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The Interim Update will generally be posted every Thursday by 4.00am NY time (3.00pm HK time).
Interim Update - 26 Apr 00
Stocks
The market sold off on Wednesday afternoon due to a lack of buying ahead of the release of the Employment Cost Index (ECI) on Thursday morning. We see the ECI as a significant risk because the market's expectations appear to be unreasonably low. Based on earnings data from the monthly Employment Report and medical cost data from the monthly CPI, an ECI in excess of 1% seems likely. However, for some reason the consensus is for the ECI to come in at 0.9%, setting the market up for a potential disappointment.
As is the case with all economic news, the market's reaction is often more important than the news itself. Therefore if the ECI is higher than expected but the market is able to recover from an early sell-off and close higher on the day, this would be a sign of underlying strength.
On Monday, with Microsoft stock having fallen by 45% from its all-time high, a number of Wall St analysts rushed to downgrade their recommendations. These recommendations will no doubt be upgraded when MSFT once again trades above $100. The unspoken rule for Wall St analysts appears to be 'buy high, sell low, and don't get caught out on a limb recommending an unpopular stock'.
With the Euro continuing its slide into oblivion the ECB meets today to set short-term interest rates. How they react to the Euro's on-going decline and how the currency markets respond to any action taken by the ECB will help us understand the potential risks and opportunities that are likely to arise in the equity markets over the coming weeks and months. It is entirely possible that whatever the ECB do with interest rates at this meeting, it will be perceived as being too little too late and the Euro's decline will accelerate.
Although somewhat mixed, sentiment indicators are closer to what you would expect to see near a bottom than near a top. Here is the current picture:
1. The CBOE Put/Call Ratio: This indicator is portraying a
significant amount of fear. However, with relatively low put/call
ratios over the past 2 days it now seems unlikely that we will
match the high level of put buying experienced in Oct 99.
2. The Volatility Index (VIX): The VIX, as at Wednesday's close, was
29.46. This is a level from which the market often rallies.
3. The Rydex Ratio: This indicator (bear funds/bull funds) continues
to hover near all-time low levels, revealing a sustained high
level of bullish sentiment, although it has moved off the lows
reached a few weeks ago.
4. Consensus Inc. Bullish %: The current bullish percentage of 38 is
neutral.
5. AAII Bullish/Bearish %: This indicator is showing a bullish
percentage of 64, an unusually high reading considering the
extraordinary downside volatility of the past few weeks.
6. We don't have charts for the Market Vane or Investor's
Intelligence surveys, but these are currently showing bullish
percentages of 30 (revealing significant pessimism) and 54 (quite
high - near its highest levels of the past year).
Gold
Gold certainly does appear to be trading in synch with the European currencies, so today's ECB meeting and the market's reaction to the outcome of this meeting is very important to the near-term direction of the gold price. We will cover the inter-relationship between the gold and currency markets in the next Weekly Update.
On Wed 26th April we were stopped
out of our LHG position at A$0.58. However, we re-purchased our
position in this stock almost immediately (at A$0.57) for the
following reasons:
1. Technical problems that have plagued the Lihir operation over
the past 2 years have now been completely resolved. This will
result in lower production costs, effective immediately.
2. The company is likely to announce an increase in gold reserves
at the end of June. The increase is expected to be about 20% and
will result in lower costs due to reduced
depreciation/amortisation.
3. LHG is finally beginning an aggressive drilling programme to
convert its huge resource base (42M oz) into reserves.
4. Cost reductions will make a mine expansion (to 1M oz per annum
from the current 600,000 oz) feasible at lower gold prices
5. Recent selling pressure has been partly due to rumours that
BMG, the owner of a 9% stake in LHG, will be taken over by NEM
resulting in BMG's LHG shares being sold. Firstly, the rumours
are probably false. Secondly, even if they turn out to be true it
seems unlikely that NEM would dump LHG shares on the market with
the LHG share price at such a depressed level.
Changes to the TSI Portfolio and Stocks List
LHG was sold and re-purchased as described above.
Interim Update - 19 Apr 00
Stocks
We are paying particularly close attention to the Dollar at this time. As discussed in the latest Weekly Update, the Dollar requires at least $30B per month of net investment capital inflows to offset the US current account deficit and thus hold its ground relative to the other major currencies. Our view was that the ability of the US to attract a sufficient amount of new investment each month would be in serious doubt unless the US stock market stabilised and began to establish an upwards trend.
Although the US stock market has recovered so far this week, as we suspected it would, it remains anything but stable. However, we note the current strength in the US Dollar and are pondering what this could mean for both the stock market and the gold price.
It seems there is enormous concern throughout the world regarding the perceived over-valuation of US stocks. Investors everywhere are looking at the US market with considerable angst, wondering if the great crash is about to happen. Despite the anxiety, however, the Dollar continues to firm, especially with respect to the Euro.
It is possible that the currency markets are telling us something rather important about the equity markets - if we are looking for a stock market crash our attention should not be directed towards the US, but to the opposite side of the Atlantic. We will address this idea in more detail in the next Weekly Update.
After two days of breathtaking upward surges, the US market in general and the NASDAQ in particular consolidated recent gains during Wednesday's session. At this stage we are open-minded as to whether the current rally will turn out to be a short-term bounce within an incomplete downwards move, or something more substantial (the beginning of a new upwards leg). Either way, we expect the market to move higher over the next week or so. The point at which this rally fails will then give us a clue regarding what to reasonably expect as far as further downside is concerned.
Here are the updated sentiment indicators. Note that the VIX and the put/call ratio suggest a continuation of the current rally.
1. The CBOE Put/Call Ratio: This indicator has fallen off a cliff
during the past week and is now beginning to portray a
significant amount of fear. Even after the strong rallies on Mon
and Tue, the equity put/call ratio on Wednesday was still a
relatively pessimistic 0.5.
2. The Volatility Index (VIX): The VIX, as at Wednesday's close, was
30.24. This is a level from which the market often rallies.
3. The Rydex Ratio: This indicator (bear funds/bull funds) continues
to hover near all-time low levels, revealing a sustained high
level of bullish sentiment, although it has moved off the lows
reached a few weeks ago. The proportion of funds in the more
speculative sectors has begun to move up, indicating that
confidence is essentially in tact (refer to the chart showing the
% of bull fund assets in OTC, Biotech and Other Tech).
4. Consensus Inc. Bullish %: The current bullish percentage of 39 is
neutral. However, considering the survey was finalised last
Friday it is higher than we would have expected.
5. AAII Bullish/Bearish %: This indicator is slightly bearish (the
bullish % is too high)
Gold
Our outlook for the gold price became more and more bullish over the past few weeks as a number of conditions for a gold rally were progressively put in place. However, the most important single factor in determining the price of gold is investment demand. With the Dollar Index gaining ground of late, despite the wild gyrations in the US stock market, we are starting to become less assured that the investment demand for gold will increase sufficiently in the near-term to bring about a sustainable gold rally.
It will be critical over the next few weeks to watch the relative performance of the Dollar versus the Euro, the US stock market versus the European stock markets, and the US long-term govt debt market versus the European equivalent. An acceleration of capital flow from Europe into the US (and Japan) may precipitate a sharp fall in the gold price.
Having now aired our concerns it should be noted that we are still bullish on gold, but do not advocate adding to positions in gold stocks until the XAU closes above 61 (that is, only buy on strength).
Changes to the TSI Portfolio and Stocks List
During last Friday's selling purge in the US we purchased CMTN, CPQ and WCOM. During Monday's panic selling in the Australian market we purchased FXF. We will most likely do no further buying until the market has tipped its hand regarding whether last Friday was a major low or just a temporary stop before much lower levels are plumbed. If CMTN makes it up to around the $90 area over the next week, we'll probably take profits on this stock.
Interim Update - 12 Apr 00
Stocks
There is a good chance that a recovery, albeit a temporary one, will get underway once the markets have digested the PPI on Thursday morning (that is assuming, of course, that the PPI doesn't reveal anything shocking on the inflation front).
We said several weeks ago that the S&P would not drop below its Feb 28th intra-day low of 1325 for the remainder of this year. We are still comfortable with this forecast, although the S&P is likely to return to the 1300s before corrective activity is complete (probably between now and the end of May).
Most attention at the moment is being focussed on the NASDAQ, for obvious reasons. On a daily closing basis, the NASDAQ Composite has now fallen by 25% since reaching its zenith on March 10th. The talking heads on CNBC are even suggesting we may now be in a bear market, something with which we do not concur since the Comp has not broken below its up-trendline dating back to the 10th Aug 1999 low and is still above its 200 DMA. A 12 month chart of the Comp can be found here.
We consider the NASDAQ's rally to have commenced from its closing low of 2490 on 10th Aug '99. It then reached its closing high of 5048 on 10th Mar '00 for a total gain of 2558 points from trough to peak. It is not uncommon for a correction in a bull market to take back 50% of the gains achieved in the preceding rally. 50% of 2558 is 1279. Subtracting 1279 from 5048 we get 3769. On 12th April 2000, the NASDAQ Composite closed at 3769!
Time will tell if 3769 turns out to be the lowest daily close on the NASDAQ for this year. We would actually not be surprised to see a lower close, perhaps in the 3400-3500 area, but probably not until after an intervening rebound.
Sentiment indicators currently point to a rebound in the near-term. It should be noted that sentiment indicators work a lot of the time, but they fail in a crash scenario. Markets only ever crash when the majority of participants are fearful, so automatically buying just because sentiment indicators reveal a high level of fear may have One buying just prior to a crash. Crashes are extremely rare and we are certainly not predicting one at the moment, it's just a point worth noting. Here is the current picture:
1. The CBOE Put/Call Ratio: This indicator remains very low
considering the extreme volatility in the markets, but is
starting to move up. The equity put/call ratio reached 0.5 on Wed
12th April.
2. The Volatility Index (VIX): The VIX is currently near its highest
level since Oct last year, meaning that a near-term bounce in the
market is likely.
3. The Rydex Ratio: This indicator (bear funds/bull funds) continues
to hover near all-time low levels, revealing a sustained high
level of bullish sentiment, although it has started to move up.
The proportion of funds in the more speculative sectors continues
to drop (refer to the chart showing the % of bull fund assets in
OTC, Biotech and Other Tech).
4. Consensus Inc. Bullish %: This survey still shows a relatively high
level of bullish sentiment, however the survey was taken prior to
this week's sharp decline in the NASDAQ.
5. AAII Bullish/Bearish %: This indicator is neutral, but once again
does not take into account this week's action.
6. We don't have charts for the Market Vane or Investor's
Intelligence surveys, but these are currently showing bullish
percentages of 38 (revealing some pessimism) and 56 (quite high -
near its highest levels of the past year).
Gold
Gold is currently showing no signs of life and gold stocks, as represented by the XAU, have been gradually declining. This is disappointing given the incredible volatility in the stock market, but not entirely unexpected. There is often a lag between a loss of confidence in financial assets and an increased focus on gold-related investments. We remain bullish on gold, anticipating a strong rally over the next few months.
A daily close above 61 for the XAU and $286.50 for spot gold would cause our Gold Momentum Model to give a new BUY signal.
Of the major gold producers we follow, Franco Nevada and Normandy Mining are showing the most definitive signs of having bottomed. FN in particular looks good.
Changes to the TSI Portfolio and Stocks List
The sharp decline on the NASDAQ over the past few days has triggered sell stops for ONT, PSIX and BDE.
Interim Update - 5 Apr 00
Stocks
The stock market continues to condense months of activity into the space of days or even hours. Tuesday's session was the most volatile in the history of the US market, with the extreme oscillations in the senior averages actually appearing tame compared to the huge movements in some individual stocks. The greatest volatility was naturally seen in the less-established "new economy" stocks with the Internet indices dropping by almost 20% at one point, but ending the day essentially flat. Although Wednesday's session felt calm relative to the previous day's frenetic action, the NASDAQ still traded over a 6.7% range.
The sharp turnaround in stock prices on Tuesday has prompted talk that some form of officially sponsored intervention took place. We certainly would not be surprised if a so-called "Plunge Protection Team (PPT)" sprang into operation to save the day for the bulls, but we also recognise that this need not have been the case. Margin-related selling of tech stocks had occurred several times during the 3 weeks leading up to Tuesday's mini-crash and recovery. It is quite possible that Tuesday morning's action was just the final capitulation of under-capitalised traders who had bought shares on margin and who, up until that point, had been 'hanging tough' in the hope of a rebound. With the weakest of hands having been eliminated and with the S&P futures approaching strong support at around 1420, a rapid recovery occurred. However, if the PPT was not involved in this particular case we have little doubt that its services will be called upon at some point in the future to resurrect a collapsing market. Unlike the usually astute John Crudele who wrote, in an article entitled "How Stocks Turned Back From The Abyss", that "except for the obvious contradictions with the free-market system it [government intervention in a collapsing market] is politically and socially a very right thing to do", we strongly believe that government meddling in the financial markets is NEVER the right thing to do. However, we do recognise the likelihood that the senior stock market averages have been/will be manipulated and take this factor into account when fashioning our investment strategy.
As far as where the markets go from here, there is still a chance that the S&P could climb to new all-time highs in the near future. The NASDAQ, however, has probably seen its highs for the first half of the year. We continue to expect a strong market in the lead-up to the November elections (the markets ARE manipulated!), but choppy, indecisive action is likely to persist for the next few months.
Although sentiment has not come close to reaching extreme negativity during the turbulent recent past, suggesting that further downside is probable, there are some signs that a rally will be mounted in the short-term. Chief among these is the VIX which, on Wednesday, closed above 30 for the first time since Oct 15 last year. Here is the current picture as depicted by a number of sentiment indicators:
1. The CBOE Put/Call Ratio: This indicator remains at historically
low levels, demonstrating a continued lack of fear
2. The Volatility Index (VIX): The VIX is currently at its highest level
since Oct last year, meaning that a near-term bounce in the
market is likely.
3. The Rydex Ratio: This indicator (bear funds/bull funds) continues
to hover near all-time low levels, revealing a sustained high
level of bullish sentiment. The proportion of funds in the more
speculative sectors continues to drop (refer to the chart showing
the % of bull fund assets in OTC, Biotech and Other Tech).
4. Consensus Inc. Bullish %: This survey now shows a high level of
bullish sentiment (although slightly reduced from last week).
5. AAII Bullish/Bearish %: This indicator has reversed during the
past week from showing a high level of bullish sentiment to
showing a high level of bearish sentiment.
6. We don't have charts for the Market Vane or Investor's
Intelligence surveys, but these are currently showing bullish
percentages of 42 (neutral) and 54 (quite high - near its highest
levels of the past year).
Gold
It was very encouraging to see gold quickly move up $10 when the stock market looked in danger of collapsing during Tuesday's session. This goes some way towards assuring us that gold will provide a satisfactory hedge against anything that leads to a loss of confidence in financial assets.
We are watching the stocks of the major gold producers closely for signs that they have bottomed. As discussed during the latest Weekly Update many of the building blocks for a gold rally appear to be in place (extremely bearish sentiment, speculators net short COMEX gold futures), with doubt remaining as to whether we will have a 1998-style spike bottom or a 1999-style extended bottom.
A daily close above 62 for the XAU and $286.50 for spot gold would cause our Gold Momentum Model to give a new BUY signal.
The re-structuring announced by NDY on 5 April is a positive development for that company and its shareholders. NDY will take full ownership of the Yandal assets and dispose of non-gold operations. The result is a simplified structure, improved cashflow, higher gold reserves/resources, increased management focus on the gold business, and higher debt (although not high enough to create any difficulty). If we had not already purchased NDY last week, we would be buyers now.
Changes to the TSI Portfolio and Stocks List
On 4th April we re-purchased PSIX for the TSI Portfolio at $27.50 (sell stop: $24). If given the opportunity we plan to buy additional shares of LPTHA at $28 or less and SPLN at $23 or less.
Interim Update - 29 Mar 00
Stocks
Sentiment towards technology stocks has turned decidedly negative on the back of Abby Cohen's statement on Tuesday that the equity portion of her model portfolio would be reduced by 5% (and advice that investors should no longer be over-weight technology) and Mark Mobius's Wednesday warning of a potential crash in Internet stocks. We are not concerned by these high-profile words of caution. If anything, they can create a buying opportunity by prompting some panic liquidation. However, we are concerned by the market's failure to mount any significant rally so far this week despite the falling oil price and the presence of quarter-end 'window-dressing' by fund managers. When typically positive factors are unable to take the market up it usually means a decline is about to occur. We'll re-assess the situation in the coming Weekly Update based on how the story unfolds during the final two trading sessions of the week.
It is likely that Wednesday's sharp fall in technology stocks once again resulted in substantial margin selling. Judging by the large declines in many of the stocks favoured by heavily-margined short-term traders, it is probable that the total amount of margin debt has dropped during the month of March. This won't be known for certain until the March margin debt figures are released around mid April, but such an occurrence would be positive for the market and confirm something we postulated some time ago - that the highly-speculative issues could experience dramatic falls without severely impacting the overall market.
Sentiment indicators are becoming more consistent as far as revealing a high degree of bullishness, telling us that we are close to at least a short-term peak in stock prices. Here is the current picture as depicted by a number of sentiment indicators:
1. The CBOE Put/Call Ratio: This indicator remains at historically
low levels, demonstrating a continued lack of fear
2. The Volatility Index (VIX): The VIX is currently neutral at around
25. An article in the latest issue of Barrons made the point that
the usefulness of the VIX, as a contrary indicator, has waned
because it does not take into account the action that occurs on
the NASDAQ (the VIX measures the volatility in a number of OEX
index options). This point was demonstrated by Wednesday's action
when the VIX fell marginally despite the NASDAQ suffering its 3rd
largest points decline ever.
3. The Rydex Ratio: This indicator (bear funds/bull funds) continues
to hover near all-time low levels, revealing a sustained high
level of bullish sentiment. It is interesting to note that the
proportion of funds in the more speculative sectors has been
dropping since early March (refer to the chart showing the % of
bull fund assets in OTC, Biotech and other tech).
4. Consensus Inc. Bullish %: This survey now shows a high level of
bullish sentiment.
5. AAII Bullish/Bearish %: This indicator has become very bearish,
with bullish sentiment rising to its highest level since the end
of last year.
6. We don't have charts for the Market Vane or Investor's
Intelligence surveys, but these are currently showing bullish
percentages of 49 (neutral) and 54 (quite high - near its highest
levels of the past year).
Gold
We are becoming more confident by the day that a reversal in the gold market will occur by mid April. In particular, sentiment has reached bearish extremes and it is highly likely that speculators are now 'net short' COMEX gold futures. We have also seen a great deal of negative press of late, including the bogus story that the French central bank is planning to sell its gold reserves. A bottom for the gold market may therefore be close-by.
Rumours that the Tiger Fund will be liquidating its assets resulted in some panic selling of Normandy Mining in the Australian market today (Tiger owns 11% of NDY). The rumours are probably true, but we saw this as a buying opportunity and purchased NDY for the TSI Portfolio today at A$0.83. The risk/reward ratio for NDY at this price is nothing short of exceptional, despite the fact that we have some reservations regarding its hedge book.
Changes to the TSI Portfolio and Stocks List
As mentioned above, we have added NDY to the Portfolio.
We will remove the stop loss protection on SPLN and will look to re-purchase PSIX (stopped out last week at $44) if it drops below $30.
Interim Update - 22 Mar 00
Stocks
The March 15 Interim Update suggested the potential for new highs in the S&P by the end of April. With the strong upside action during the final 2 days of last week, the latest Weekly Update then concluded that new highs above 1500 were, in fact, likely by the end of March. This target was achieved one week early, with both the cash S&P and the June futures having both reached new record highs above 1500 on Wednesday. The market is certainly due for a pullback and this will probably occur during the next few sessions. However, we expect to see the S&P and the NASDAQ trading at higher levels by month end.
Although large-cap industrial stocks have attracted some investment attention over the past week we anticipate a switch in focus back to the 'new economy' stocks in the near future. As such, the NASDAQ Composite should out-perform both the S&P and the Dow over the next few weeks as we move towards a potential peak of some significance. It is worth noting that during Tuesday morning's action the NASDAQ completed a successful re-test of last Thursday's lows, telling us that a strong upwards move in tech stocks is probably underway.
In our view the three most important events of the week, with respect to the financial markets, were the trade deficit, the official interest rate rise and the Taiwanese Presidential Election.
The February Trade Deficit came in at an unexpectedly-high $28B, boosted by the sharp rise in oil prices. The fact that the Dollar has not weakened, despite such a large trade gap, indicates that net foreign investment in the US is still growing at a healthy pace. If foreign investors ever tire of expanding their exposure to US assets, then the huge US trade deficit will cause the exchange value of the Dollar to plummet. Until that time the US will continue to reap the dual benefits of low-priced foreign imports and large net capital inflows.
To the surprise of almost nobody, the FOMC hiked both the Fed Funds Rate and the Discount Rate by 0.25% on Tuesday. This lack of surprise caused a wave of relief buying to hit the stock market, helping to confirm the end of the NASDAQ correction and giving us the new record highs in the S&P.
The victory of the pro-independence candidate Chen Shui-bian in Taiwan's Presidential Election initially caused some nervousness throughout the world based on China's threats to take military action if Taiwan ever declared itself to be independent. China's threats, designed to scare the Taiwanese into not voting for Chen, had exactly the opposite effect. The proud Taiwanese people, offended by China's efforts to compromise their recently-won freedom to choose, responded by turning out in droves to vote for Chen.
The dictatorial Chinese Government is driven primarily by the fear of losing power and thus reacts to the changing world in a way that it perceives will solidify its position of power. With fear as its driving force we are not surprised that the attempt to influence the outcome of Taiwan's election ironically led to a result that was exactly the opposite to that intended. This is certainly not the first time that China's current leadership has sought to suppress a perceived threat to its total power and, by its own actions, magnified the supposed threat. For example, last year the superstitious and reactionary Chinese Government targeted the Falun Gong, claiming that the religious group was superstitious and reactionary. Hundreds of Falun Gong members and leaders were arrested and a PR campaign was launched with the aim of discrediting this seemingly innocuous group. The result? The popularity of Falun Gong has increased.
Gold
The consensus seems to be that, with the Swiss gold sales commencing in May and another BOE gold auction scheduled to occur in May, the gold price should remain weak over the next few months. The predominance of such negative sentiment is very bullish.
As stated in our latest Weekly Update, we expect gold to reach a low by mid April. A drop below 280 between now and then, along with a further increase in bearish sentiment and the accumulation of a large speculative short position, would set the scene for a strong rally.
Gabriel Resources (CDNX: GBU) occasionally drifts down into the C$2.00-$2.30 range on very low volume. In this range the stock is exceptional value.
Changes to the TSI Portfolio and Stocks List
We will remove ADI, HAUP and INTC from the TSI Stocks List because these stocks are now priced way above our original target buy zones and are unlikely to ever approach these targets again.
We will add LightPath Technologies (NASDAQ: LPTHA) to the Stocks List and the Portfolio (at Wednesday's closing price of $43.50) and will add Liberty Digital (NASDAQ: LDIG) to the Portfolio (at Wednesday's closing price of $43.38). These stocks are purchased with a 12 month view (although profits may be taken if an explosive move up occurs in the short-term).
Interim Update - 15 Mar 00
Stocks
The direction of the next breakout in the S&P is still unknown (and, we think, unknowable), although the odds remain slightly in favour of a bullish resolution. Much will depend on the inflation data to be released to the market on Thur and Fri, the continued unwinding of derivative positions leading into the options/futures expiration this Friday, and the outcome of the FOMC meeting on 21st March. If the market can navigate through this potential mine-field of events without breaking short-term support (now around 1377 in the June S&P Futures), then a move to new highs could occur by the end of April. However, this is a big "if".
Wednesday's strong upwards moves in the S&P and the Dow, in parallel with another sell-off in the NASDAQ, was probably due to the unwinding of bearish positions in S&P futures/stocks/options that were being used to hedge long positions in technology stocks. As the tech stocks continued the decline that commenced on Monday and the S&P500 began to rally, the unwinding of this trade (effectively short S&P / long NASDAQ) exacerbated the divergence.
We do not think that Wednesday's action, which saw a reversal of the divergence (tech stocks strong, everything else weak) that had been occurring for many months, was the start of a major trend change. We are confident that the technology sector will lead the overall stock market for many years to come, with the occasional pullback that shakes weak holders out of the market (a weak holder is anyone who has bought shares on margin or who has scant knowledge of the fundamentals behind the stocks they have purchased). The fact that the so-called "old economy" stocks have been able to hold steady in the face of an almost 10% drop in the NASDAQ actually bodes well for the overall market provided we can get through the next few sessions without a breakdown (as discussed above).
For the past few weeks we have been suggesting that a drop in the oil price would possibly provide some support to the market. It now seems likely that the $2 spike in the oil price to over $34 per barrel on 7th March may have marked the peak in the current leg of the oil bull market. Even though the short-term profits of many companies will suffer as a result of the surge in the oil price that has already occurred, if the expectation that oil prices have peaked begins to take hold then the market will start to discount an improved profit outlook. This may already be happening as indicated by a 2-year chart of the Dow Transportation Average. It can be seen from the chart that the Transports held their Oct '98 low during their decline from a May '99 peak to a March '00 nadir and have since begun to move up.
Sentiment indicators are still mixed and therefore provide us with no clear direction. Refer to the following charts:
1. The CBOE Put/Call Ratio: This indicator remains at historically
low levels, demonstrating a continued lack of fear
2. The Volatility Index (VIX): The VIX reached an intra-day high of
29.14 on 15th March, a level from which rallies often commence.
However, by the end of the day it was neutral at around 25.
3. The Rydex Ratio: This indicator (bear funds/bull funds) has been
hovering near all-time low levels for the past few months,
revealing a sustained high level of bullish sentiment
4. Consensus Inc. Bullish %: This survey still shows a low level of
bullish sentiment, signaling the potential for the market to
rally.
5. AAII Bullish/Bearish %: This indicator has become more bearish,
with bullish sentiment rising to its highest level since the end
of last year. However, that was before the NASDAQ's recent dive.
This week's survey results may show a decline in bullishness.
6. We don't have charts for the Market Vane or Investor's
Intelligence surveys, but these are currently showing bullish
percentages of 29 (low!) and 52.3 (quite high - near its highest
levels of the past year).
Gold
Gold continues to hover between support at 287 and resistance at 292. With speculators still significantly net long COMEX gold futures, the most likely near-term direction for gold is down. A close below 286 for spot gold would probably see a quick drop to the 275-280 range.
One positive for gold is that gold stocks are showing signs of having bottomed. If the XAU can hold above 58 during any short-term drop in the gold price then we would be very confident that a substantial rally was close at hand.
Changes to the TSI Portfolio and Stocks List
On 14th March Odetics dropped into our target buy zone ($19-$23). Further to the 1st March Interim Update we made an additional purchase of this stock at $22, bringing our average cost to $24.75. Odetics is an incubator of technology companies. Its goal is to develop companies to the IPO stage, with all shares in each newly-listed company being issued to Odetics shareholders. One of the Odetics companies - Iteris - is scheduled to have its IPO next Tue (21st March), with 20th March being the record date for the distribution of Iteris shares. Iteris is a designer and manufacturer of vehicle sensors (to stop vehicles from running off the road) and traffic information devices (to provide drivers with traffic information, including congestion, best route, etc.). Since the sum of the values of the individual companies held by Odetics exceeds the current Odetics market cap, it is a relatively low risk speculation in the technology sector. We also like the fact that all profits from IPOs flow directly to shareholders.
Interim Update - 8 Mar 00
Stocks
Our thinking at the end of last
week, as outlined in the Weekly Update, was that short-term
downside risk had increased. However, since the 28th Feb - 3rd
Mar rally had exceeded the normal limits of a bear-market bounce,
we were prepared to give the bulls the benefit of the doubt
provided that:
a) The S&P Futures did not break below 1380 during the
pullback that was anticipated to occur this week
b) The oil price did not rise appreciably
Unfortunately for the bulls, both of these caveats came into
effect on Tue as a $2 surge in the oil price and a profit warning
from Proctor and Gamble combined to knock the S&P down to
1351.
This is a market that seems hell-bent on making life difficult for both the bulls and the bears. One day it breaks below support, heartening the bears, then a few days later it encourages the bulls by breaking above resistance. We are not interested in adopting a permanently bullish or bearish mindset, just in being on the right side of the market. As such our goal is to objectively analyse the psychological, fundamental and technical forces at work in the market and position ourselves to maximise profit and minimise risk. This requires keeping an open mind at all times (as opposed to the permabears, who are unable to look beyond high P/E ratios, or the permabulls, who seem to dwell in a "New Paradigm" fantasy land where the business cycle no longer exists).
In keeping with the confusing nature of the current market, one day after a $2 rise in the oil price contributed to a sell-off in stocks a $3 drop in the oil price helped support stock prices. Therefore, whilst the decline in the S&P on Mon and Tue did significant damage to the technical picture, a continued easing in oil prices would keep the short-term bullish argument alive. It is worth noting that the latest figures issued by Market Vane show a bullish percentage of 98 for oil. The 2% who are currently not bullish are probably the ones who were bullish 12 month's ago when oil was $12 per barrel.
One of our greatest concerns for some time has been the high level of bullishness/complacency revealed by a number of sentiment indicators. However, even here the picture is muddied by some conflicting information. For example, here are the current readings for some of the sentiment indicators we look at to determine the overall mood of the market, with links to the associated charts:
1. The CBOE Put/Call Ratio: This indicator is at its lowest level in
over 10 years, demonstrating an extraordinary lack of fear
2. The Volatility Index (VIX): At last Friday's close the VIX was at 21,
a level that indicates complacency (suggesting we were at a
near-term top). However, during early trading on Wed it reached a
high of 29, a level from which rallies often commence. It is
currently in neutral territory in the mid 20s.
3. The Rydex Ratio: This indicator (bear funds/bull funds) has been
hovering near all-time low levels for the past few months,
revealing a sustained high level of bullish sentiment
4. Consensus Inc. Bullish %: This survey actually shows a low level of
bullish sentiment. The current level of 27% would normally be
seen near a correction low!
5. AAII Bullish/Bearish %: This survey shows mid-range values for
bullish and bearish sentiment and is hence neutral
6. We don't have charts for the Market Vane or Investor's
Intelligence surveys, but these are currently showing bullish
percentages of 32 (low!) and 53 (quite high - near its highest
levels of the past year).
The above indicators certainly do not paint a clear picture of current market psychology. This contrasts markedly with the 16th July 99 peak in the market, a point at which all the above indicators pointed towards a high level of bullish sentiment (thus clearly identifying the peak). The apparent contradictions in the current sentiment readings possibly come about because today's overall market consists of a raging bull market in technology stocks and a severe bear market in almost everything else.
Gold
Gold finally caught a bid on Tue, helped by a $2 spurt in the oil price, but lost most of those gains on Wed as the oil price fell back. Although gold has not responded in any meaningful way to the huge rally in the oil price over the past 12 months, a drop in the oil price may turn out to be a suppressant on the gold price (due to a perceived relaxation in inflationary pressures).
The short-term up-trend in the gold price, commencing with the Dec 99 low in the mid 270s, is still in tact. A move below 286 would break this up-trend and would probably lead to a re-test of the Dec low.
The previous release of the Commitment of Traders (COT) Report revealed that Commercials were substantially net short. For the past several years no gold rally has commenced when the Commercials have been net short COMEX gold futures, so the next COT Report (scheduled to be released this Friday) should be checked to see if it shows that the Commercials have been reducing their short position.
A pullback into the 275-280 range for spot gold, in parallel with steady/firming gold stock prices and a reversal in the Commercials' position from net short to net long, would be an ideal setup for a substantial gold rally.
Changes to the TSI Portfolio and Stocks List
Vari-L (NASDAQ: VARL), a maker of components for the wireless communication industry (e.g., voltage controlled oscillators for mobile phones), is currently in our Stocks List with a recommended buy target of around $20. On Wed 8th March the stock traded as low as $23.50 before closing at $24. Based on the fact that VARL represents good value at its current price (its P/E is equal to its growth rate) and provides exposure to the burgeoning mobile communications market, we will add it to the TSI Portfolio at $24.
Interim Update - 1 Mar 00
Stocks
In our latest Weekly Update we highlighted the large declines already experienced in several stock market groups. We also pointed out that the Dow, had its composition not been altered late last year, would have fallen by around 20% from its 25 Aug 99 close to its 25 Feb 00 (last Friday) close (that is, it would have reached a new 52-week low). With such a large drop having already occurred we speculated that now was not a good time to be turning bearish on the market. This comment proved to be correct as the market has rallied strongly so far this week.
The current rally shows no immediate signs of failing and, in fact, Wednesday's close of 1385 in the S&P futures (above the 200 DMA) suggests a continuation of the upside in the near-term. New record highs continue to be set on the NASDAQ on almost a daily basis, thus providing further confirmation of the bullish case. We are also watching the TSC Internet Index, which closed at 1199 on Wednesday and is now only 19 points below its all-time high reached on 3rd January. A decisive move above the old high by this index would potentially signal the start of yet another upside explosion in these high-priced stocks. Stranger things have happened!
Although we see technical signs that a substantial rally may be in the works, we have two major concerns (excluding the ever-present valuation risk) regarding the current market environment. Firstly, as mentioned in our latest Weekly Update the recent declines in the "old economy" indices did not lead to a large increase in bearish sentiment. We suggested this was possibly due to a spreading belief that the Fed will never let anything really bad happen to the stock market. However, in the absence of a platform of strongly bearish sentiment a rally has little chance of success beyond the short-term. Secondly, the oil price continues to move higher. The April crude contract was up $1.34 to $31.77 per barrel on Wednesday and shows no signs of pulling back despite (or perhaps because of) US political efforts bent on achieving an increase in supply. If the oil price continues to press higher, or even remains near current levels, both the economy and the stock market will be adversely affected (claims that a high oil price is not a problem for "new economy" stocks are ridiculous since the "old economy" contains the major customer base for the "new economy"). So, if the oil price doesn't drop substantially then the stock and bond markets will. As mentioned in last week's Interim Update, a drop in the oil price some time in the future may turn out to be the catalyst that ignites the next major stock market rally.
Gold
There is nothing new to say regarding the gold market. Gold continues to consolidate and we still expect an important low to be reached during this month (probably in the 275-285 range). Gold stocks holding steady during any further decline in the bullion price would be a very positive development.
Changes to the TSI Portfolio and Stocks List
We recently added Odetics (NASDAQ: ODETA) to the Stocks List with a buy target range of $19 - $23. The stock price has strengthened over the past few days without entering our buy zone and looks to be headed higher. Since this stock looks very good both technically and fundamentally, we will immediately add it to the Portfolio at Wednesday's closing price of $27.50. If it pulls back into our original buy range then we will buy more.
We were not impressed with the half-yearly report issued yesterday by Delta Gold (ASX: DGD). Based on this company's contraction in profitability and its significant hedge position we will remove the stock from our monitored list.
We will add North American Palladium (Toronto: PDL) to the Stocks List with an initial buy target of $8. If we are successful in taking an initial position at $8 we would add more on a further pullback to around $6.
Previous Interim Updates