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REALITY CHECK UPDATE
Published Every Tuesday and Friday

ARCHIVE:    APRIL-AUGUST 2000  

Contributed by Mitch Harris
President: Market Trend Realities,
Editor: The Reality Check Newsletter

November 28, 2000

STOCKS
REALITY RATIO: -0.29
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.
TUESDAY, November 28, 2000: In the name of “AMERICA”, we ALL have the right to have our votes counted. At least that’s what Al Gore is using as his argument to continue his challenge to the vote count in Florida, upon which the entire election was riding. George (Dubya) Bush on the other hand, couldn’t wait any longer, declaring himself the new Emperor elect!, using “his people” as his reason to take control. It reminds me of a bad call made that was the game changing, deciding factor in the greatest of all Super Bowls. The team that benefited is trying to hurry the game back into play to keep the other team from getting its challenge reviewed by the officials. In the end, we think the markets will be much more concerned over the growing risk of a “hard landing”, and the debt implosion that is now underway, along with the deteriorating earnings that are going along with it.
The September Merchandise Trade Deficit surged ahead again to another all time record of $34.26 billion as our markets remain comfortable totally ignoring it and the ramifications that we remain ever more dependent on foreign capital to keep the charade going. We think this has great potential to be the catalyst for the next worldwide “Contagion”. 

The S&P 500 and the OTC Composite made new 52 week lows last week, keeping with the over riding trend of lower lows that have followed lower highs. This is part of how we define a bear market, and we do not understand how there are still many who still believe that this is within a larger “bull market”. Our indicators remain mixed, as indicated by the Reality Ratio reading. Some factors that turned bullish last week were our Short Interest Indicator, which finally turned up to “bull alert” status. This indicates that short sellers have decided that after a 1300 point rally from the 10/18, 9654 low, they are concerned that the rally will continue. While I disagree, their short covering has added to the recent buying pressure that had a large influence due to the light holiday volume. Several other of our shorter term indicators that are turning bullish are the 5 Day Up Volume Indicator, which turned up from oversold, and the 10 Day Trin reading, which hasn’t turned up yet, but is oversold. This indicates that the downside volume driving the selling relative to the number of advancing vs. declining issues has reached a level where selling energy has generally reversed itself in the past. Also, the NYSE 10 Day A/D Line Indicator turned bullish for the first day yesterday. Another good day would turn this bullish, confirming that the short term trend has turned bullish. Perhaps these are signs that the year end rally is finally confirmed after a very rocky start. If so, there should be plenty of time to benefit AFTER we are convinced. 

On the bearish side, sentiment continues to remain MUCH closer to levels seen only AFTER the end of a powerful rally. For instance, The Investors Intelligence weekly survey of Investment Advisors most recently reported 55% WHO ARE BULLISH AND JUST 28.5% who are bearish. This is NOT consistent with what we expect at the bottom. Last week the Dow Jones Utility Average had another major Buying Climax (BC), indicating strong distribution. The Dollar Index rolled over yesterday on very strong selling, bringing the index down by -1.30. While its too soon to call an end to its unrelenting strength, follow-through here would be fundamentally bad for our markets. This also helped gold surge for the best one day gain in months, and the CRB Index also benefited and has moved back to “bull alert” status. These are not signs that will lead to continued bullish conviction!

Our Elliott Wave work continues to suggest that the rally has already ended, or is close to it, and if this is correct, plenty of selling remains directly ahead, as do new lows on the Dow Industrials as they “catch down” to the S&P and OTC averages. As stated last Tuesday. “we cannot yet say that selling conditions are becoming washed out. We’ll leave the javelin catching to those that enjoy multiple full body piercings! WE DON’T!” From the November 6 highs, the market has the potential to accelerate within its larger, 3rd primary wave of decline within the bear market. If this is correct, there should still be a an absolute minimum decline below the lows reached on 10/18, when the Dow bottomed at 9654. As stated on Friday, we have introduced in this month’s issue of the Reality Check Newsletter, a cluster of Fibonnacci support that we are forecasting as a downside target. The Dow has so far successfully tested key short term support at 10,369, from last Monday’s (11/13) low. A clear break of this level will confirm that primary degree wave (3) is indeed developing, indicating a test of the 10/18, 9654 low was on its way. Short term resistance is found at between 10,790 to 10,870, with more at 11,000 - 27 (Fibonnacci .618 retracement resistance of 11,407 high to 9654 low). A push above 11,050 would confirm 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 have benefited by the election uncertainty along with the perception that the economy may be weakening faster than expected, and may even suffer from a “hard” landing, if the Fed’s managed approach slows things more than they hoped for. Whether they manage a soft or hard landing, the Treasury market is the expected benefactor as bonds do better with economic weakness. We think that they are really benefiting from the plunging high yield and corporate markets, as the yield spread widens between the three, with the money flowing out of the riskier credits to the safest. This is a clear sign that corporate earnings and cash flows needed to pay dividends and interest income is diminishing, and this will not be good for the markets. Slower going in the corporate sector will trickle down to the consumer and throughout the economy. This will mean lower tax receipts, a lower budget “surplus” (if it doesn’t disappear altogether), less Treasury buybacks and potentially higher yields in the safer Treasury markets, following corporate yields higher. 

While further gains are possible in the short term, both, our trading indicators are very overbought and our long term indicator remains bearish overall. Our Elliott Wave analysis continues to suggest that the long term trend is most likely approaching its primary degree wave (2) high, if it hasn’t already been reached. Technically, the yield has remained range bound between 5.925% and 6.725% (or 5.65% in its broader sense). A break out of this range will point the next direction, with 5.65%-.675% and then 5.50% the next levels of resistance and Initial support back down to 5.85%, then layered, beginning at last Wednesday’s 5.925% high, 5.97%, 6.05%, 6.20%, 6.32%, 6.40%, and 6.75%. 

GOLD

Gold & the XAU have been pinned to the mat by the perpetually strong US Dollar, but we think that is, or will soon be changing. Yesterday’s sharp dollar plunge was a good sign of this as HSBC cash gold gained $4.00 on its weakness. Our indicators are in position for a major upturn and it is conceivable that this may have started yesterday. The only thing that we haven’t seen as bullish is the sentiment among the majority of traders, investors, stock bulls and central bankers, who have everything to gain by keeping prices down. The weight of the evidence strongly suggests that the makings for a MAJOR bull market to emerge remain firmly in place. We have no doubt that it has been, and still is only a matter of time. We’ve seen on many occasions how an investment category has gone from virtually UN-owned to heavily over-exploited. We expect the precious metals will have their day as well as once it is underway, investors and momentum traders will lock on like they had in techs, nets, energy, utilities and other areas, driving them to similarly unimaginable levels. 

Yesterdays gains pushed the XAU to a high of 47 and a new short term P&F buy signal for the first time since June. Coming after an October selling climax (SC), we think that has the makings of a major bottom. Our XAU/Gold ratio also gave a buy signal after a major (SC). 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

Tuesday, November 28, 2000: 11/22: American Express (AXP) 53 �, short sale (Please refer to our P&F Chart of the Week analysis at: www.stockcharts.com for our reasoning on this). 11/27: Anglogold (AU) 12 � to average down after it had a selling climax (SC) last week & in preparation for selling our higher cost shares before year end. 
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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