Last Signal: 01/12/01, TRADING SELL
Dow: 10,525.38 OTC: 2626.50
The ratio inched higher last week, but remained BELOW the recent high of .161, for a negative divergence against the higher prices reached by the averages. Another week or two should tell us whether this leads to another market downturn, but ahead of time, we see signs that the rally is ending or already has!
TUESDAY, February 6, 2001: This should prove a critical week for the stock and bond markets. For stocks, the Dow has once again failed to overcome what we have been calling stubborn resistance at the 11,028, Fibonnacci resistance level [11,402 high - 9654 low = 1748 X .786 = 1374 + 9654 low = 11,028]. The Dow fell shy of this again on Friday, reaching 11,022.78 before reversing to close lower by over 119 points. On a weekly basis, the OTC Composite has netted a gain of all of 34 points since we issued a "Trading Sell" on 1/12 (above), closing at 2660.73 last week, after Friday’s sharp downturn. This should prove to be an interesting week as the markets may be ready to break out of their recent range. The question we all await is, in which direction?
So far this year, two very rare and dramatic rate cut actions by the Federal Reserve have not yet produced the bullish reaction that was expected, as the markets get so eager and confident over what was going to happen, when it did it was an anti-climactic event. Twice now the Dow Industrials have challenged the resistance mentioned above, but have not had strong enough momentum to punch through it. As the saying goes, "if it’s obvious, its obviously wrong"! And so it has been. Perhaps the lopsided bullish majority will also be wrong about the market’s future too, that we are in a new bull market that has, once again been bailed out by the Fed. To this we say, PROVE IT! So far, while many factors have improved, the bottom line, prices have not, at least not by much more than they had before the Fed. We need a whole lot more assurance than the perpetual Wall Street Rhetoric that can only acknowledge one half of the game. What remains amazing is how many follow this clearly unobjective advise, day in and day out.
On a brighter note, the average stock has indeed done much better than the larger, more popular stocks that are constantly touted by those same Wall Street big boys. These were the stocks that lead the A/D Line dramatically lower for the past 18 months or so, until they began to lead the markets higher from their October low. Our question is not a simple one to answer, are these smaller names in their own bull market, or are they have a very strong bear market rally from the extreme lows they had reached as WS was still arguing over the potential life cycle of the internet boom. We thank that whatever the right answer, the fact that there are still many, many issues that look relatively cheap and attractive, while there are many sectors and issues that appear to still be way to over-valued and vulnerable, lead us to believe that we need to remain objective on an issue by issue basis, and remain patient for the stocks we like. It also allows us to look for opportunities on both sides of the market, as many are still falling, regardless of what the market is doing on a daily basis. This has been our strategy in recent months, and while the markets have become very overbought and we expect a new downturn to begin at any time, we will continue what we’ve been doing, picking what we like on both sides of the market, with our effort to time our decisions.
The Dow remains within striking distance of the key, 11,028 resistance level that we’ve considered a "tough barrier" since our December Issue of Reality check, but again, we think the market is already too over-extended and vulnerable to push above it. Even if it does, we’d advise holding off on chasing this market as we doubt if the rally can be sustained much longer. The markets suffered another downside reversal on Friday, as the Dow reached a high of 11,022.78 before reversing this 40+ point gain to close 120 points lower. The Dow and S&P each had what’s known as an "outside bearish" day, by moving above Thursday’s high before closing below Thursday’s low. This often signals a trend reversal, but the first minimal sign of this would be a close below last Wednesday’s 10,832.58 low. We are also noticing "closing tick sell signals" on many days, which while not yet leading to the downturn we expect, they warn that investor’s and big money in particular are becoming too confident, doing a lot of buying on the close. This would be considered capitulation if it were accompanied by higher volume. If the Industrials were to push through 11,028 resistance, we think it would get a surge in both, volume and optimism as many would turn bullish. This is why we think that even if it does happen, it would more likely signal the END of the rally. We must point out that the current rally began essentially from the 10/19/00, 9654 panic low. That makes it impossible for any further gains to be considered anything "new". Initial support begins at 10,832 with more near 10,700, 10,620 and 10,470-500. A break of this level would confirm that the elusive wave 3 of (3) decline has started. Lower support remains near 10340-280, and then its down to the 9654, October low! In the event that the Dow pushes through the 11,019 - 28 barrier, higher resistance remains near 11,120, 11,250 and 11,400-25. A close above 11,450 would indicate a more complex bear market rally had developed.
TREASURIES
Treasury yields abruptly turned higher on the Fed, as if their actions or the ongoing economic downgrade is coming as a surprise. Perhaps what is surprising is the rate of descent being endured, but even so, the expectation of a slower economy than consensus should really not be a surprise after such an extended period of expansion. Indeed, this morning’s January Employment report shows unemployment rose from 4% to 4.2% in January, supporting the view that the economy is slipping. The only thing that the bond market’s bullish reversal can be discounting for now is that the economy is even WORSE than has been thought, as money finds its way back to the relative safety they offer.
The bond market is enduring a very heavy issuance of new corporate bonds, as savvy corporate Treasurers are rushing to take advantage of the lower rates to issue their debt while the costs have come down dramatically. In fact, new corporate debt issuance reached a one month record high in January, at $75 billion. In itself, this is often a strong implication that rates are near their lows, or at least low enough to take a bird in the hand. This has been our recent strategy lately as well, as once Long Bond rates declined below our long standing 5.48-.50% objective, we turned bearish sighting a poor risk/reward basis. While this doesn’t preclude the potential for the rally to take the yield even lower than the recent 5.35% low, we think that the majority of the move has already discounted the Fed’s efforts to man the economic life boats.
What we are still considering a strong technical bounce has kept the market firm but choppy ahead of this week’s Treasury refunding (swap of maturing debt for new issues) and economic data. Friday’s January non-Farm payroll report showed that while the unemployment rate rose from 4.00% to 4.2%, that payrolls were much stronger than expected, while yesterday’s NAPM "Non-Factory" Index was reported at 50.1 vs 61.1 in December. With the NAPM already showing that manufacturing has been contracting for five months, a decline in this index would confirm that the economy was contracting and already in a recession.
Our work continues to suggest that primary degree wave (2) of the longer term bear market rally has ended or will very soon, again, against resistance from the last low at 5.35%. The Fed’s work to re-stimulate the economy risks igniting higher inflation, a lower dollar, and again, the withdrawal of foreign funds from our markets. A repatriation of foreign capital has the potential to become an overwhelming challenge for the US and the new Bush Administration. In itself, this is perhaps Greenspan’s biggest concern, especially as they lower the interest rate bar. Our dependence on foreign capital is America’s "Achilles Heal" in our view. Support begins at the most recent 5.689% high that was reached a week ago Monday, and then at 5.725%. Higher levels remain the same, at 5.85%, 5.925%.& 6.00-6.05%. Lower resistance is at the key, 1/2/01, 5.35% low, 5.25%, near 5.13% (78.6% Fibonnacci retracement of 9/98, 4.69% low to 1/00, 6.75% high) and then 5.00%. Again, we remain BEARISH, even against lower yields!
GOLD
Gold & the XAU are also attempting to respond to the Fed’s latest action, as it pressures the dollar and lowers the cost to buy gold on margin lower, a bullish factor for the futures traders. While neither have quite advanced enough to confirm that a new bullish move has started, yesterday brought our cash gold P&F chart very close. A bullish "Low Pole" (LP) would be reached on our (1X3) P&F chart if it can reach 270 (basis Republic/HSBC cash gold). If reached, it would project an initial move to at least the vicinity of $284, which is also close to resistance from the downtrend line drawn from the 1/00, $315 high. This potential would be negated with a decline back below the recent $263 January low. Longer term, a close above $276 would confirm a longer lasting bottom. With the I.I., Precious Metals Bullish Percentage indicator recently moving to "bull confirmed" status, the ingredients remain in place for a dynamic price rise. A rally above the 55-6 level of resistance (on the XAU) would confirm that the short term trend has turned bullish. Higher resistance is at 59, 64, and 69.
PORTFOLIO CHANGES
Tuesday, February 6, 2001: We still suggest buying Pennzoil (PZL) for our Income Portfolio, for its total return potential, on a dip BELOW 11.75. We also recommend shorting America Online/Time Warner (AOL) on a further bounce above 51, as it has reversed up while still on a "High Pole at the Bearish Resistance Line (HpBr), after a 5 wave rally into resistance above 55. If executed, we would give this plenty of room, with the initial stop/loss point at 59.25. [Part of our offensive is to have a good defense! That means limiting losses and protecting gains]!
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: April 01, 2001
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