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REALITY RATIO: +.419 Last Signal: 4/20/01 Trading SELL
Dow: 10,579.85 OTC: 2163.18 The Reality Ratio pushed into
overbought territory last week, making our "judgment call", trading sell one
week early at least. This only supports our opinion that the rally is getting
very mature, and a downturn remains our expectation for the next market
gyration.
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TUESDAY, May 1, 2001: HAPPY MAY DAY! The markets showed new
resilience in April with the Dow recovering 9% and the NAZ up 15%, for the best
single month gains in 10 years. Of course, the question remains whether a new
bull market has begun, or this is a prolonged technical retracement rally, still
within the bear market. Our sense is that we are still in a bear market. While
the recovery has been impressive, we are not convinced that the Fed s efforts
can stimulate new debt based consumer spending, which is the only kind of
spending lower interest rates may be able to influence. The markets remained
strong through the end of month "tape painting" as portfolio managers use the
"last minute" to manipulate their portfolios ahead of their monthly
reports.
Yesterday s trading began on a strong tone, but ended with a big, 150 point
downside reversal for the Dow. New York averages followed the Dow, but the OTC
managed to hold about half of its early day gains, remaining well within our
analysis that the NAZ would outperform for a while, relative to the NY averages.
The markets have found some relief in recent economic reports that the economy
is trying to stabilize. We were surprised last week with the Q1 GDP up+2%, when
only a 1.1% gain was expected. The question is whether the glass is half full or
half empty. We think it is too soon to read much into the recent reports, where
the markets are very quick to rejoice that the economy is on the cusp of
rebounding.
We may have been a week early on our overall sell last week, but we still
think the odds of a downturn are growing as prices are well into past, failed
support levels that are now areas of resistance. When the markets become
overbought, they have already expended much of their energy to generate these
gains. Our view is that this makes it much less likely that the bulls have
enough energy left to keep prices moving through these well established
barriers, as it becomes more likely that sellers will re-emerge. We continue to
look for the downside reversal that may have started with yesterday s key
reversal.
While the Dow pushed above our next resistance, between 10,700-40, its
gravitational pull brought the Dow quickly back toward the top of this range
yesterday. The Fibonnacci resistance barrier identified last week at 10,740 was
like a magnet, bringing prices back after they had reached a high of 10,906
[10,740 is 61.8% of the entire decline from the 1/14/00, 11,750 high (11,750 -
9106 = 2644 X .618 + 9106 = 10,740)]. Last Tuesday we had thought that "further
gains would be limited at best". This may be what is happening. The Dow remains
above its 200 day moving average (near 10,600), but the S&P 500 and the OTC
remain well below theirs.
We are raising initial sup[port to 10,450. An hourly close below this would
now indicate that a new decline was underway. Below that, support is down to
10,200. Our 20X60 P&F chart is on a high pole, sell alert, indicating that
the next move should be lower. A move above 10,920 would negate this "sell
alert" signal, making 11,000 the next barrier. We ll get into that more if and
when we need to.
If you haven t received a sample of our work, our April issue is now
available. This is a good time to request a sample, by emailing us at
mtr@fuse.net. This month s commentary is titled, "HOLD THE PRESSES!"
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Treasury yields haven t been able to bounce much, after becoming
oversold near higher, 5.80% support. Stronger than expected GDP, Durable Goods,
new and existing home sales, and inflation data, such as the Q1 Employment Cost
Index (ECI) +1.1%, and the GDP Price Deflator, which rose by an alarming 3.2%,
making the percolating inflation pressures a concern that will not go ignored
forever. The slow economy with rising price pressures continue to suggest at
least moderate "stagflation". Add to these the soaring money supply, and the Fed
s ability to "ignore" these compelling inflation warnings may end abruptly.
While many conveniently tell us that it is due only because of rising energy
prices, the truth is that MANY prices are rising. Regarding rising energy
prices, the argument to "factor" them out of the core rate may be an acceptable
rationalization when energy prices rise temporarily, but their sustained higher
prices can no longer go ignored, factored out, or simply rationalized out of the
numbers. People in America are being forced to make choices of heating (or
cooling) their homes, driving their cars, or eating, reducing the quality of the
spending they can do. At SOME point this will NOT go ignored!
We continue to advise that anyone wanting to sell, or position ahead of what
we are confident will be much higher rates in the months ahead, should do so
into this retracement rally, provided it plays out accordingly. While their is
nothing to prevent the entire 1st wave of rising rates to be retraced, but more
likely, it remains unlikely, especially as the losses are being consolidated
without much progress of retracement. It is not likely that the yield will be
able to move below its original break down point, near 5.40%, if it can even
reach that.
The bond rally from the 1/00 6.75% high has likely ended, and should
ultimately lead to much higher rates. Our analysis labels the 3/22, 5.217% low
as cycle degree wave "(2)" within the longer term bear that we think bonds have
been in since the yield reached a 4.69% in 10/98. This may partially explain how
the yield is rising against the Fed s aggressive short term rate cuts, as the
yield curve reverts proportionately steeper, from its inversion of last year. We
noted at that time that this was one of the best indicators of an economic
slowdown, and perhaps a recession.
Resistance begins at 5.70% which was reached at the close yesterday, and
then 5.55-50%, 5.40%, 5.37-30%, and the 5.24-.217% low(s). Higher support is
near 5.85%, 5.925%.& 6.00-6.05%. Our long term analysis suggests that the
long end will ultimately push above the 1/00, 6.75% high.
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Gold & the XAU have remained suspiciously firm, calling our
near term expectation for weakness further in question. The XAU remains close
enough to resistance from the 3/9, 57.42 high that we are simply waiting for the
market to point the next direction. A push above this would turn the chart
bullish, resolving its "sell alert" P&F chart pattern status. Our analysis
still continues to suggest that a last downturn is the most likely outcome, but
this would be called into question with a push to 58. REGARDLESS of any short
term disparity, we would only be buyers into weakness, and holders into
strength. Perhaps this makes the other analysis less critical, as the market can
do nothing either to surprise us or to change our overall game plan.
Technically, the XAU remains on a bearish HP formation, BUT, our shorter
term HSBC cash gold chart turned bullish Monday and shows a potential double
bottom. On "this" particular chart, a move to $274 per ounce is needed to
confirm the upturn on our longer term 2X3 P&F chart. Until, or unless this
happens, there is equal potential for the upturn to remain within the fifth wave
of decline from the 2/00 $315 high. Our "early warning indicator", the XAU/gold
ratio gave a buy signal last Wednesday. We remain bearish the XAU against
resistance from the last high at 57.42. Regardless of whether prices fulfill our
more immediately bearish stance, we think that great opportunity lies ahead! XAU
resistance begins at 53-4, with more at the recent 57.42 high, 59, 63-4, &
69-73. Next support is at the 2/14, 45.64 low, the 7/14, 41.61 low, and then at
37-40. In contrast to the poor risk/reward we see for bonds, we see the exact
opposite here, at least if we go out beyond the immediate future!
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PORTFOLIO CHANGES****PORTFOLIO CHANGES ****PORTFOLIO CHANGES****PORTFOLIO
CHANGES****
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Friday, April 27, 2001: --none today-- [Part of our offensive is to
have a good defense! That means limiting losses and protecting gains]!
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