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Today's Market WrapUp |
Running in Place
Since a picture is worth a thousand words, one look at the five-day graph of the S&P 500 shows that the stock market went absolutely nowhere this week. The S&P 500 closed at 896 for a gain of 7 points, the Dow Jones Industrial Average added 77 points or 0.9%, to close at 8512 and the NASDAQ closed at 1363, exactly the same close as last week.
The US dollar is still under pressure, especially with the continuing reports of weakness in the employment numbers. For now the dollar is hanging on by a thread to the 104 level on the US Dollar Index. Throughout most of the week money has been going into US Treasuries with “War Worries” on the increase again. With any weakness in stocks over the near term, we could see more money pile into Treasuries which would force interest rates back down to forty year lows. It certainly looks like the Fed will work to keep rates down through the first couple of quarters in 2003. With rising commodity prices, it will be interesting to see how long rates will stay down. It’s beginning to look like we will see a double-top in the bond market, which could put in one more round of mortgage refinancing. I plan on processing an application for a re-fi so that everything is in place to lock a lower rate. I suspect that if it happens, it won’t last long, so I need to be ready in advance.
Quick Recovery from “Soft Patch”??
Last night Alan Greenspan delivered a speech to the Economic Club of New York and said that, “The economy is emerging from a soft patch, damping demand for fixed rate government debt.” Today bonds moved lower and stocks gained on Mr. Greenspan’s proclamation that the economy is emerging from weakness. In my mind the statement contradicts what was just said back on the day of the last rate cut. It was just on November 6th that the Fed said its low target for rates, along with strong productivity growth, should eventually boost economic activity. In the November statement the Fed also cited “recent signs” that economic activity has slowed, in part because of fears about the possibility of war with Iraq. I have a difficult time believing that economic activity has changed much over the last six weeks since the Fed took action to lower interest rates. I think the real reason for “damping demand for fixed rate government debt” is simply a negative return on your investment. If you consider a four percent return on ten year notes, back out taxes and adjust for inflation…..you’ve made nothing.
Also in the news today, the largest securities firms in the US will pay $1.4 billion to settle claims that they misled customers with biased stock research. This is clearly an admission of guilt. I call it hush money—just leave us alone and we will pay (the regulators, NOT the investor) for the slap on the hand. Regulators began investigations into stock research as investors lost more than $8.5 trillion in stock market value between March 2000 and October of this year. The $1.4 billion is but a small "regulator rebate" for the many billions of dollars that the Wall Street firms made during the raging bull market. It’s hard to believe that so many people in America, from investment houses to corporate executives, have so much greed that they lie, cheat and steal just to have more, more and more. It’s disgusting!!
Take Profits When You Can!
I spent very little time this week looking at the news headlines, fundamental analysis, and geopolitical developments. Based on our prior analysis, the trends are in place for things to go up and for paper to go down. My focus for this week has been on executing trades, primarily in taking some profits off the table from gold and silver mining companies. Gold closed the week at $340.30 per ounce after topping out at $355.00 in offshore trading on Wednesday. Silver also came down off of its highs to close the week at $4.61 per ounce. All healthy bull markets require consolidations and retracements to establish support levels along the way. Last week I posted the one-year chart of the HUI Index along with the caption “Patience Rewarded” that showed the recent breakout. In just eleven trading days (12/3 to 12/17), the index moved from 115 to 145 for a gain of 26%. I really wanted to wait until after January first to take profits for tax purposes, but as my Grandfather always told me, “A tax problem is a good problem to have…..it beats the heck out of losses!”
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Short Term Double Top Since we looked at the one-year chart of the HUI last week to see the breakout, I decided to look at the index from a very short time-perspective to the longest one available. If you take a look at the fifteen-day chart, it’s easy to see the short-term double top at 145. The index hit resistance. Now take a look at the seven-year chart and you can see the two sources of the resistance. So far, the red downtrend line that began in 1996 has contained the golden bull. The peak that we saw in June of this year coincides with the critical support/resistance that extends horizontally from 1997. With a look at this chart we can see that the gold bull market is still in its infancy. Once the 155 level is broken, we should be clear to go much higher. Next week I will be studying the charts to look at the most likely retracement levels for the metals and for the mining stocks to re-acquire the shares for the next run north. I suspect gold could move to re-test $330 and the HUI could re-test the 125-130 area before moving up again. It will be important to watch the strength of the dollar and war developments as we re-assess our precious metals positions. |
In Search of the Santa Clause Rally
While this week has been busy with precious metals and energy shares, I’ve also been nibbling away at placing money to go short for the next down-turn in stock prices. I don’t want to be fully invested too early on the short side and get burned with a year-end rally. With that in mind, I put the following data table together to see what has happened the last few years with roughly two weeks on each side of New Year’s Day.
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Dates |
Holiday Rallies |
Gain/Loss |
% |
| 12/14/98 - 01/11/99 | 8,696 - 9,620 | +924 | +10.6% |
| 12/16/99 - 01/12/00 | 11,245 - 11,551 | +306 | +2.7% |
| 12/14/00 - 01/10/01 | 10,695 - 10,604 | -91 | -0.9% |
| 12/12/01 - 01/14/02 | 9,895 - 9,891 | -4 | 0.0 |
| 12/13/02 - 01/10/03 | 8,434 - 8,000e | -434e | -5.1%e |
| e = My estimate | |||
According to the data, the Santa Clause Rally was a sure thing during the bull market of the 90’s, but I’m not so sure the thinking is still accurate. The last two years we really haven’t seen much of a rally. The seasonally positive time frame has been tainted since the bear market began. The last good Christmas/New Year’s Rally came with the millennial new year of 2000 when the Dow topped out at 11,908. Since that time the Holiday Cheers have been muted. In all fairness, last year the Dow continued to climb into year end, but then fell sharply right after the first of the year. With all of the geopolitical tensions moving into January it will be difficult for stocks to mount a new bull run. The first thing we need is to get American’s jobs back and start knocking down debt. Debt and spending tend to stimulate economic activity in the early part of the debt cycle, but as it matures and grows the debt service payments only work to reduce disposable income which then becomes a drag on economic activity. I will be looking for more entry points to go short the market and buy back my precious metals positions.
Overseas Markets
European stocks rose as Credit Suisse First Boston advised investors to increase their holdings of shares in the region, saying cost cutting will help lift corporate profits. The Stoxx 50 Index added 1 percent to 2456.29. The benchmark has advanced 6.1 percent since Sept. 30, and is poised for its first quarterly gain this year. It lost more than a third of its value in the previous three quarters. For the week, the Stoxx 50 has added 0.3 percent.
Japan's Topix stock index fell, led by exporters such as Canon Inc., on concern higher oil prices and a threat of war with Iraq will impair an economic recovery in the U.S. The Nikkei 225 Stock Average rose 0.2 percent to 8406.88, led by Seven Eleven Japan Co. and other companies that do most of their business at home, after a government report late yesterday showed that the economy will expand for a second year.