher cost. It is also, as we had pointed out many times over the past year or so, exactly the reason why so many companies were rushing bond issues to the market ahead of these troubling higher borrowing costs. This was lead by Merrill Lynch, who has historically had an outstanding record of recognizing these market changes ahead of time. This is one clear result of the Fed’s tight money policy, as well as the result of corporate America’s over-leveraged use of their stock as currency, as many debt to equity ratios have soared (one example of the leverage of corp. stock as currency, just look at GE’s debt as a percentage of total capitalization today vs. 10 or 20 years ago, NOT including their proposed $42 billion buyout of Honeywell, with their “stock” (as currency)!
A reversal above 5.825% would be a bearish “high pole at the bearish resistance line” (HPBr) on our short term yield chart. As of this morning, it reached 5.81% on the stronger than expected October employment report, bringing it close. This would indicate that a move back above 6.00% was forthcoming. A push below 5.65% on the other had, would indicate that the move we gave up on, to 5.50% was underway. We see this as the less likely resolution of the recent range. Support is layered all the way up, beginning at 572%, 5.85%, 5.97%, 6.05%, 6.20%, 6.32%, 6.40%, and at the 6.75% January high.
GOLD
Gold & the XAU remained on the treadmill, after last week’s major selling climaxes (SC) for the XAU and our XAU/Gold Ratio, and sector leaders, Barrick Gold (ABX), Placer Dome (PDG) and Homestake Mining (HM) (according to Investors Intelligence [(914) 632-6422]. While this is considered a bullish sign of accumulation, nothing has happened ahead of next Tuesday’s 9th 25 ton gold auction by the Bank of England. Support is at last Wednesday’s 41.64 low, and then between 40 - 37. A push to 49 on our 1 X 3 P&F chart will be a “Low Pole” (LP) buy alert, but a rally above the 55-6 level of resistance is still needed to turn the short term trend bullish. Higher resistance is at 59, then at 64, and 69.
PORTFOLIO CHANGES
Friday, November 3, 2000: 10/31: Short sales on Merrill Lynch reached our 70 stop loss & was removed (-5.66%); as did Liz Clayborne (LIZ) at 42 (-7.69%); and the Turkish investment Fund (TKF) at 14 �, yesterday, 11/2 (+8.66%). We added to the shorts, Fannie Mae (FNM) at 74 � after it had a high pole top (HPT), as a play on higher interest rates that we expect. On the long side, 10/31: We added Fluor Corp (FLR) at 34 �. It is on a Low Pole (LP) buy alert after a Selling Climax (SC) back in March, a higher low/double bottom and P&F buy signal that measures an upside price objective (PO) to 50. They also have insider buying and as an engineering and construction company, are a good infrastructure play on our free trade deal with China.
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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Last modified: June 15, 2001
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