The Interim Update will generally be posted every Thursday by 4.00am NY time (3.00pm HK time).

Interim Update - 28 Jun 00

Stocks

The Fed met the market's expectations on Wednesday and chose to leave interest rates unchanged. As is usually the case whenever widely-anticipated good news is confirmed, a bounce following the news was cut short and the major indices drifted lower into the close.

In the latest Weekly Update we suggested that a substantial up-move was probable by mid July. Although nothing has changed that would rule out such an outcome, the market may run out of gas before major overhead resistance in the September S&P can be surmounted. Furthermore, there is perhaps a more likely scenario in the making: a rally over the final 2 days of the month followed by choppy action (with a downward bias) for a week or so that convinces the majority that the hoped-for 'Summer rally' will not eventuate. Only after many of those who bought near the highs over the past month have become despondent (probably around mid July) would the market break-out to the upside. As such, a definitive answer to the question "is this a bear market rally or a new bull market?" may not be provided until at least late July. We remain confident that the question will be answered in favour of the bullish case.

One nagging concern is the behaviour of the Dow Utilities Index. The Utilities tend to be a leading indicator for interest rates and, therefore, the stock market. The Utilities broke down through support on Tuesday and partially recovered on Wednesday. A move back above 325 would stabilise this index whereas a daily close below 310 would be a negative development for the overall stock market and the bond market.

Sentiment indicators are generally bullish, that is, they reflect a healthy degree of pessimism. Here is the current picture:

1. The CBOE Put/Call Ratio: The 10 DMA of the put/call ratio is currently 0.52. This is lower than we would prefer considering our bullish outlook.
2. The Volatility Index (VIX): The VIX, as at Wednesday's close, was 23.58. The VIX suggests that there is some near-term downside risk (a pullback is therefore likely following some end-of-quarter 'window dressing').
3. The Rydex Ratio: This indicator (bear funds/bull funds) never came close to hitting a bearish extreme at any stage during the April/May sell-off and is now very close to its all-time low (indicating a firm belief that stocks are going higher).
4. Consensus Inc. Bullish %: The bullish percentage was 30 in the most recent survey, a low level that usually precedes a strong rally.
5. AAII Bullish/Bearish %: The latest survey results show that the bullish percentage is 27 and the bearish percentage is 40. This survey is reflecting a significant degree of bearish sentiment.
6. We don't have a chart for the Market Vane or Investors' Intelligence surveys, but these are currently showing bullish percentages of 32 (showing a healthy number of bears) and 50. Investors' Intelligence is the only survey that never showed a substantial reduction in bullish sentiment during the April/May sell-offs.

Gold

Spot gold has rallied almost $10 so far this week and has just achieved its highest daily close since 28 Feb 00. Although this price action can only be viewed as positive, we are concerned at the continued failure of the gold stocks to acknowledge the rally in the bullion price. The gold price has now risen $22 since May 25 and yet the XAU has only moved up 2.5 points over the same period. Such under-performance by the gold stocks is quite extraordinary.

The complete absence of any long-side speculation in gold stocks suggests that either the gold price will immediately retreat to the low 280s or that a large catch-up move by the gold stocks lies ahead of us. At this stage, with the US Dollar Index holding above support, gold stocks comatose and speculators probably heavily net long COMEX gold futures, a near-term drop in the gold price is a possibility. However, we do not want to try to out-think the market. Often the reason for a price change does not become evident until some time after the price change has occurred (that is, "news follows price"). Therefore, although there are some causes for concern at the present time we will not disturb our long position in gold stocks unless the XAU breaks below important support. If the XAU closes below 56 we would reduce our exposure to gold stocks.

Two gold stocks that warrant specific mention at this time are Lihir Gold (LHG) and Gold Fields Limited (GOLD). LHG has performed poorly (both the stock and the company) for some time due to operational problems, frustration by investors that expansion plans were shelved, and its substantial leverage to the spot gold price. The company has made excellent progress over the past few months and now seems to have resolved all major technical issues at its mine-site and implemented a significant cost-reduction programme, the initial effects of which are an increase of 2.2M oz in its reserves and a plan to proceed with the previously-shelved expansion. LHG looks great at its current price of around A$0.67.

The management of GOLD have agreed to a merger with FN in an all-stock deal with virtually no takeover premium. They have therefore gone a long way towards validating the discount at which SA gold shares sell relative to their NA counterparts. Owning GOLD now has less appeal since its shares will trade in line with those of FN and will most likely yield less upside in a gold rally than they would have in the absence of the merger.

Interim Update - 7 Jun 00

Stocks

So far this week the market has been uncharacteristically quiet. We expect this relative stability to continue for the next 2 weeks, probably with a downside bias as last week's huge gains are consolidated prior to the next move higher.

Judge Jackson's absurd decision to order a breakup of MSFT into two separate companies should have surprised no-one. The confirmation of this much-anticipated bad news signals the beginning of an appeals process that could last up to 2 years, thus putting the Microsoft breakup issue into the background as far as its effect on the overall market is concerned.

Despite a string of economic reports over the past 2 weeks that displayed evidence of a slowing economy, the April Consumer Credit data released on Wednesday reveal that Americans are still spending more than they earn. This data, in conjunction with the high consumer confidence number reported last week, make a mockery of the recent Employment Report. We suggest that if the BLS is going to fudge the employment statistics it should do so with far greater subtlety in order to maintain some semblance of credibility.

Sentiment is no longer positive for stocks, that is, the pessimism that was evident 2 week's ago has been replaced with cautious optimism. However, with the large declines of April and May still fresh in the minds of many investors and traders it should only take a modest pullback from current levels to once again instill a healthy measure of fear. Here is the current picture:

1. The CBOE Put/Call Ratio: The 10 DMA of the put/call ratio has moved down to 0.49, confirming a general belief that the worst is over.
2. The Volatility Index (VIX): The VIX, as at Wednesday's close, was 25.19. This is neutral.
3. The Rydex Ratio: This indicator (bear funds/bull funds) never came close to hitting a bearish extreme at any stage during the April/May sell-off and is now approaching its all-time lows (indicating a firm belief that stocks are going higher).
4. Consensus Inc. Bullish %: The bullish percentage was 37 in the most recent survey, up from 19 just 3 weeks ago. This is slightly positive.
5. AAII Bullish/Bearish %: The latest survey results show that the bullish percentage is 42 and the bearish percentage is 37. This survey is still reflecting a significant degree of bearish sentiment.
6. We don't have a chart for the Market Vane survey, but it is currently showing a bullish percentage of 34 (up from 25 two weeks ago, but still showing a healthy number of bears).

Gold

The US Dollar Index has now fallen during 8 of the past 9 trading sessions and is testing support at around 106. With the Dollar now over-sold and with sentiment having recently plummeted, a rebound is likely over the next 5-7 trading days. It would be reasonable to expect the Dollar to move back to around the 109 level before resuming its down-trend.

The ECB meets later today to decide whether or not to raise interest rates. Based on the action in the foreign exchange markets following this organisation's previous two meetings, Europe's Central Bankers should appreciate the fact that higher interest rates are not necessary in order to stem the decline in the Euro. Since the Euro has risen in almost a straight line since May 25 it would be reasonable to expect that some of the recent gains will be retraced over the next week regardless of today's decision on interest rates.

Assuming the Dollar does experience an upwards correction and the Euro a downwards correction between now and the end of next week, gold is unlikely to advance much further during this time frame. We will probably need to wait for the final 2 weeks of June for a decisive break above $300.

Interim Update - 31 May 00

Stocks

Over the past few weeks we have been watching the bond market very closely because we thought that a sharp drop in bond prices presented the greatest potential threat to the stock market. In last week's Interim Update we suggested that "If bonds can move higher or simply stabilise around current levels then the downward pressure on stocks should be contained such that the Feb and Apr lows in the S&P are not penetrated." Since that time bonds have enjoyed a strong rally, thus removing one potential downward force from the equity market.

It is not just long-term government debt that has rallied of late as interest rates have, in fact, been falling across the entire yield curve. The following charts show the movements in 30-year and 3-month yields.

Chart courtesy of Decision Point

As the above chart illustrates, an up-trend in 3-month T-Bill yields dating back to Sep '99 has recently been broken and the yield on the T-Bill is now 100 basis points (1%) below the Fed Funds Rate. It looks like the debt markets may be starting to anticipate a recession. Hopefully the Fed will act accordingly, that is, hopefully it will resist the urge to react to backward-looking economic indicators and will, instead, try to reduce the severity of the coming slowdown.

As bonds have rallied over the past week the oil price has continued to move up. If, however, Wednesday's drop in the oil price turns out to be an important reversal then further downward pressure will be removed from the equity market.

We do not expect a sustainable rally to commence in the short-term. Today (Thurs) there will be some nervousness ahead of Friday's Employment Report, prompting buyers to stay away. If the Employment Report turns out to be 'market friendly', then we will no doubt get a knee-jerk move up. However, with the put/call ratio being neutral, with a large gap existing below the market in the S&P futures courtesy of Tuesday's 'gap up', with massive resistance hovering above the market in the 1440-1480 range, and taking into account the failure of the market to continue rallying on Wednesday despite the release of some good ("good" means indicating a slowdown) economic news, any bounce is likely to be followed by another downward push.

Sentiment in the market is still negative, but not overly so. If we do get another push lower over the next 2 weeks then we would expect bullish sentiment to have reduced to the point where another buying opportunity will be upon us.

Gold

Since its reversal on May 25 the Dollar has continued to move lower, increasing the probability of a gold rally in the near future.

As stated in the latest Weekly Update, we will not be concerned with any short-term weakness in the gold price unless the Dollar Index makes a new high or the XAU makes a new low. Wednesday's 2.5% drop in the XAU was probably due to a few of the last remaining bulls exiting their positions, something you generally see near a market bottom.

It is worth noting that gold's bullish consensus, as calculated by Market Vane, has dropped to 18%. It is very positive that the bullish percentage has fallen over the past week whilst the gold price has barely moved. This is the type of development you would expect as market participants become increasingly-bearish and give up on an investment just prior to a strong rally.

Interim Update - 24 May 00

Stocks

The action so far this week has been surprisingly irresolute, despite some wild swings. With the level of fear approaching market bottoming levels last Friday we had thought that a final liquidation wave might occur this week, thus setting up an excellent buying opportunity for a small portion of funds earmarked for equity investment. In terms of price action alone Monday appeared to fulfill the requirement of a final capitulation, but there was no panic evident during Monday's sell-off and the volume was not as high as it should have been if we were, in fact, seeing a washout. Similarly, there was no statistical evidence of extreme fear during the sharp decline towards the end of Tuesday's trading. Wednesday's session was the most positive because the market penetrated the previous day's lows and then reversed to finish higher on the day on heavy volume. For both the NASDAQ and NASDAQ100 it was actually an outside up day (lower low, higher high and higher close). Market breadth and the ratio of new highs to new lows were quite poor, but this is what you would expect to see whether the reversal marked the final lows or not. When a market makes such a pronounced turn from down to up it is always a few large-caps that lead the way. Only after the rescue effort is secure will money start to gravitate towards the mid and small caps, thus creating an improvement in the market internals (breadth and highs vs. lows). The reason we call the action "irresolute" is that even Wednesday's sharp intraday drop was not accompanied by any real panic as indicated by the Volatility Index (VIX) and the put/call ratio.

Further to the above, we are not convinced that the lows have been seen. If the market is able to move up over the next few days we will probably get another downward push during the first half of June. The success of any further downside efforts over the next month will probably be determined by the bond market. If bonds can move higher or simply stabilise around current levels then the downward pressure on stocks should be contained such that the Feb and Apr lows in the S&P are not penetrated.

Although new lows are still a possibility, we are convinced that the bear market in stocks is very close to an end. The fundamental change that will bring about a new upwards trend is the completion of Federal Reserve tightening (in our opinion, of course). The fact that the Fed is on hold will not be widely recognised until at least August, however the discounting nature of the stock market will result in a rally commencing well before the basis for the rally is appreciated by the majority.

The sentiment indicators listed below are currently showing significant, but not extreme, fear.

1. The CBOE Put/Call Ratio: The 10 DMA of the put/call ratio is in neutral territory. We expect this ratio to reach 0.7 (it is currently 0.61) near a bottom.
2. The Volatility Index (VIX): The VIX, as at Wednesday's close, was 27.89. We would have expected the VIX to have moved into the 35-40 range at some point over the past 3 days, however it has not exceeded 30 on a closing basis and 32 intraday.
3. The Rydex Ratio: This indicator (bear funds/bull funds) continues to hover near all-time low levels, showing that individual investors are not worried enough to move a significant amount of their money from bull funds to bear funds.
4. Consensus Inc. Bullish %: The bullish percentage was 25 in the most recent survey, up from 19 the previous week and still near a market-bottoming level.
5. AAII Bullish/Bearish %: The latest survey results show that the bullish percentage is 35 and the bearish percentage is 40. These are results you would expect to see near a market bottom.
6. We don't have a chart for the Market Vane survey, but it is currently showing a bullish percentage of 25 (very low - indicates we are close to a bottom).

Gold

As the stock market undergoes wild swings the gold market treads water. Gold continues to be held in check by a strong Dollar and we do not expect any meaningful upside in the gold price until the Dollar begins to decline against the major European currencies.

The risk at the moment is that the Dollar commences a new upwards leg in its bull market, a situation that may arise due to another emerging market financial crisis. The breakdown of the Hong Kong, Japanese, Argentinean and Brazilian stock markets may be telling us that a crisis is brewing in Asia and/or Latin America. If this is the case then we may see an acceleration of capital flows into the US, thus boosting the exchange value of the Dollar.

Changes to the TSI Portfolio and Stocks List

Following the market's turnaround on Monday we purchased PSIX at $25 and MRVC at $49. We were stopped out of SFE on Monday at $35 and re-purchased our position near the close on Wednesday at $31.75. An additional position in SPLN was purchased on Wednesday at $11.

Interim Update - 17 May 00

Stocks

In our latest Weekly Update we were quite bullish on the near-term prospects for the stock market. Had we seen the updated versions of the following charts at the time of writing the Weekly Update we would have been very bullish.

Charts courtesy of Decision Point

We have found the Consensus Inc. survey to be one of the most useful sentiment indicators, particularly when it comes to identifying important lows. A bullish percentage below 20% has, for many years, indicated that the market is at, or near, an intermediate bottom. In fact, since 1995 the bullish percentage has reached 20% or lower on only 3 occasions - Oct 98, Oct 99 and last week.

Taking into account psychological, monetary and political factors, if we could look at the US stock market in isolation we could proclaim, with great confidence, that we have seen the lows for this year. Based on a number of sentiment indicators and our belief that the Fed will be more accommodative in the months leading up to the elections we would, under normal circumstances, feel quite certain that the bottom for the NASDAQ occurred on April 14 and that May 10 represented the first 'higher low' in an evolving up-trend. Unfortunately, it is not reasonable to look at the stock market in isolation.

Tempering our optimism at this time is the action in the bond and currency markets. Firstly, a strong US Dollar is not usually a negative factor except that it may now be warning us of a financial crisis originating in Europe or Asia. An equity market collapse in Europe would no doubt lead to the panic selling of stocks throughout the world. Secondly, if the stock market is to continue working its way higher from here then some assistance is required from the bond market. If bonds tank, as they will be in danger of doing if commodity prices continue their recent rally, then stocks will follow.

The bottom line is we are medium-term bullish on stocks provided the European currencies can stabilise and the bond market doesn't experience a large fall. In the immediate-term, we expect an upward bias into the end of this week due to the influence of options expiration on Friday.

Gold

Gold continues to be a victim of US Dollar strength or, more relevantly, European currency weakness. Until Wednesday it had been holding up quite well, but has now made a new intraday low (although it has not yet made a new closing low). The XAU also finally succumbed to Dollar strength and bullion price weakness on Wednesday, but is still 5% above its April 13 closing low.

It looks like gold will remain under pressure until the Euro and the Swiss Franc begin to recover against the Dollar.

Interim Update - 10 May 00

Stocks

US stocks were hit hard across the board on Wednesday as an absence of buyers ahead of inflation data and next week's FOMC meeting meant that a modest amount of selling was enough to cause outsized falls in the major indices. As we write Japan's Nikkei is down around 800 points. The Hong Kong market is closed today (11th May) in honour of Buddha's Birthday, but has recently broken below its up-trend line. The Australian market suffered a relatively minor drop today in the wake of the Wall St worries, probably because the CRB Index has just made a new recovery high thus providing support to Australian resource stocks.

After dropping like a stone since reaching a high in early April, the T-Bond price has firmed slightly so far this week. It will be important to watch the behaviour of bonds over the next two weeks in order to get a feel for the sustainability of the equity market's fall and the viability of a subsequent rally. We expect the major stock market indices to reach an intermediate bottom some time during the next two weeks (or perhaps even during the next few days) provided that yields on US Govt bonds and 10-year notes do not move substantially above their current levels.

The fact that the US stock market's recent decline has been on low volume is neither bullish nor bearish, it simply shows a lack of conviction on both sides. It does, however, leave the door open for a much sharper drop if those who are holding out for higher prices throw in the towel and sell. Until we see panic selling and evidence of real fear the lows will probably still be ahead of us.

Sentiment indicators are progressing towards bearish extremes, but are not there yet. It will probably take at least two days of panic selling with the NASDAQ dropping below 3000 to get us to a point where buying can be done with confidence. Here is the current picture:

1. The CBOE Put/Call Ratio: The 10 DMA of the put/call ratio is in neutral territory. We expect this ratio to reach 0.7 (it is currently 0.56) near a bottom.
2. The Volatility Index (VIX): The VIX, as at Wednesday's close, was 32.94. This is an unusually high reading, but it will probably climb into the 40-50 range at the bottom.
3. The Rydex Ratio: This indicator (bear funds/bull funds) continues to hover near all-time low levels, but is finally beginning to show an increasing interest in bear funds relative to bull funds.
4. Consensus Inc. Bullish %: The bullish percentage remained at 31 as of last Friday, a level generally seen near an intermediate-term bottom.
5. AAII Bullish/Bearish %: From last week's Interim Update: "This indicator is showing a bullish percentage of 61, an unusually high reading considering the extraordinary downside volatility of the past few weeks. The AAII survey results sometimes oscillate quite dramatically, so it would not be surprising if next week's reading showed a substantially reduced bullish percentage." The latest survey results show that the bullish percentage has plummeted to 35.
6. We don't have charts for the Market Vane or Investor's Intelligence surveys, but these are currently showing bullish percentages of 28 (very low - indicates we are close to a bottom) and 48.6 (still too high) respectively.

Gold

The US Dollar continues to hold its ground, but everything else is in place for a gold rally. The XAU has performed well over the past 3 weeks with several of the gold stocks we follow appearing to have bottomed and to be in the early stages of a rally. The current rally in the CRB Index should also provide some support to gold.

For the past few weeks we have focussed on the Euro-Dollar exchange rate as a potential key to the US Dollar gold price and, possibly, an important factor in the unfolding financial turmoil. Although the Euro has recovered back above the 90c level there is no evidence at this time that it has bottomed. Today's ECB meeting will probably determine the Euro's near-term direction - if the outcome of the meeting is perceived to be a re-confirmation of the ECB's policy of benign neglect when it comes to their currency, a drop to new lows would probably occur. A continuation of Euro weakness would be a negative influence on the US Dollar gold price.

Changes to the TSI Portfolio and Stocks List

When we see panic liquidation and/or evidence that tech stocks have bottomed, we will purchase the stocks listed in the latest Weekly Update. To this list we will add Analog Devices (NYSE: ADI) which we would be interested in buying if it drops to around $35. We will not be doing any new buying until we are satisfied that general market risk has been substantially reduced.

Interim Update - 03 May 00

Stocks

As often seems to be the case, a couple of potentially market-moving economic reports are scheduled to be released at the end of this week. On Thursday we get the Q1 Non-Farm Productivity Report with the consensus expectation being a 3.7% productivity gain and a 1% rise in labour costs. Note that the labour cost number included in the Productivity Report is the most realistic of the Government's labour cost measures because it encompasses stock option compensation. For this reason it is closely watched by the Fed. On Friday we get the April Employment Report with the consensus expectation being a 0.1% drop in the unemployment rate (to 4.0%), 358000 new jobs created and a 0.4% increase in average hourly earnings. Although the financial markets tend to focus on the Employment Report to a greater extent than the Productivity Report, those responsible for framing monetary policy have expressed a preference for the labour cost info contained in the Productivity Report (for the reasons mentioned above).

A number of things appear to be coming to a head. The downward trend in the Euro has accelerated, probably indicating that we have reached the final capitulation stage of this currency's bear market. Bonds have reversed sharply from their highs reached only a few weeks ago, so the debt market is not benefiting from the stock market's troubles. The US Dollar continues to strengthen despite falling stock and bond prices, but with bullish sentiment at 96% (down from 97% last week) it should reverse course very soon. In addition, buying interest in the stock market has all but dried up. We expect important intermediate-term lows for stocks, bonds and the Euro to be reached during the next 3 weeks.

As far as the very short-term is concerned (the next few trading sessions), a bounce in the stock market seems likely based on the following sentiment indicators. Any rally attempt today (Thursday) may be muted due to a reticence to buy ahead of Friday's Employment Report, but we would certainly expect a rebound to get underway by Friday afternoon at the latest.

1. The CBOE Put/Call Ratio: After having reached unusually high levels during the week commencing 17 April, the 10 DMA of the put/call ratio is now neutral. However, the equity put/call ratio was 0.61 on Wednesday suggesting a healthy level of fear.
2. The Volatility Index (VIX): The VIX, as at Wednesday's close, was 34.51. This is the second highest reading in the past year (the highest occurred on April 14) and increases the likelihood of a near-term bounce in the market.
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.
4. Consensus Inc. Bullish %: The bullish percentage had dropped to 31 as of last Friday. We are now approaching a level generally seen near an intermediate-term bottom.
5. AAII Bullish/Bearish %: This indicator is showing a bullish percentage of 61, an unusually high reading considering the extraordinary downside volatility of the past few weeks. The AAII survey results sometimes oscillate quite dramatically, so it would not be surprising if next week's reading showed a substantially reduced bullish percentage.
6. We don't have charts for the Market Vane or Investor's Intelligence surveys, but these are currently showing bullish percentages of 34 (revealing significant pessimism) and 50 (still quite high, but dropping) respectively.

Gold

It is possible that Friday April 28 gave us the closing low for gold. The fact that gold has been able to bounce over the past 2 days in the face of a strong Dollar is certainly a positive sign, as is the recent recovery in gold stock prices. If the gold price can achieve a $3 up day on strong volume during the next week without dropping below Friday's (April 28) close at any time, we would be confident that a bottom is in place and the long-awaited gold rally has begun.

Changes to the TSI Portfolio and Stocks List

We will add Safeguard Scientific (NYSE: SFE) to the Stocks List and will endeavour to purchase it for the Portfolio at $41 (or lower if possible) on Thursday or Friday. SFE is an incubator of Internet infrastructure companies.

Previous Interim Updates

Mar 00 - Apr 00
Dec 99 - Feb 00