Last Signal: 7/14/00, SELL
Dow: 10,806.74 OTC: 4243.02
The ratio continued lower for another week, moving within a hair of the minimum oversold -.40 reading. We still think it is pre-mature to get optimistic before there is some type of climactic panic selling over the next week or so. Perhaps this will be made on the news of an disappointing earnings announcement of a very significant company, into the end of the month ends the period of seasonal bearishness. 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 to sell into rallies has been good and continues, as rallies have been sharp but short lived.
FRIDAY, October 20, 2000: Highly emotionally charged trading continues!! This time it has been on the upside as bottom fishers couldn’t resist the prices they were seeing. Now that actual earnings reports are for the most part, replacing pre-announced warnings, the perception has changed from OH NO! To OH YES!! Not because of anything special happening, but because it is perceived that for the most part, the pre-announcement warnings are over and that leaves only the reports that will be good news. We’ll see if it can last. WOW! What a week!! You’d think it was some kind of special option expiration week or something. Oh Yea, this is an option expiration week, and because it is also the last month of the fiscal year for many mutual funds, it is their last opportunity to have sold what they don’t want to show on their books and to replace them with what they do want to show. This certainly does NOT diminish or minimize the significance of the terrible earnings warnings that have weighed heavily on the markets and investors, but has added to the carnage. The events in Israel and the Persian Gulf haven’t helped any, which, in addition to the political, military and international risks it has created, it didn’t help relieve the fat price of oil any, or help the bond market or consumers at the gas pump.
It is difficult to assess the significance of the price rally of the past 2 trading days, but here is what we think: While it is very impressive. One of our reasons for skepticism is that there has been NO pauses, pullbacks or retracements. This indicates that investors are highly confident that Wednesday morning’s 430 point plunge and low was the bottom, and they are panicking into the market to avoid being left out. There has been NO rethinking or backing and filling that would show healthy uncertainty. This is not the wall of worry that helps to drive prices higher. To me, it more closely resembles another sharp but potentially brief corrective rally.
The rally has done little to relieve most of our trading oscillators and remain very bearish. The A/D Line made a new low this week, and the McClellan Oscillator turned negative. These imply a bear market and that selling pressure will resume. One or our indicators, the 5 day up volume indicator is already overbought, already indicating excessive buy side volume for the short term. We are also concerned that our Elliott Wave analysis of the DJIA is that we are in an upward correction within intermediate wave “4” of the 5 wave structure that is still not complete. If correct, once the current rally ends, one more five wave decline to new lows is expected to lead to the bottom of the entire decline. This should clear the way for the year end rally we had been forecasting. We therefore see renewed selling as GOOD news, and what we’ve expected and been waiting for, because it will allow us the opportunity to position for the more sustainable rally that could last through the seasonally bullish period between November and the end of April. Resistance begins between 10,200 and 10,280, at the top of the 4th wave bounce of one lesser degree (a typical Elliott retracement expectation). Above this, resistance is near 10,400 and then near 10,600. This rally has no business recovering to that level if a wave 5 decline remains ahead. Support is at what MAY end up being Wednesday’s panic low at 9654, which by the way, was the lowest level since 2/99. Next support is near 9500 and then 9100.
TREASURIES
Treasury yields had a decent day yesterday, but we see further strength as a selling opportunity as we are now bearish on bonds. The Treasury bought back another $1.5 billion of bonds yesterday, which went poorly because no one wanted to tender their bonds. This was perceived to be bullish and they rallied the yield back to 5.76%. An upturn is expected soon as our trading indicators are overbought and vulnerable to a downturn. Another problem is the rapidly deteriorating credit quality of corporate bonds as companies are getting more vulnerable due to deteriorating earnings growth and as many have spent much of their cash flow on share buybacks. There is also the potential problem going forward, that the Treasury will buy back less long term debt in the future because of shrinking tax revenues as the economy slows. Further gains point toward next resistance at 5.72%, with lower resistance at 5.65%, but it is doubtful at this point that it would be reached again. Support above 5.85% is at 5.97%, 6.05%, 6.20%, 6.32%, 6.40%, and at the 6.75% January high.
GOLD
The XAU & Gold have shown almost no support from investors seeking alternative to equities recently as sellers don’t even let a $1 dollar per ounce rally go without selling short against it. We think that with our indicators very depressed and sentiment so extremely bearish, that the next upturn should lead to something more significant than we’ve seen for many months. In fact, there is a tendency for gold to bottom during the 4th quarter of the year and top in mid summer, so we are keeping our fingers crossed. We can only point out that both, technical and fundamental conditions surrounding gold seem very ripe for an explosive rally to begin at any time. This won’t really change until it begins.
The XAU continues to reach new lows, closing at 43.64 yesterday, for another all time low. A new low early next week with a stronger close would be a very major selling climax (SC), so we continue to look for this as an initial sign that a bottom might be in. This again lowers the Low Pole (LP) buy alert point to 50 (from 51) on our 1 X 3 P&F chart, but has not changed our sited point of initial resistance, at 55-6, which is still needed to turn the short term trend bullish. An upturn a few weeks ago in the Investors Intelligence [(914) 632-0422] Precious Metals Bullish percentage indicator was a good sign that higher prices should develop, but that turned lower again with the continued liquidation. This downturn may actually be a bullish factor, because it lowered the point of confirmation for a bullish reversal, to 26%. Higher resistance is at 59, then at 64, and 69. Next support remains near 44, as prices had decisively broken support from the 8/31/98 low of 48.73.
PORTFOLIO CHANGES
Friday, October 20,
2000: 10/18: We covered the QQQ’s at 75 � (+18.55%) as they haven’t been able to make much further downside progress below our target of 76, and the OTC selling looks fairly washed out; We also Recommended the purchase of Novellus Systems (NVLS) 29, for the same reason regarding the OTC and chip sector, as they had just reported what I thought were outstanding earnings and stated that they have gained market share away from competitors, KLA Instruments and Applied Materials, yet were sold off relentlessly anyway. Here is a company that reported an earnings gain of 344%, with a P/E multiple of just one half of the S&P 500, at 14 times current earnings (even after its surging recovery of the last two days). This is what we consider a must have stock, regardless of the hysteria of the market! Because it has already jumped back to a high yesterday of 41, we would buy this on dips. While the chart (below) looks bearish, it is very oversold and we look for a recovery to 50 or better.
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).
Copyright � 1998-2002 Tulips and Bears LLC.
All Rights Reserved. Republication of this material,
including posting to message boards or news groups,
without the prior written consent of Tulips and Bears LLC
is strictly prohibited. 'Tulips and Bears' is a registered trademark of
Tulips and Bears LLC
Last modified: April 01, 2001
Published By Tulips and Bears
LLC
