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The Interim Update will generally be posted every Thursday by 4.00am NY time (3.00pm HK time).
Interim Update - 30 Aug 00
Stocks
A correction most likely commenced at Monday's intra-day high of 1529 in the Sept S&P. We didn't anticipate any significant downside this week and that remains the case. In fact, assuming Friday's Employment Report does not provide a negative surprise then a bounce at the end of the week will probably occur, although we doubt that any rally in the near-term will take out Monday's high.
In the latest Weekly Update we mentioned that the NASDAQ was showing tentative signs of 'broadening-out', as evidenced by a slight improvement in breadth and in the ratio of new highs to new lows. The following chart of the NASDAQ Advance-Decline Line shows this barely-perceptible improvement. It is too early to get excited about the potential for a broad-based NASDAQ rally, it is just worth noting that market breadth has been behaving in a more bullish manner of late.
Chart courtesy of DecisionPoint.com
Sentiment indicators continue to reveal more optimism than we would prefer, however it would probably only take a moderate decline from current levels (say 20-30 S&P points) to generate a healthy amount of worry and thus provide a launching pad for the next rally. The next 2-3 weeks are crucial. We are now in a time of year when the market is often weak and currency problems tend to bubble to the surface, so if there is going to be anything unexpectedly-bearish in the offing over the next 2 months (more bearish than our anticipated 30 point drop in the SPU) then now is a likely time for it to begin. Note that we are bullish and expect the market to reach new all-time highs by October, we are just on the lookout for anything that might derail this generally positive view.
It is potentially very significant that the copper price has broken out to the upside over the past 2 days. Bond prices tend to move inversely to copper prices and energy prices, so a rally in the copper price combined with continuing strength in oil creates substantial downward pressure on bonds (upward pressure on interest rates). So far, however, bonds have experienced nothing more than a normal pullback within an on-going up-trend.
Gold
There is a positive correlation between the gold price and the major European currencies. This relationship has existed for a long time, but over the past few months it has been particularly strong. As such, the aggressive selling that has recently been directed towards the Euro and the SF has acted like a giant lead weight on the gold price. So far gold has not penetrated its May low, possibly because Euro/SF selling has occurred in parallel with Yen buying (suggesting that Japanese investors are re-patriating funds invested in Europe). The gold price would almost certainly have weakened to a greater extent if the Dollar had been the primary beneficiary of Euro/SF selling.
Later today the ECB meets to determine official European interest rates. According to popular opinion the Euro will be sold regardless of what action is taken by the ECB. A failure to raise rates will supposedly indicate a continuation of the covert 'weak Euro policy', whereas a 50bp rate hike will be seen as potentially damaging to Europe's economic growth. In other words, the ECB are damned if they do and damned if they don't.
The overwhelmingly-negative sentiment towards the Euro and a widespread belief that the Euro's exchange value will drop whatever the ECB does, probably means that the Euro is finally about to rally. Rampant pessimism surrounding the Euro and the extremely lopsided traders' commitments for the SF mentioned in the latest Weekly Update should be sufficient to stimulate a multi-week up-move in the European currencies, thus giving the gold price a boost at the same time.
Our Normandy Mining (NDY) released its annual report yesterday. The results were very good and, in our opinion, confirm NDY as the lowest-risk play in the gold mining sector. The after-tax profit for the year, pre-abnormals, was A$138M. Cash costs were quite low (A$304) and are forecast to decrease further over the coming 12 months. Production is forecast to increase by 10% (to 2.2M oz) over the same period, paving the way for a healthy rise in profit during the current year even if the gold price stays at today's level. Reserves increased to 22M oz, conservatively estimated using a gold price of A$450 (US$260).
Interim Update - 23 Aug 00
Stocks
So far this week the market has been unable to decline for more than an hour or two before rebounding. This type of behaviour is bullish because it indicates that there is a good deal of underlying support. However, a more substantial decline at this time is probably necessary to set the stage for the next multi-week advance.
Several sentiment indicators are now near levels that usually point to at least a short-term top, although sentiment is certainly not uniformly bullish. Many analysts and traders are still skeptical of this rally that launched itself in late May amidst massive pessimism. As such, a moderate decline (something in the range of 40-60 S&P points) is probably all that will be required to significantly reduce the amount of optimism revealed by a number of indicators and set the stage for the next important advance.
Looking at the very short-term, if a pullback occurs over the next 3 sessions then a sharp upwards move into the Labor Day weekend is likely.
The surge in the oil price over the past 2 weeks has, for all intents and purposes, been ignored by the bond market. This is probably because a great deal of the buying support for US debt is coming from Europe in a flight to quality (or a flight from the Euro). If the rate of this foreign buying slackens then the Dollar would fall and so, most likely, would US bond prices. Without the support of global capital flows bonds would become far more sensitive to changes in energy prices.
One thing worth noting about the oil price is that it seems to be taking a lot of bullish news on inventories to keep it in the low 30s. If the bullish news flow stops then the oil price would probably drop back to the 25-28 range.
Gold
Euro futures (Sept) hit an intra-day low of 89.20 on Wednesday before closing the session with a small gain and above the 90 level (the Swiss Franc performed a similar reversal). If there is some follow-though on the upside over the next 2 days then we may have seen the lows for the Euro, at least for the next few weeks.
While the Euro was bouncing off critical support near its May lows, gold also declined to the near vicinity of its May low. Unlike the Euro gold did not bounce off these lows, at least it hasn't yet. But stay tuned - if there is follow-through buying in the European currencies today then a gold price reversal should occur immediately.
We seldom comment on silver, but its recent price action is setting up a very bullish scenario. We will try to cover this in the coming Weekly Update.
Interim Update - 16 Aug 00
Stocks
As outlined in the latest Weekly Update we were looking for some strength at the beginning of this week followed by a pullback. So far so good as the market rallied strongly on Monday and then declined modestly on Tuesday and Wednesday. We noted that a pullback that did not result in a close below 1460 (basis the Sep S&P) would be a very bullish outcome as it would probably alleviate the 'overbought' condition of the market without doing any technical damage. Monday's rally has increased the chances of holding above this level.
From a technical perspective the market looks good. The broad-based strength of the NYSE, with the average stock performing better than the indices, is also a positive omen. Below we have included two charts that illustrate the internal strength of the NYSE-based stocks. The first chart shows the NYSE advance/decline line, which bottomed between March and May and has been rising steadily since late May. The second chart shows that 62% of NYSE stocks are now above their 200 day moving average.
Charts courtesy of DecisionPoint.com
It should be noted that the NASDAQ 'internals' are nowhere near as robust as those of the NYSE, suggesting that the downside risk in the NASDAQ indices is greater.
The NYSE's broad-based strength gives us confidence that the major indices will see higher levels over the coming months, but we are concerned that the market is 'over-heated' at the present time. Some sentiment indicators are showing an uncomfortably-high amount of optimism, possibly signaling that the herd is close to being fully invested (everyone who is going to buy has already bought). However, the picture is not totally clear because other indicators are not showing a high degree of bullishness or complacency. It is possible that a further decline over the next 2-3 sessions will add a bit more nervousness into the mix (bring the 'overbought' indicators back to more healthy levels) and set the stage for another upwards leg following next Tuesday's FOMC meeting.
Complicating matters over the next 2 sessions is the fact that Friday is an 'options expiration' day. We doubt that there is enough unspent short-covering fuel to push the market higher into the expiration, but certainly do not discount such an outcome (even in the face of overly-bullish sentiment by some measures). In the unlikely event that the market does work higher into the end of this week then any upside following next week's Fed meeting will be minimal.
Gold
The open interest in COMEX gold futures has risen over the past week. Given the fact that large speculators were substantially net short COMEX gold futures as at August 8, the recent increase in open interest probably means that they now have an even larger net-short position. If this is the case then the gold price has risen over the past week in parallel with speculators becoming increasingly short, a very bullish scenario.
The key to the gold price continues to be the Dollar and, more particularly, the value of the Dollar relative to both the Euro and the Swiss Franc. If this week's small bounce in the European currencies turns into something more meaningful then we will see some major upside in the gold price. If not, and the Dollar marches higher after a brief consolidation, we will probably see a short period of gold price strength (as speculative short positions are covered) followed by a return to the low 270s.
Changes to the TSI Portfolio
ADI, which we added to the Portfolio at $58 on 7 Aug, has run through to $94 on the back of some excellent results. We like ADI and will keep it in the Portfolio, but with the stock having risen 60% in less than 2 weeks it would be prudent to take some money off the table.
Interim Update - 9 Aug 00
Stocks
From the latest Weekly Update: "Although the market is now positioned comfortably-above major support, we suspect that another probe to the downside will occur over the next 2 weeks (following a push upwards during the early part of the coming week)." The inability of the market to push ahead to any great extent during Tuesday's and Wednesday's trading sessions, despite a higher-than-expected productivity number and a terrific earnings/revenue report from Cisco, indicates that the recent rally has probably run its course and we are about to encounter the above-mentioned probe to the downside. The results reported by Applied Materials after the close on Wednesday were very strong and the company gave positive guidance in its conference call, so there is most likely going to be some strength in the semiconductor stocks on Thursday morning. However, we expect that any upward moves at this time will be short-lived.
The Volatility Index (VIX) is currently positioned near its lows for the year, indicating a high degree of complacency in the market. However, other sentiment indicators show a healthy degree of skepticism and/or pessimism so the anticipated push downwards over the next week or so should not penetrate major support in the 1390-1420 range. In fact, we do not think the 1424 intra-day low from July 28 (basis the Sept S&P) will be taken out during the coming pullback. Ideally the market will reach its low point by the end of next week, following which a strong rally will ensue.
As it has for much of this year, oil still presents the most serious risk to a sustainable stock market rally. A rising oil price tends to put upward pressure on market interest rates and thus downward pressure on stock prices. The oil price has experienced some wild swings in both directions of late, with sharp downward corrections being cut short by evidence of contracting inventories. The path of least resistance appears to be down since the price has been going down on 'no news' and up on very bullish news, but further data revealing shrinking supplies could certainly result in some more upside fireworks in the short-term.
The latest issue of the Fed's Beige Book held no surprises, reporting signs of an economic slowdown in parallel with a labour market that remains 'tight'. On Friday we get the PPI and the Retail Sales numbers.
Gold
Gold has once again been caught in the Euro-Dollar crossfire. As the Euro has come under increasing selling pressure and dropped perilously close to its late May low, gold has followed suit.
In the latest Weekly Update we mentioned that a correction in the Dollar was likely to commence this week, thus leading to a bounce in the gold price. This is still our expectation, although there are currently no signs of a reversal in either the Dollar or gold. The risk is that with COMEX open interest still very low there is room for a lot more speculative short positions and thus the potential exists for a spike to new lows.
Despite the poor price action over the past few weeks we see no viable alternative to maintaining a long position in gold stocks, for the following reasons:
Our suggestion is therefore to remain invested and to manage risk by using sell-stops.
Changes to the TSI Portfolio
As per the latest Weekly Update we added ADI to the Portfolio on Monday (at $58). We also added AEM at $5.63.
SFE was sold (stopped out) and we will look for an opportunity to sell DROOY.
Further to the above we are, in effect, replacing DROOY with AEM in the Portfolio. DROOY probably provides the highest leverage to the spot gold price of all the world's medium-large gold producers, but also encompasses substantial risk in that its operations are relatively high cost (although definite improvements have been made in this area) and its cash reserves are minimal. Also, the fact that the vast majority of its operations are located in SA, combined with its reasonably-high cost structure, reduces the probability of shareholders benefiting from a takeover. We see AEM as being a much lower risk proposition due to the low-cost nature of its resources, its sound balance sheet and the fact that it is not encumbered with any derivatives contracts. At current prices AEM is also a potential takeover candidate.
Interim Update - 2 Aug 00
Stocks
Evidence of an economic slowdown continues to filter through. The NAPM survey results released on Monday helped bolster the idea that the economy is heading for a 'soft landing' and the construction spending numbers released on the same day revealed a contraction for the third straight month. On Wednesday a reduction in new housing starts added weight to the 'slowing economy' thesis.
Two of the most important economic numbers of the month are due to be released on this coming Friday. As far as the financial markets are concerned, the July Employment Report has the potential to cause large moves in the stock, bond, currency and gold markets. If the report is 'soft', that is, if it confirms both a slowdown in employment growth and minimal wage pressures, then stock and bond prices would most likely move up sharply and the Dollar would come under selling pressure (since slower growth means reduced returns on US assets and lower interest rates). Gold would also be a beneficiary of a soft report since it is now extremely oversold and is looking for some catalyst to push it higher. A lower Dollar is the perfect catalyst. For once, therefore, the interests of stock, bond and gold bulls appear to be lined up. If, on the other hand, the report is strong (or at least stronger than expected), then bonds would come under selling pressure and stocks would probably fall to test major support in the 1390-1420 area (basis the Sep S&P). The Dollar would be boosted, thus creating downward pressure on gold.
The other report scheduled for release on Friday is the ECRI Future Inflation Gauge (FIG). The FIG is not considered a 'market mover', but it is one of the monthly numbers most closely watched by Fed Chief Greenspan and has been a good leading indicator of trends in official interest rates for many years.
The market (as represented by the S&P500 futures) has recovered marginally from last week's 60-point drop, but is currently positioned at or just below important resistance. In other words this week's recovery has, thus far, simply taken the SPU back to resistance. If Friday's Employment Report is market friendly and is able to propel the SPU comfortably above important support (currently resistance) in the 1450s and 1460s (say to above 1480) then a subsequent decline would likely halt above 1450. However, if the report is not market friendly or a rally in the wake of a friendly report fails to push the SPU substantially higher, then a test of 1390-1420 will probably be on the cards for next week.
Two other points are worth noting. Firstly, there has been massive put-buying in Cisco over the past few days. Several mutual funds hold large stakes in Cisco so we could be seeing a fund manager trying to hedge ahead of Cisco's earnings report (due next week). This type of activity places the stock in question under downward pressure in the short-term, but also creates the potential for a sharp move in the opposite direction if a negative surprise on earnings or company guidance is not forthcoming. Secondly and more importantly, the Dow Utilities Index has broken out to the upside. Strength in the Utilities is a positive omen for the stock market taking a 6-12 month view.
Gold
As the gold price grinds lower the recent action in gold stocks keeps our bullish outlook alive. The Australian gold stocks have been showing strength for the past 2 months, with today's action being no exception (the XGO closed up by 1.65% despite another small drop in the gold price overnight in NY). The XAU has also stopped responding to a gold price that seems to drift relentlessly lower. Positive gold stock action, combined with a substantial contraction in COMEX gold futures open interest, encourages us to retain both short and long-term gold stock investments at this time. As discussed above, Friday's Employment Report has the potenial to be the catalyst for a drop in the Dollar and a consequential up-move in the gold price.
Interim Update - 26 Jul 00
Stocks
We weren't enthusiastic about the market's short-term upside potential following the strong run-up into mid July and we are not interested in embracing a bearish stance now that the market has pulled back towards the middle of its June/July trading range. The recent (and on-going) pullback only presents a problem for those who insisted on 'confirmation of strength' prior to buying and thus bought following the early-mid July rally.
Despite the drop in the major indices over the past 7 trading sessions the market is not yet oversold by most measures and sentiment indictors do not suggest that downside action is complete. In fact the Consensus-inc Index of Bullish Market Opinion, after being below 30% until quite recently, hit 51% last week. This is the highest percentage of bulls since the end of March. Also, the VIX continues to measure in the low 20s, indicating that traders are disconcertingly complacent. On the positive side of the ledger the advance/decline line (see chart below) looks healthy and has out-performed the S&P500 and the NYSE Composite during the decline of the past 2 weeks. In particular it is worth noting that declining stocks outnumbered advancing stocks on the NYSE by a margin of only 145 during Wednesday's sell-off, a significant positive divergence. The NASDAQ's breadth, however, has not showed the same resilience, suggesting that the NYSE Composite may out-perform the NASDAQ Composite over the near-term.
Chart courtesy of DecisionPoint.com
The market's case wasn't helped earlier this week when Consumer Confidence and Housing Starts numbers revealed signs of continuing economic strength. Fears of further interest rate hikes were hence rekindled. The strong numbers already released increase the focus on the most critical economic statistics of the week - Thursday's Employment Cost Index (ECI) report and Fridays GDP report. The ECI, in particular, has the potential to move the market quite substantially since it is known to be one of Greenspan's favourite indicators. If it comes in stronger than expected (the consensus view is +1.0%) then we may get a selling climax followed by a reversal. A key level to watch for the SPU (Sept S&P) is 1452 (the June 29 intra-day low). If the market spikes down to 1452 and then recovers to close higher on the day or with only a small loss, then we will probably get a bounce lasting 2 or 3 days before further downside occurs.
Gold
Sentiment towards gold currently ranges from extreme pessimism to total disinterest. There are almost no bulls, as highlighted by the fact that the COMEX open interest has just hit its lowest level in more than 7 years. It is this absolute lack of optimism in today's gold market that keeps us interested on the long-side. What we are seeing looks very much like a market in the late stages of bottoming, thus prompting us to conclude that the risk/reward ratio is exceptionally good.
As mentioned in previous Updates, the Australian Gold Stock Index (the XGO) appears to have bottomed several weeks ago and has recently been performing very well. In fact, the XGO chart reveals a definite up-trend in progress. NDY and LHG are our preferred Australian gold stocks (from both fundamental and technical viewpoints), but we also like the recent action in DGD (Delta Gold suffered a massive sell-off over the past few months as political unrest in the Solomon Islands and Zimbabwe stopped production at two of its mines, but has been steadily recovering over the past few weeks).
Changes to the TSI Portfolio
Last week we recommended SportsLine as a short-term play on its July 25 earnings release. Although SPLN has shown good relative strength over the past week in the face of the NASDAQ's decline (it closed yesterday at $16.50), it did not get a kick from its earnings. As such this trade should be closed out at break-even.
We will add Global Crossing (GBLX) to the Portfolio provided we can buy it at $28 or lower. GBLX has gone a long way towards linking up all the world's major cities with its optical network (the only global fibre-optic network) and is now positioned to reap huge returns from the sale of bandwidth.
DGD has been added to the Portfolio at A$1.35.
Interim Update - 19 Jul 00
Stocks
As we warned in the latest Weekly Update, the market was fully extended going into this week and due for a pullback. We suspect there will be some further selling on Thursday morning and then the market will rebound into the end of the week. Critical support is around 1490 in the Sept S&P500 contract (the breakout point) and a decisive move below 1490 on a daily closing basis would turn the short-term outlook negative. We don't expect that to happen, but with Greenspan's testimony being an unknown factor (strangely enough we haven't been sent an advance copy) and with some 'expiration-related' volatility something untoward is possible.
There are 4 significant positives as far as Thursday's trading is concerned:
The biggest risk we see on the horizon continues to be the oil price. Over the past few weeks the oil price has oscillated between $29 and $32 as conflicting information regarding OPEC's intentions seems to hit the market almost every day. A high oil price puts upward pressure on interest rates and, therefore, downward pressure on stock prices.
The Israel/PLO negotiations, which have just been extended, may have an effect on the stock market. We think that an agreement is almost a certainty and will be announced by Bill Clinton after his return from the G8 meeting in Okinawa. Although the US will bear a large financial cost from such an agreement (resulting from inducements paid to both sides, most of which will go unannounced), the prospect of peace in that troubled region will most likely give a boost to stock markets throughout the world.
Gold
The gold price continues to drift lower in response to a firming US Dollar. On Wednesday the Dollar Index achieved its highest daily close since May 25 (the day that gold reached its lowest closing price of the year). If a reversal is going to occur (higher in gold, lower in the Dollar) it must do so immediately. Otherwise, we will assume that gold's rally has failed and reduce our gold stock exposure accordingly.
Interestingly, although the XAU continues to make new lows the XGO (Aust Gold Stock Index) has held above is recent upside breakout point and looks to be headed higher. NDY and LHG are currently our 2 favourite selections in the gold stock universe.
Changes to the TSI Portfolio
LDIG closed below its stop-out point on July 18 and was sold at the open on July 19. We like this company and will look for an opportunity to re-purchase the stock.
On July 19 an additional position in Alliance Semiconductor (ALSC) was purchased at $24. This stock should perform very well once the semiconductor sector gets through its traditional Summer slowdown.
SportsLine.com (SPLN) is an interesting prospect for a short-term trade. This company is growing its business at 100% per year and has a low price/revenue ratio. As one of the two dominant sports content providers it stands to benefit greatly from the proliferation of mobile Internet access. At around $16 per share there appears to be minimal downside risk in the stock and there is the distinct potential for a 'pop' in the stock price when its Q2 results are released to the market on July 25.
Interim Update - 12 Jul 00
Stocks
During the first 3 days of this week stock indices moved up nicely and are now very close to exceeding levels that would emphatically deny the argument that the recovery since the May lows was simply a reaction in an on-going bear market. If the major indices can decisively move above such levels (around 1510 for the SPU and 4100 for the NASDAQ Comp.) then we will probably see an avalanche of buying as those who like to buy after confirmation of strength, and those who remained overly cautious during the selling purges and subsequent rebounds, leap into the market on the long side.
As relayed in the latest Weekly Update, we weren't expecting a major upside breakout to occur this week. With the market now quite extended by a number of measures and despite the close proximity of obvious breakout points, we still expect a pullback prior to the sharp rally that should eventuate after the herd figures out that a new bull market commenced at the end of May. Our guess is that some upside fireworks will occur during the latter part of next week. Initial support during any pullback in the near-term is around 1490 for the SPU and if the market is as strong as we think it is then this level will not be broken on a closing basis.
On Friday we get the Retail Sales and PPI numbers. Unless these reports are much worse than expected (Core PPI: +0.1%, PPI: +0.6%, Retail Sales: +0.3%) we do not think they will have a significant effect on the stock market.
The recovery since the lows of May
24 has been led by the Semiconductor Index (SOX). Here is a chart
of the SOX, provided courtesy of DecisionPoint.
The chart shows that the SOX rose 50% in the space of 4 weeks
following the May 24 selling climax before beginning a pullback
(helped along by Salomon Smith Barney's downgrade of the sector).
The leading stocks at the beginning of a bull market tend to
maintain that leadership so we expect the SOX to out-perform over
the next few months, especially after the traditional Summer
slowdown in chip sales runs its course. In the chip sector we
like Alliance Semiconductor (ALSC), a company that is growing
both its revenues and its profits at rapid rates. ALSC has a
large backlog of orders and, at current prices, is selling below
book value.
Gold
The result of yesterday's BOE auction was, at a superficial level, quite disappointing for the gold bulls. However, restrictions on who can bid at these auctions, and the fact that the amount of gold on sale is not large, mean that the auction results say absolutely nothing about the demand for physical gold.
The BOE auction was blamed for pushing the gold price down a couple of Dollars on Wednesday, but the real problem for gold is the mounting strength of the US Dollar. The Dollar Index has now moved above 108, helped along by a weak Yen. If the Dollar continues to strengthen we will most likely recommend that investors reduce their exposure to gold stocks. In the mean time we are still giving the bullish case the benefit of the doubt (due to limited downside risk at current levels).
Changes to the TSI Portfolio
PSIX was stopped out on July 10. On July 12 LDIG closed below its sell stop and would normally have been sold at the open on July 13, but we decided to retain the stock due to an expected bounce on the back of the Yahoo earnings report. The Yahoo report may have been a major turning point for Internet stocks, or it may have just provided a short-lived rebound within an on-going downtrend. It is too early to know.
Interim Update - 5 Jul 00
Stocks
In the latest Weekly Update we noted the likelihood of a decline this week, so we were neither surprised nor disappointed by Wednesday's sell-off. Wednesday's drop was precipitated by a downgrade of the major semiconductor stocks by Salomon Smith Barney (SSB) and earnings warnings from Computer Associates, BMC and Entrust.
As we mentioned in the Weekly Update, historical earnings are not the critical factor in the market. The key determinant of stock prices is the general expectation of investors regarding future earnings growth rates, so the important consideration is whether market participants will anticipate an expansion or a contraction in growth rates. One problem faced by 'chip stocks' has been that growth expectations have been so optimistic that it was going to be almost impossible for companies to generate upside earnings surprises. The positive aspect of the SSB downgrade is that it creates some pessimism and thus provides some scope for pleasant surprises.
We continue to work on the basis that the current range-bound action in the S&P will be resolved with a breakout to the upside, but the market is too close to critical support to be complacent. A drop below 1420 in the Sept S&P, on a closing basis, would see us reducing our exposure to stocks and/or tightening our sell-stops.
The negative side of the ledger is currently being dominated by Q2 (historical) earnings disappointments and the valuation concerns voiced by a few Wall St analysts. On the positive side of the ledger we have some evidence that oil prices may have topped and a continuing stream of data suggesting that the economy is slowing (perhaps removing the need for further rate hikes). In particular, both the headline number and the prices paid component from Monday's release of the NAPM survey were lower than expected. These are non-manipulated (that is, non-government) numbers.
The June Employment Report will be released on Friday morning. If this report substantiates the argument that the economy is slowing enough to circumvent the need for further rate rises then a substantial rally will probably get underway. If not then support at 1420 might come into play.
Gold
From last week's Interim Update: "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." With Wednesday's close below 56 in the XAU prudent money management dictates a reduction in our exposure to gold stocks.
We remain bullish on gold although the technical picture has weakened considerably following yesterday's $6 drop in the spot gold price and the XAU's breakdown below support. One positive factor is the recent strength in the Australian Gold Stock Index (XGO). Despite Wednesday's sharp sell-off in NY, the XGO actually closed marginally higher on Thursday mainly due to strength in Normandy Mining (NDY). Over the past 2 sessions NDY has risen almost 10% on heavy volume in parallel with a falling spot gold price and a prolonged shutdown at one of its largest mines due to a serious accident. The stock price would normally have fallen under such circumstances. We have no idea why the stock is currently performing as well as it is - it could be a takeover target or it might just be benefiting from the closing-out of a large short position.
Wednesday's drop in the gold price may be linked to the drop in the exchange value of the Yen, either because speculators who were long Yen and long gold have been forced to 'de-leverage' by the Yen's recent about-face or because a falling Yen will encourage the Yen carry trade and thus boost the Dollar.
Previous Interim Updates
May 00 -
Jun 00
Mar
00 - Apr 00
Dec
99 - Feb 00