Last Signal: 11/10/00, SELL
Dow: 10,602.95 OTC: 3029.10
Last week’s largely holiday inspired trading was light on volume, heavy on volatility and absent of enlightenment. The ratio line turned up after making a higher low, but the faster moving average moved below the slower one. This made it very difficult to interpret for the week, indicating that the best thing to do is to wait until the dust settles when more sense can be made of it. For this reason, we are leaving the indicator on its most recent sell signal for now, even though we did see improvement in some of its components.
FRIDAY, December 1, 2000: Wednesday evening’s big earnings warning posted by Gateway Computer worked as a catalyst to bring the entire market down yesterday on all time record volume for the NYSE and close to it on the NASDAQ. Could this morning’s higher pre-opening indicators be the buying opportunity that so many expect? Or perhaps, might it be the typical adjustment made at the beginning of the new month? We can say with conviction that it’s too soon to tell. What we can also say is that yesterday’s noticeably heavy volume was an all time record for the NYSE, trading better than 1.5 billion shares and NASDAQ’s the 2nd heaviest on record, with better than 2.6 billion shares traded. This was indeed impressive and perhaps a sign that selling was being capitulated, but because the damage has been so severe, and because MANY things are still not in place to suggest the potential for a lasting bottom, we remain on the side of caution until our indicators suggest that a change is in the wind.
In reverse of when the markets had no problem inventing new rationalizations for chasing over-bloated stocks on the upside, investors are having little trouble finding reasons for their fearful selling. The Gore election challenge will soon take a back seat to the realities that really matter for investors. The markets will likely re-focus on issues such as the very disappointing earnings deceleration that many were unprepared for, the rapidly decelerating economy, continued inflationary pressures that have not yet found relief, the perhaps too big to manage debt problem our society has based its recent prosperity on, and finally, what the Fed may be able to do about it all.
One of the forecasts we made in our January, Forecast 2000 Issue of Reality Check was achieved this week when the OTC Composite moved below the lows of last October (10/99), when we stated, “we think it is likely that as large as it has been, the entire rally from the October lows will be erased and possibly more.” The basis of that statement was that the rally from those lows represented the final “blow-off” stage of the entire bull market. While it was so spectacular that even today, many think it will resume, the blow-off phases of all of histories great manias were always quick to be reversed. This is how the majority that participated in it become trapped within their unrealistic expectations for it to continue, way beyond the point that it had ended. They were so conditioned that it would last forever that even now, they look at every Zig and Zag as the next great buying opportunity. Until this thinking is completely purged from the system, it is not likely that a new bull market will emerge.
When we examine our measures of investor sentiment, we can only conclude that the market is not even close to this point. This week’s Investors Intelligence survey of Investment Advisers shows that even after a 50% decline in the popular OTC averages, 55% are still bullish and a very low 29% are bearish. Typically after an extended period of selling, this would be reversed, with less than 30% BULLS and over 50% BEARS. In itself, this tells us that the markets have still not hurt investors enough to shake their confidence. We also see signs of this in our futures related sentiment indicators and among small investors, as measured by the AAII survey of individual investors, as well as the Wall Street Week Elves Index, which has remained stubbornly at +8, their most bullish expectations ever.
On a trading basis, the markets have only become mixed, with oversold readings as measured by our 10 day Trin readings, the 5 day up volume indicator, RSI, and Stochastics, while the McClellan Oscillator is only at a relatively neutral reading of -32 yesterday, and the Elliott Wave picture remaining firmly bearish. This alone has gone a long way toward keeping us on the right side of the market. If the Fibonnacci forecast presented in the November Issue of our Reality Check Newsletter is even close to correct, the current selling may be only the beginning of the current wave of selling, with new Dow lows still ahead as it plays catch “down” with the other averages. While technical bounces and short covering along the way are clearly part of the process, the evidence does not yet clearly suggest that rallies can be sustained.
The Dow held above key support at 10,369 yesterday, after reaching an intraday low of 10,292 before recovering a bit into the close. A clear break of this level is still needed to confirm that primary degree wave (3) is indeed developing to indicate that a test of the 10/18, 9654 low was on its way. Short term resistance is found at 10,500-640, 10,790, with more at 11,000 - 27 (Fibonnacci .618 retracement resistance of 11,407 high to 9654 low). A push above 11,050 would make it more likely that the Dow is still within a more complex, double zig zag corrective rally toward next major resistance at 11,400 or so. We think that before an extended bear market will end, the A/D Line will have likely seen its low AHEAD of market prices, as many stocks generally see their lows before the overall market.
TREASURIES
Treasury yields continued to benefited by the election uncertainty along with the data that suggests the economy may be weakening faster than expected, and that the prospects for a “hard” landing have increased. Treasuries are also benefiting from the plunging high yield and corporate markets, as the yield spread is now wider than it was during the 1990 bear market for high yield bonds. We take this as a sign that the market too is warning that the prospects for a hard landing have grown larger. We think that at some point, Treasury yields will begin to rise again, as it is realized that a soft economy will limit the potential for budget “surpluses” and that will not only mean no more Treasury buy backs, but re-issuance of long term Treasury debt, as a slower economy will clearly mean lower federal tax receipts.
Treasury yields finally pushed through the resistance that had turned them back since their first attempt failed back in April. This re-established the bullish trend for bonds, and again makes it likely that our 5.50% target will be realized. This does not change our long term picture, and in fact may support it further. Our trading indicators are even more overbought and our long term indicator remains bearish overall, but it did turn up yesterday. Our Elliott Wave analysis continues to suggest that the long term trend is most likely approaching its primary degree wave (2) high. Again, next resistance is near 5.50%, as a Fibonnacci .618 retracement of the entire rise in yields from the 9/98, 4.69% low to the 1.00, 6.75% high is at 5.48%. Support now begins at 5.725%, then 5.85%, 5.925%, 6.00 - 6.05%, 6.20%, 6.32%, 6.40%, and 6.75%. For now the trend is back to bullish.
GOLD
Gold & the XAU have finally found some relief form this week’s sharp plunge in the US Dollar, which gave a P&F sell signal yesterday. We think the loss of confidence in our next president combined with newly emerging signs that our economy is deteriorating rapidly could be the tip of the iceberg for the greenback and this would clearly remove one of the strongest pressures that has held down gold in terms of dollars. This has the potential to quickly reverse many foreign central banks policies of selling off their gold reserves as they have profited greatly based on their own currencies that have fallen sharply.
While we would not rule out further efforts to keep the price of the metals down, we think the war that the world’s central bankers have waged against gold is losing its edge, and this means that it should still, remain just a matter of time before the continued stronger demand than supply will overcome the advantages that have kept prices depressed.
The XAU’s high of 47 and a new short term P&F buy signal for the first time since June remains the biggest positive for now, after an October selling climax (SC), we think that if this is not the major bottom that has eluded us, it is becoming very likely that the next great market exploitation will be in this sector. Support remains at the 41.64 low, and then between 40 - 37. A push to 54 on our (2 X 3) P&F chart is still needed for a longer term “Low Pole” (LP) buy alert. A rally above the 55-6 level of resistance is still needed to confirm that the short term trend has turned bullish. Higher resistance is at 59, then at 64, and 69.
PORTFOLIO CHANGES
Friday, December 1, 2000: 11/30/00: We are recommending Mattel (MAT) for our Small Cap portfolio, on its current modest pullback at 12 �. It is way down from its high and has been basing very nicely in recent months, and insiders have been buying on its strong prospects for an earnings turnaround, which we think may have begun. We are also added Archer Daniel’s Midland (ADM) at 12 yesterday (this one to our Large Cap Portfolio), as it too has been basing nicely, good insider buying and strong prospects for an earnings recovery. Both stocks have virtually ignored the recent market turmoil and have characteristics as January effect stocks that may be bought into December tax related weakness.
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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