Crosscurrents March 30/05
March 30/05
by Alan M. Newman
The range bound scenario gained more credence in the last two weeks with the failure of volatility to expand dramatically and no real acceleration on the downside. We have said all along that the range bound scenario was the most likely case and thus far, the range has held.
But at this juncture, stocks are sufficiently oversold to posit that April’s typical performance will again ring true. Since 1984, mutual fund inflows have increased more than 49% month-over-month into April and there is no reason to suspect the trend to end now. Support should begin to surface imminently and influence prices. The recent print highs of Dow 10,984 and SPX 1229.11 and Nasdaq’s December high of 2191 are 5.2%, 4.9% and 10% away, respectively. If nearly achieved, these levels would be very decent gains and we would expect these highs to continue to act as substantial overhead resistance.
Nasdaq broke below the important 2008 level highlighted in our last issue. This factor reinforces the significance of Dow 10,386 and SPX 1163.75. If those levels are taken out, the rationales for bulls pretty much evaporate in a puff of smoke.
We’re short term bullish but still rate the intermediate term neutral, since the dreaded “Dead Zone” arrives in a little more than a month. Since 1950, virtually all of the stock market’s gains have come in the months from November through April. We will cover the “Dead Zone” in depth in the upcoming April 28th issue.
The disappointing technical conditions achieved in
the last 13 sessions of only modest deterioration in sentiment as breadth
crumbled (and prices did not) leads us to believe the odds for our Dow
8500 low target for the year have increased. Enjoy the month ahead
while it lasts.
It is still quite difficult for most observers to accept
the notion that a secular bear market commenced for stocks in 2000.
They would rather believe that the bottoms achieved in October 20002 and
in March 2003 were worst possible scenarios from which only more good
times could spring. Amazingly, even with recoveries measuring as
much as 58.5% for the S&P 500 and 52.2% for the Dow Industrials, there
is very little if any belief that prices must even suffer a correction.
In fact, as viewed by professional market letter writers, optimism has
been abundant all along. The two-year moving average of the bull/bear
ratio stands at over 2.5 to 1. Historically, a one-week measure
of similar magnitude would by itself, be bearish. Two years?
Not a record, but if anything, it should reveal how extended the cyclical
bull market has become.
But secular bear cycles do exist, as evidenced by the enduring devastation that began in 1929 and more recently, from the first jaunt by the Dow Industrials above 1000 in 1966. In both cycles, record highs in the averages were followed by many years of underperformance. Of course, bear cycles end as well, as evidenced by the huge stock market gains from 1982 to 2000. And precisely for this reason, we believe that huge asset shifts are now underway towards the two longest running secular bear markets in recent history; Gold and Japan [Editors note: Japan will be covered in Crosscurrents soon]. As our featured chart illustrates, the relation of Gold and the Dow Industrials has been very volatile, ranging from 1.29 in January 1980 to 42.19 in August 1999. Eventually, we suspect that the ratio will move back to the pre-mania average of roughly six-to-one. Our "initial" secular bull market target for Gold is a ratio of approximately 11, which represents the level at which we believe the mania for stocks commenced. In the meantime, the two horizontal lines that abut our question mark delineate the current range; from 22 to 26.5.
This "trading range" has already persisted for 27 months, and most likely
the long lived phenomenon has to do with the continued belief that stocks
will continue to recover and eventually go on to new highs. Since
we have already gone on record with a low side target of Dow 8500 for
2005, extrapolating a range for Gold becomes a simple mathematical exercise
of division, by 22 and by 26.5. Given the computation, a low in
Gold this year could be anywhere from $321 to $386 per ounce. We
also believe that there is a decent likelihood that the Dow has already
seen its high for the year but there is a slim chance that a run for a
new record could surface late in the year. For the purpose of this
exercise, we'll assume a top target for the Dow of 11,000, where we would
expect ample resistance. The same computation places the high for
Gold at anywhere from $415 to $500 per ounce. Thus far, Gold has
consolidated well over the last few months and we feel a lot more confident
about the higher range estimates, from $386 to $500. Technically
speaking, the XAU and HUI gold indexes do seem somewhat "tired" and we
could conceivably close out any of our Trading Stance positions (see page
five) at anytime, but we intend to be holding onto the Investment Stance
positions for quite awhile. If we are correct, this bull market
is still very much in its infancy.
PLEASE NOTE: OUR BREAKING COVERAGE
OF A POTENTIAL SHORT SQUEEZE OF NOVASTAR FINANCIAL STOCK HAS FORCED US
TO TEMPORARILY DISCONTINUE FREE TRIALS. IF
YOU REQUEST A FREE TRIAL, YOU WILL BE GIVEN SEVERAL ALTERNATIVES.
THE FREE TRIAL PROGRAM SHOULD BE REINSTATED WHEN THE ARTICLE SERIES
IS COMPLETED, PROBABLY IN FEBRUARY 2005.
ABOUT ALAN M. NEWMAN
Alan M. Newman has been the Editor of CROSSCURRENTS since the first issue was published in May of 1990. Mr. Newman is also a member of the Market Technician's Association and has been widely quoted for years by the financial press, media, and other newsletters and has written articles for BARRON'S.
The newsletter is published 22 times per year and focuses on economic and stock market commentary, often covering controversial subjects. Several proprietary technical indicators are usually featured in every issue accompanied by current interpretation. Broad samples of our work can be viewed at http://www.cross-currents.net/.
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