Alert #115, Apr-08 2003
The stock indices surged at the open on Monday then spent the rest of the day grinding lower, creating what could be a key reversal. Anyone who has ever spent more than about 5 minutes looking at charts would have immediately spotted the obvious failures in almost all the US stock indices on Monday and would know that a top of some importance had just been put in place. Of course, in the financial markets what everyone knows is seldom worth knowing.

At this stage we will assume that Monday's failure by the stock market to follow-through on its initial surge was just a continuation of the frustrating pattern of the past several months. Once again an advance has halted at obvious resistance, so perhaps we are now headed back to obvious support defined by the 31st-March/1st-April lows (around 845 on the S&P500 Index). By the way, whenever the market reverses higher after breaking below support it has become popular to point the finger at something called the "plunge protection team", so why doesn't anyone ever speculate about a "surge protection team" when the market reverses lower after breaking above resistance?

The main concern for us at this time, and the reason for this e-mail, is that by spiking above its 21st March peak on Monday the S&P500 Index has fulfilled our minimum expectations for the rally that began on 12th March. As such, some adjustments to our trading plan are warranted. We had previously suggested taking profits on the Alcoa call options recommended in mid-March if they traded up to $1.10. We now plan to exit this position if they trade at $0.70. We will also place a sell-stop at $19.94 on our position in Alcoa stock (as always, the sell stop is effective on a daily closing basis only). 

In addition to the downward reversal in the stock market, the US$ reversed lower while bonds reversed higher. None of these were classic reversals since the stock indices and the dollar still managed to close higher on the day and bonds still closed lower. Furthermore, unlike the S&P500 Index neither the dollar nor bonds spiked to new price extremes before reversing course.

The bottom line is, there is no technical evidence that Monday's action was especially significant. However, as a result of our longer-term bearish views on the stock market and the US$ we don't see any reason to give the benefit of the doubt to the bulls here, particularly when it comes to the US$ (the fundamentals for the dollar are overwhelmingly bearish and the recovery rally has, to date , been feeble). Also, our expectation has been that the rally in the Dollar Index would halt below 104, or less than 2% above Monday's high (that is, even if the dollar moves higher it probably isn't going substantially higher). As such, we will immediately reinstate our short-term bearish view on the US$, thus bringing our short-term view into line with our longer-term view. 

Gold stocks continued to trade in bullish fashion on Monday, selling off sharply near the open and then recovering a good portion of their early losses by the end of the day. 

Alert #114, Mar-11 2003
The Stock Market

Monday was an ugly day for stocks in that downside volume on the NYSE was about 17-times greater than upside volume. However, no real technical damage was done. For example, of the 4 major US stock indices (the Dow Industrials, the S&P500, the NASDAQ Composite and the NASDAQ100) only the Dow hit a new low for the year on Monday. It was a very different story with many of the other major stock markets around the world, though, with several markets plunging sharply to new multi-year lows.

We expect the US market to move lower over the coming 2-3 weeks, but not substantially so. Interestingly, the NASDAQ100 Index, a proxy for the large-cap tech stocks, continues to hold up much better than the Dow Industrials. This suggests that a good deal of the selling pressure in the US market is emanating from overseas. With the US$ probably within 2-3% of an intermediate-term bottom there should soon be a temporary reduction in this foreign selling (we expect that there will be a much greater wave of foreign selling at a later date). Also, relative weakness in the Dow Industrials often occurs after a general market decline has become 'long in the tooth'.

Gold and Gold Stocks

In the latest Weekly Market Update we argued that the US$ was close to an intermediate-term bottom, that the US stock market was likely to bottom over the coming 2-3 weeks, and that gold stocks were close to a bottom. In doing so we appear to have generated some confusion. At least, this is the impression we get based on the e-mails received from our readers since the Weekly Update was posted. Our intention is never to create confusion, but there are times when we try to cover too many ideas in one commentary and/or when the markets themselves are confusing.

We did note, in the Weekly Update, that gold moves in anticipation of the future value of the US$ and gold stocks move in anticipation of the future value of gold. For example, at the current time it looks like the equity market is busily discounting the sharp drop in the gold price that everyone knows will happen once the Iraq situation is perceived to have been resolved. So perhaps there is a 'sell the rumour, buy the news' situation evolving with the gold stocks. In other words, it is certainly possible for gold and gold stocks to rally at the same time as the US$ experiences an upward correction. It all depends on what the market has already discounted.

On Monday the HUI broke decisively below trend-line support, something we did not expect would happen. It is possible the breakdown was false and will be reversed over the next 2 sessions, but even so it is becoming clear that the marginal new high achieved by the HUI in January of this year was an intermediate-term peak. Our longer-term outlook is unaffected by this latest development, but it is likely that any gold stock rally over the next 2-3 months will result in most of the major gold stocks making lower highs (similar to what happened during the July-September rally last year). 

While the major gold stocks have recently plunged on strong volume, most of the junior gold stocks we follow have suffered only modest losses on weak volume. This suggests that the juniors are, to a large degree, already in strong hands. While the majors are probably going to make lower highs during the next gold stock rally we expect that many of the juniors will move to new highs for the year. With Kinross Gold having been stopped out on Monday the gold/silver section of the TSI Stocks List is now comprised entirely of junior producers/explorers.

We'll go into this in more detail in this week's Interim Update, but the current environment reminds us of July 2002 (when the US$, gold, gold stocks and the general stock market bottomed within 2 weeks of each other) and March-April 2001 (when gold stocks and the general stock market bottomed at the same time then rallied sharply together for 7 weeks).

Alert #113, Mar-03 2003
We've been on vacation since 24th February and won't be providing any of our normal market commentaries until the 9th March
Weekly Update. However, we did say we would send out an e-mail alert if anything happened that was dramatically different from what had previously been outlined in our commentaries. At this stage nothing unexpected has happened, but we also said we'd provide a brief e-mail update on 3rd March regardless of whether or not one was needed as a result of market action. So, here it is.

STOCKS

The stock indices were flat over the course of the past week (the S&P500 dropped by less than 1%) and there were no large daily
moves. However, the past week's tedious drift has helped work-off the 'oversold' condition that existed when we wrote the 24th
February Weekly Update. For example, the 10-day moving average of the equity put/call ratio has fallen to 0.65, one of the lowest
readings of the past several months and only marginally higher than the levels reached at the early-December and early-January
market peaks. Also, after being at a very oversold level of -170 only 3 weeks ago the McClellan Oscillator closed last week at +70. 

Markets never move in a straight line for long and when a downward-trending market becomes extremely oversold, as was the case
with the US stock market in mid-late February, a rally will often occur to alleviate the pressure. However, when an oversold extreme
leads to only a weak rally, as has also been the case with the US market over the past 1-2 weeks, there is a good chance that the
downtrend is still in force. As such and although the major sentiment surveys still show moderate levels of bearishness, with the
oversold condition reflected in a number of indicators having now been eliminated without the market making much upward progress it
is likely that the short-term downtrend is about to resume.

In the 24th Feb Weekly Update we suggested exiting put options if the S&P500 traded below 790 or if it closed above 878. At this
stage, a drop below 790 is the more likely outcome over the next 2 weeks. (Note that although we will officially be exiting the QQQ put
options in the TSI Stocks List if/when the S&P500 moves below 790, traders might consider retaining some exposure to the 'short
side' just in case the market drops below last October's low in the near future and accelerates downward.)

Our view continues to be that a tradable bottom will be in place by the end of March.

BONDS

Our forecast over the past few months has been that T-Bond futures would move to new highs (above last October's peak) during the
first half of this year BEFORE a substantial downward move in bond prices (upward move in LT interest rates) would occur. Bond
futures achieved a new high at the end of last week.

If the stock indices resume their declines over the coming week (as expected) then bonds will probably move higher still, but the
risk/reward ratio is poor at current levels for anyone trading bonds from the long side. In fact, the way we see it T-Bond futures
presently have maximum upside potential of about 4 points and downside risk of about 20 points (bond prices are likely to tumble as
soon as stocks reach the 'tradable bottom' mentioned above).

By the way, last week's new high in bond futures is a bearish omen for the stock market.

GOLD

In the 19th February Interim Update, with gold trading at $349, we said that it would be unusual for a market that has corrected so
sharply to 'turn on a dime' and head straight back to its highs. And, that a more likely outcome would be a bounce to around $360
followed by a drop to test the recent low before an advance to new highs got underway. 

April gold futures peaked at $359.40 on 25th Feb and then dropped back to the mid-340s.

Our view continues to be that an intermediate-term peak in the gold market has NOT yet occurred. Furthermore, we don't see a viable
bearish alternative for gold as far as the coming 6-12 months are concerned. However, rather than reaching an intermediate-term
peak during the first quarter as has been our expectation over the past few months, such a peak might not occur until later this year.

Some strength in the gold market is probable over the coming 2 weeks and the size of the next up-move will give us more information
about the likely pattern over the remainder of this year.

CURRENCIES

There has been little movement in the currency market over the past week, although relative strength in the commodity currencies (the
A$ and the C$) is a sign that commodity prices are not yet close to an important peak.

The most significant developments over the past week involved the Yen. The Yen has edged above the downtrend-line that has been
in force since 1995, but the breakout hasn't exactly been decisive. The reason this break of the long-term downtrend hasn't caused
much excitement is, we think, because currency traders are focused on major resistance at around the 87 level (if Yen futures can
move above 87 - about 3% above last Friday's close - they will complete a 2-year head-and-shoulders bottom and project a move to
around 100 over the coming 12 months). It would be 'par for the course' for the Bank of Japan (BOJ) to intervene in the market to
prevent Yen futures moving above 87, and apparently they did intervene during February (they sold Yen and bought US Dollars in
order to weaken the Yen). However, early last week Japanese Finance Minister Shiokawa stated that foreign exchange rates should
be left to market forces and that the government should only intervene if movements are deemed to be too rapid (he defined "too
rapid" as being, for example, a move of 10 Yen in one week). So, there were conflicting signals emanating from Japan because
intervention did occur but the moves in the currency market over the past month don't appear to have been "too rapid".

In any case, most of the news and the utterances of politicians/bureaucrats is just 'noise'. With the Dollar's bear market still in its
infancy and the Yen very close to a major upside breakout it is becoming clear that the Yen is going to move much higher against the
US$ over the coming 12 months regardless of what Japanese monetary officials say or do.

COMMODITIES

The CRB Index is probably in the early stages of a correction, but we expect the commodity-price trend to remain 'up' for at least the
next 12 months. 

In the 9th March Weekly Update we intend to discuss a few interesting 'copper plays'

Alert #112, Feb-19 2003
We are going to add two more junior gold stocks to the TSI Stocks List. We had planned to wait until tomorrow's Interim Update to mention these additions, but both stocks have looked quite strong over the past few days so we decided to introduce them via e-mail alert.

* The first stock is Metallic Ventures (TSX: MVG). MVG had its IPO about 2 months ago so there is minimal stock price history, but since it began trading on the Toronto exchange it has moved in a C$2.80-C$3.20 range. The IPO price was C$3.00.

MVG has several interesting projects in the US and controls three advanced-stage exploration/development projects in Nevada. Those interested in finding out more about each of the projects should read the press releases issued by the company over the past month (they can be read at http://biz.yahoo.com/n/ca/m/mvg.html). These press releases provide a neat overview of MVG's planned activities at each of its main projects over the coming 12 months. Here, though, are a few of the pertinent details:

- MVG has 41M shares outstanding, so at yesterday's closing price of C$3.25 it has a market cap of C$133M (US$88M).

- The current resource base is 4.8M ounces, 3.2M of which are in the 'measured and indicated' category

- The company has C$23M in cash and no debt

- There is an existing mill facility at the company's Esmeralda Project. A mill superintendent has been hired to bring the mine into production at an estimated rate of 75,000 oz/year.

- MVG has experienced management with a history of success in the mining industry

Relative to many other exploration-stage junior gold stocks the risk associated with MVG appears to be low. The stock has been trading at around C$3.10 over the past week, but jumped up to C$3.25 yesterday. We will immediately add it to the List.

* Another stock with relatively low risk (as far as junior gold stocks go) is Cumberland Resources (TSX: CBD), one of our previous selections. Like MVG, Cumberland is well-financed (it has almost C$20M in cash and no debt) and the exploration risk is low because the company has already established a large (>3M ounce) high-quality resource at its 100%-owned Meadowbank project in Canada. CBD has just committed to spend C$10.5M this year to prove-up additional resources/reserves at Meadowbank and get the project to the development stage. Current indications are that Meadowbank will be able to produce 250,000 ounces/year at a cash cost of US$168/ounce.

* The second new addition to the List is one for our Australian readers. It is Charters Towers Gold, which trades on the ASX under the symbol CTO. CTO currently has a market cap of around A$35M (US$21M) and has a potential resource of 15M ounces. The company has existing infrastructure and could quickly move into production at an initial rate of 50,000 oz/year. Unlike MVG, though, it is not well-financed and will need to raise more money (at least A$20M) over the next year. CTO appears to be a riskier proposition than either MVG or CBD, but has substantial upside potential. 

CTO closed at A$0.105 today and it would be reasonable to take an initial position at that price. However, we will only add it to the Stocks List if it trades down to 9.5c.

By the way, the correction in the gold market probably ended when gold traded down to $340 during Asian trading on Monday.

Alert #111, Feb-11 2003
Gold stocks were hit hard on Monday, with the HUI breaking below support at around the 138 level and dropping to 133. Next support lies at the 200-day moving average (currently around 126) and at the uptrend-line dating back to the July low (currently around 122). In our opinion, the short-term downside risk in the HUI from yesterday's closing price is about 5%-7%.

The recent sharp pullbacks in the prices of gold and gold stocks have caused some gold-market commentators to lapse into what Jim Dines would probably refer to as the low state of blame. Everything, from short-sellers to increased margin requirements on futures contracts to negative internet articles about gold, is being blamed for the sell-off. Everything, that is, except for the most likely cause. It looks to us like the gold market is just going through the sort of correction that all bull markets must periodically experience in order to maintain the proverbial "wall of worry". There doesn't appear to be anything sinister or unnatural about it.

We mentioned in TSI commentaries over the past 2 weeks that the short-term risk/reward ratio was no longer attractive enough to warrant any new buying of gold stocks, although we did say that it was reasonable for those with minimal exposure to accumulate the junior gold stocks on weakness. Thanks to Monday's sharp decline the risk is now lower, not higher, and the risk/reward ratio has become more attractive. For those with minimal exposure to gold, you are being given a chance to buy at lower prices. For those who already have substantial exposure to gold, riding a bull is not supposed to be easy (if it was then everyone would do it). 

Even when the risk/reward is attractive each individual investor/trader should employ some form of risk management. After all, as far as the future is concerned nothing is ever a sure thing. For most people the simplest and most effective way to manage risk is by using protective stops. On Monday two of the gold/silver stocks in the TSI Stocks List closed below their sell stops and will be removed from the List (GSS for a 44% profit and SIL for a 10% profit). 

Several of the junior gold stocks we follow are now at, or just above, good support. For example, DSM has support at C$0.80, BZA has support in the C$0.25-0.30 range, CBD has support at C$2.50, RBK has support at A$0.35, RIC has support at US$3.40 and GSS has support at US$1.50. When you buy following a pullback to strong support in a bull market you get the dual advantage of having probability on your side and being able to clearly define your risk (tight sell-stops can be employed on the basis that the support SHOULD hold). 

Finally, the below paragraph was taken from last week's Interim Update. It seems quite appropriate right now.

"The people who make the most money in a major bull market are the ones who don't pay much attention to the daily, weekly, or even monthly price fluctuations. The best course of action for most people is to keep the big picture in mind at all times, observe the short-term volatility with detached amusement, and take advantage of the periodic buying opportunities that occur when those who are influenced by the short-term swings in the market 'puke up' their shares."

Alert #110, Jan-28 2003
The Stock Market

We expect the stock market to drop well below its current level over the next few months, but it is now probably near a short-term low. We say this for three main reasons. First, some technical/sentiment indicators show that the market has become, from a short-term perspective, deeply 'oversold'. For example, the McClellan Oscillator has just moved down to near its October-2002 low, the 10-day moving average of the Arms Index has moved above 1.50 (a sign of indiscriminate fear-driven selling), the VIX has spiked up to 40 and Monday's CBOE put/call ratio was greater than 1. Second, the S&P500 Index, the Bank Index, the NASDAQ Composite Index, the NASDAQ100 Index and the Semiconductor Index were all poised right at important support at the close of trading on Monday. Third, the NASDAQ100 Index (NDX) continues to hold up extremely well given the weakness in the overall market (the NDX remains above its November and December pullback lows and is still up for the month of January).

Further to the above, we are going to immediately exit the position in Dow put options added to the TSI Stocks List 2 weeks ago. The options were added at $2.35 and closed at $4.45 yesterday. We will retain the QQQ put options in the Stocks List (a bearish position should be maintained in case the market ignores its oversold condition and continues to fall) and plan to re-purchase the Dow puts if the market can put together a decent rally over the next several days.

Gold and Gold Stocks

The gold price continues to edge higher, but gold stocks sold off sharply on heavy volume on Monday. In fact, Monday's weakness in gold stocks was sufficient to negate the upside breakout in the XAU mentioned in the Weekly Update.

There is clearly a lack of belief within the gold stock investing/trading community with regard to the sustainability of the gold rally. The gold price has risen for 8 weeks in a row and should experience a correction soon. It appears, though, that traders in the gold stocks are extremely eager to anticipate, and therefore side-step, such a correction, and are thus running for the exits every time there is any sign of weakness. Also, the misguided notion that this gold rally is being driven by the impending war against Iraq results in traders buying/selling in response to the latest Iraq news or in anticipation of what the news is likely to be.

We don't think the current phase of the gold bull market will end until there is widespread belief in the sustainability of the gold rally as indicated by enthusiastic speculation in the gold shares. This will occur if the gold price continues to defy gravity and just keeps pushing higher. It will also occur if there is a 1-2 week pullback in the gold price followed by a move above the recent high.

Alert #109, Jan-23 2003
The Stock Market

There are two technical positives at the present time. The first of these is that the major US stock indices are still above their December and November pullback lows. In other words, there hasn't yet been a serious breach of support. The second positive is that the NASDAQ100 Index (NDX) is having difficulty moving lower and is trading as though it is going to bounce very soon (earnings news from Texas Instruments and Qualcomm released after the close of trading on Wednesday will potentially be the catalyst for such a bounce). As we've stated in the past, we expect the Dow to fall by as much (in percentage terms) as the NDX during the next stage of the bear market. However, the most likely sequence of events is that the NDX leads (falls by a greater %) during the initial phase of the decline with the Dow catching up during the final stage. As such, the resilience shown by the NDX over the past 2 days might be a sign that the overall market is not yet ready to tank. 

There are, however, many technical negatives. For example:

a) On Wednesday the Walmart (WMT) stock price closed below its December low and, in fact, achieved its lowest close since last August. How important is WMT? Well, if we add together the annual sales of Microsoft, Intel, Cisco, Dell, Texas Instruments, Nokia, Oracle, Motorola, Applied Materials, Qualcomm and Sun Microsystems we get a number that is well below the annual sales of Walmart

b) The French CAC40 Index has just completed a 'head and shoulders' top formation

c) The German DAX Index has broken below its December low

d) London's FTSE100 Index is within 2% of its October low

e) The Dow Transportation Average has broken below support

f) The S&P500 Index, measured in terms of gold, is within 2% of its October low

In summary, the recent performance of the NDX suggests that a short-term low is likely this week. However, a broad view of the market action substantiates our belief that last October's lows will be breached over the next few months.

Gold

In the latest Weekly Update we said that with the gold price having risen for 7 weeks in a row it would not be surprising to see gold consolidate its gains for a while, perhaps following an upward spike during the first half of this week. Gold closed at a new high on Wednesday and is trading even higher as we write this. So a consolidation certainly hasn't begun at this stage, although it remains a likely near-term prospect. In any case, we continue to expect the gold price (and the prices of gold stocks) to trade significantly above current levels before an intermediate-term peak is reached. 

We have sell stops on all the large-size (in terms of market cap) gold and silver stocks in the TSI Stocks List and if the stock prices strengthen over the remainder of this week we will raise these sell stops. We are, however, holding our junior gold/silver stocks without stop-loss protection, and our aim is to continue to accumulate the high-potential juniors during periods of significant stock price weakness.

The silver price should be watched closely at this time because it is hovering above critical support at the $4.75 level. A daily close below $4.75 (basis the March contract) would be a very negative development, as would the inability of the silver price to exceed last year's 'double top' in parallel with further gold price strength over the next several weeks.

Alert #108, Jan-15 2003
Gold stocks dropped sharply on Tuesday, thus providing some confirmation that the 2-4 week correction we've discussed over the past week is underway. With most gold (and silver) stocks having already experienced significant pullbacks from their recent highs it is likely that additional time, more so than additional price weakness, will be needed to set the stage for the next advance. Based on our assessment of price action and sentiment indicators there is no evidence that we've seen anything more significant than a short-term peak in the gold sector. As such, we continue to expect the prices of most gold stocks to hit new highs during the first quarter of this year before an intermediate-term peak in the gold sector is reached.

In the latest Weekly Update we said that the euro was probably close to a short-term peak (and, by extension, that the US$ was close to a short-term low). The pullback in gold stock prices adds some weight to this view. 2-4 week counter-trend moves in the euro, the SF and the Dollar Index are likely to begin very soon.

Interestingly, the US$ seems to be making a short-term low at the same time as the US stock market is approaching a short-term peak. If this occurred it would not be typical behaviour, although it certainly wouldn't be unprecedented as there are many examples of the US$ and the US stock market moving in opposite directions over 1-3 month periods. 

If you haven't already done so we suggest you read the "Roundtable" discussion in the latest edition of Barrons magazine, not because you'll find a lot of great investment insights or ideas (you won't) but because the views of the eleven investment strategists who participate in the discussion reflect the current mood. In particular, note how optimistic the nine American participants are relative to the two non-Americans (Faber and Zulauf) in the group and take note of their respective track records for 2002.

Alert #107, Jan-08 2003
In the latest Weekly Market Update we said that new highs for the gold price were likely in the immediate-term. When we made that comment we were thinking in terms of at least a $5-$10 move above the December peak ($355). Gold did move marginally above its December peak on Monday, but then reversed course. However, Monday's new high does open up the possibility that the surge in the gold price that began at the end of November is complete and that a 2-4 week pullback or sideways consolidation will occur before another rally gets underway.

A pullback might have commenced, but the probability is low that an intermediate-term peak is already in place and we therefore don't think it makes sense to do any selling of gold stocks at this stage unless sell-stops are hit. If one or more of the sell stops recently placed on the senior gold/silver stocks in the TSI Stocks List get hit during the current pullback then our plan is to add at least one more junior to the List. Based on some preliminary analysis on our part and depending on price action, a stock that is likely to be added to the List over the next few weeks is Wheaton River Minerals (TSX: WRM, AMEX: WHT). Wheaton is a small-size gold/silver producer that is currently generating revenue at the rate of around US$60M/year.

The stock market has reached a decision point. A few important indices have moved up to, but not through, important resistance. For example, the NASDAQ indices are testing their 200-day moving averages and the Bank Stock Index has moved up to a level at which it has peaked on three previous occasions since its July-2002 bottom. Also, put/call ratios and volatility indices are near their lowest levels of the past 6 months. So, although we've discussed the prospect of a 2-3 week January rally there is a significant chance that the rally is already complete or very close to being complete. For those with experience in trading options and who don't yet have any bearish-oriented positions on the market, now would be a reasonable time to buy a small put-option position (e.g., Dow June $76 puts (DJX RX-E)). The risk is that the market will manage to push above the nearby resistance levels, thus setting off a short-lived buying panic.

In tomorrow's Interim Update we'll discuss the likely impact on the financial markets and the economy of President Bush's economic stimulus package.

Alert #106, Dec-03 2002
There were a number of reversals during trading on Monday that may turn out to be significant. The Dollar Index spiked well above its 50-day moving average on Monday morning only to reverse course and end the day with a small loss. The gold price did the opposite, starting the day quite weak but ending with a small gain. The stock indices rocketed higher during the first 30 minutes of trading and then slid lower for the rest of the day. And bonds plunged in early trading only to end the day on the plus side.

One thing we didn't see on Monday that we would have expected to see if the reversals did in fact signify important trend changes, was strength in gold stocks. The major SA gold stocks were quite strong, but this strength was offset by weakness in most of the major NA gold stocks. The HUI ended the day with a small loss and has now spent 8 days trading sideways. 

Gold stocks will almost certainly break out, one way or the other, before the end of this week. As discussed in the Weekly Update, we expect that the direction of this impending breakout in gold stocks will give us a good idea of what to expect from all the financial markets over the coming 2 months. 

That's all for now. We just wanted to point out that Monday's action, while interesting and potentially important, didn't settle anything.

Alert #105, Nov-05 2002
The S&P500 Index rallied strongly on Monday morning, but the advance halted at the 11th September peak (around 925). It then gave up most of its gains to finish 7 points higher on the day (it had been 24 points higher at one stage). 

While it is certainly possible that Monday's reversal signalled the end of the rally that began on 10th October, sentiment indicators still suggest that more upside is likely before the ultimate rally peak is reached. For example, the volume of QQQ put options traded on Monday was more than 50% higher than the volume of QQQ call options. 

One of the challenges presented by the current environment is that the usual sentiment benchmarks will probably not 'work'. We are in the late stages of a bear market and we have not yet had a selling climax, so it probably doesn't make sense to assume that sentiment will be as bullish at the next market top as it was at previous important tops. We might be wrong about this and perhaps we will, for example, see the VIX drop to the mid-20s and the 5-DMA of the equity put/call ratio fall below 0.50 before the next major decline gets started. However, as far as the next 6 months are concerned there is a lot more downside risk than upside risk and those who wait for the 'ideal' opportunity to bet against the market might find themselves watching from the sidelines while the next major decline unfolds. 

As per the latest Weekly Update we've added a second position in QQQ June-2003 $20 put options to the Stock selections List at $0.90. We'll now stand back and see what happens. The behaviour of sentiment indicators during the next significant pullback will give us an important clue as to how much, if any, more upside potential there is in the market.

One of the most intriguing things over the past few weeks has been the failure of the US$ to benefit from strength in the US stock market. For example, even when the stock market was rocketing higher on Monday morning the US$ was only up by a small amount. This suggests that the US$ will tank once the stock market resumes its downward trend.

Gold stocks are generally considered to be counter-cyclical because they tend to move in the opposite direction to the overall stock market, but the most bullish environment for gold stocks is actually one in which the US stock market is rising and the US$ is falling. Such an environment, however, usually only exists for brief periods because the US$ tends, more often than not, to move in the same direction as the US stock market. The recent ability of gold stocks to strengthen in parallel with general stock market strength can be attributed to the weakening US$. 

On Monday the HUI and most of the major gold stocks closed above their 29th October peaks, a short-term bullish development. Notable exceptions were AEM and DROOY, two stocks that have recently been weak for company-specific reasons (AEM is issuing a lot of new shares and warrants while DROOY released a disappointing earnings report last week and announced, on Monday, that it was issuing some convertible notes).

Alert #104, Oct-18 2002
One month ago we were very unenthusiastic with regard to the major gold stocks. Our view, at the time, was that most of the stocks had minimal upside potential and short-term downside risk of around 30%. As such, we suggested that any new buying be focused on the junior gold stocks where the downside risk was small compared to the upside potential. We also noted that we had, for our own account, been 'lightening up' on the large-cap gold stocks and increasing our exposure to some of the juniors.

Towards the end of last week we became more enthusiastic about the short-term prospects for the gold sector in general, noting at the time that the plunge in gold stock prices on 10th October was potentially a successful test of the 26th July low. After yesterday's action in both gold and gold stocks we are now even more enthusiastic.

Yesterday (Thursday 17th Oct) the HUI once again spiked below its 200-DMA, only to once again rebound and close above it. Furthermore, the December gold futures contract dropped to within a few cents of its 200-DMA before rebounding. Note that on 10th October the HUI bottomed at 102 while December gold bottomed at around 317. On 17th October the HUI bottomed at 106 while December gold bottomed at 310. That is, a $7 drop in the gold price was accompanied by a higher low for the HUI. This is the scenario (the gold price making a lower low while gold stocks make higher lows) that we clumsily tried to describe in yesterday's Interim Update. It is a positive divergence.

We had planned to add Golden Star Resources (AMEX: GSS) to the Stock Selections List on a drop to US$0.90. The stock is holding up quite well and probably won't fall that far, so we'll add it immediately at US$1.17. We will also add a position in Gold Fields Ltd (GFI) April-2003 $12.50 call options (GFIDV) at US$1.45. For those who don't already have positions in these stocks, Kinross Gold (AMEX: KGC) and Cumberland Resources (TSX: CBD) look attractive at yesterday's closing prices (US$1.66 and C$2.15 respectively).

The copper price was very strong on Thursday and has risen by 6% over the past 2 weeks, so the inconspicuous bull market in commodities continues to broaden out. A daily close above 0.7150 in December copper futures would be a very significant upside breakout (the contract closed at 0.6970 on Thursday).

Alert #103, Oct-09 2002

Gold Stocks

A few weeks ago we said that the owners of gold shares should be prepared for a 20%-30% draw-down and have previously nominated the 200-day moving-average on the HUI (the Amex Gold BUGS Index) as a likely target for the current correction. The HUI came within one point of its 200-DMA on Tuesday and most of the major unhedged gold stocks tested, but held above, their respective 200-DMAs. The thing is, we had expected the decline to around current levels to take 1-2 months rather than the 2 weeks it has actually taken. We'll review the implications of this faster-than-expected decline in tomorrow's Interim Update.

Unlike the situation with most gold stocks, most silver stocks have fallen below their respective 200-DMAs. This is consistent with the much weaker technical position of the silver price relative to the gold price. Most of the major silver stocks have, however, held the up-trends that date back to the final quarter of last year. 

Our approach, during a bull market, is always to scale-in during periods of 'high fear' and scale-out during periods of euphoria. At this stage we don't know whether the 200-DMAs will hold, but whereas the surge in both prices and bullish enthusiasm that culminated during the first half of September created a good short-term selling opportunity, the recent sharp sell-off has created a decent buying opportunity. We have recommended that any new buying be focused on the junior gold stocks and that the large-cap NA gold stocks be avoided for valuation reasons, but amongst the larger NA companies KGC has fallen to a level where it is once again a reasonable buy. 

The US Stock Market

Almost every day, regardless of what is happening in the world, the US stock market moves into positive territory at some point during the first hour of trading. This shows that most market participants in the US are still more afraid of missing the bottom than they are of 'catching' a large decline. So, the slow grind lower continues, interrupted every now and then by a 1 or 2 day rally. 

The US stock market has fallen for 6 months in a row, so the "law of averages" suggests that this month will be up. However, as long as the market can keep working its way lower in an orderly fashion without generating a major selling climax then October will be down, as will November, and December, and so on until most people stop thinking we are close to the bottom and give up.

By the way, when the 'give up' finally does occur there is a good chance that gold stocks won't escape the liquidation. 

Alert #102, Oct-02 2002

TThe Stock Market

For anyone wanting to make the argument that we are seeing a successful test of the July low, the market action during the first 2 days of this week has been 'picture perfect'. The Dow spiked to a new bear market low on Monday morning, but then recovered enough to close the day above its July-24 intra-day low. The NASDAQ indices made new lows on Monday before rebounding sharply on Tuesday, while the S&P500 tested, but did not move below, its July-23 closing low. The problem is, we have still not seen a genuine volatility spike.

Since the first quarter of 2000, when the bear market was born, no major rally has occurred without the VXN first moving up to at least 80. At the July bottom the VXN peaked at around 70, thus indicating that the rally off the July low would be weaker than, for example, the rallies beginning in April and September of 2001. Earlier this week, with the NASDAQ indices trading at new bear market lows, the VXN peaked at around 62. The lack of a volatility (fear) spike suggests that new bear market lows will be seen within the next few weeks.

At best, the market might move higher by as much as 15% over the coming 2-4 weeks before resuming its decline (when we talk about "the market" we mean the S&P500 Index). At worst, the market could fall by 15% over the next few weeks (a 15% decline over the next 4 weeks would take the S&P500 to the bottom of its major downward-sloping channel). In our view, the odds favour the latter (another plunge), but not by a big enough margin to warrant initiating any bearish positions at this time.

The Dow fell far enough on Monday to take us out of the Dow put options we recommended buying during the 3rd week of August. The profit on this trade was 160%. We will let sentiment indicators be our guide, but from a trading perspective we will probably 'fade' the next 10% move in the market, that is, do some buying following a quick 10% decline or initiate some bearish positions (buy more put options) following a quick 10% rally. 

Gold

There are no changes to our views on gold and gold stocks. Some further strength is possible during the next week or so, but our expectation is that the HUI and the gold price will fall to near their 200-day moving averages over the coming 2 months (around 105 for the HUI and $306 for gold). If/when this happens it will set-up another good buying opportunity, although as discussed in recent commentaries good value can already be found amongst the small-cap gold stocks.

On Monday, Golden Star Resources (AMEX: GSS) hit our sell-stop ($1.28) and has been removed from the Stocks List. The loss on this trade was 10%. GSS was added to the Stocks List based on the potential for the recent upside breakout in the gold price to be followed by a surge into the 340s before the next substantial pullback got underway. Such a surge is still possible, but is now highly improbable. We like GSS and will probably return it to the List at some point during the next 1-2 months.

Alert #101, Sep-24 2002

The Stock Market

Following the huge spike in the volatility indices last Thursday we said that the stock market might be within a few days of a good buying opportunity. The trading action of Friday and Monday has, however, snuffed-out that prospect. Price changes are important, but just as important is how market participants react to the price changes. On this basis, the happenings of the past 2 trading days have very bearish implications.

On Monday, the NASDAQ100 (NDX) and NASDAQ Composite indices fell to new bear market lows, but the VXN (the NDX Volatility Index) barely moved. In fact, the VXN closed at 62.76 last Thursday and it closed at 59.85 on Monday. So, despite the fact that the NDX has fallen by almost 3% to a new bear market low over the past 2 trading days, the level of fear (as measured by the VXN) is now lower than it was last Thursday. This is, of course, a bearish divergence.

In June, when the NDX first dropped below its September-2001 low, the VXN was well below the type of extreme it usually reaches near an important low. It was therefore apparent to us that the majority of traders were expecting the test of the September low to be successful. Initially, it looked like they might be right because immediately after the NDX fell to a new bear market low it began to recover. However, 3 days later it resumed its decline and fell to much lower levels over the ensuing 6 weeks. A similar story seems to be unfolding at the moment because the relatively low VXN reading (considering the technical damage that has been done) suggests that most people are expecting this test of the July low to be successful. If the similarities with the June breakdown continue then the NDX will start to recover at some point during Tuesday's trading session, but the recovery will fail after 2-3 days and be followed by a plunge well below the recent lows. Such an outcome would clearly differ from what we've been expecting (we've said that the odds were in favour of the August highs being tested before the July lows were breached), but so be it. We are constantly updating our short-term forecasts as new evidence becomes available (our long-term forecasts, though, have not needed to be changed at all over the past 2 years).

In European trading on Monday the German and the French markets fell to new multi-year lows and during Asian trading today the Japanese Nikkei225 Index fell back below major support at 9400, so the overseas market action is not helpful to the US bulls.

Due to the exceptional values that are currently presenting themselves in some parts of the US stock market it is tempting to do a little more buying at this time, but we will, instead, wait until volatility (as measured by the VXN) moves much higher. We will continue to offer our Dow puts for sale at $7.00 (they traded as high as $6.20 on Monday).

Gold

The HUI broke below short-term support on Monday, but the gold market is still delicately balanced. We might get one final surge to new highs following the current pullback, but as advised in recent commentaries we consider the short-term risk/reward ratios for the major gold stocks to be unattractive right now. With or without one final 'pop', our view is that most gold stocks will trade well below current levels within the coming 2 months. The short-term risk is, however, worth taking with some of the small gold stocks due to their enormous upside potential.

Alert #100, Sep-20 2002
The S&P500 Index and the NASDAQ Composite Index held above their early-August lows during Thursday's sharp decline, but the Dow Industrials achieved its lowest close since 23rd July. Importantly, we now appear to be getting a full-scale panic. On Thursday, for example, put/call ratios were once again extremely high, there was a sharp increase in volatility, and the down-volume on the NASDAQ was 14-times greater than the up-volume. We are not there yet, but if the selling pressure can be maintained for just another couple of sessions then we will likely be presented with a very good buying opportunity. 

About 5 weeks ago we recommended buying Dow put options (the March-2003 $76 puts). They were trading at $2.70 at the time and closed at $5.50 yesterday. We plan to sell these puts today if they trade at $7.00. By our reckoning it will take a decline of at least 300 Dow points to get these options to trade at that price. If the market doesn't drop sharply today then there is a reasonable chance it will do so early next week.

December gold achieved an upside breakout on Thursday by the slimmest of margins. Although the breakout was not decisive and was not confirmed by the price action in the gold shares, we are going to add two more gold stocks to the TSI Stock Selections List. The additions to the List will be Cumberland Resources (CBD.TO) at C$2.35 and Golden Star Resources (GSS) at US$1.39. We won't use a sell-stop for CBD but will exit GSS if it closes below $1.28. American Bonanza (BZA.V) also looks good at C$0.16 or lower (BZA is already on our list), as do the BZA warrants (BZA.WT) at C$0.06 or lower.

We would steer clear of the major gold stocks at this time, particularly the popular NA gold stocks such as AEM, GG, MDG and NEM. The current prices of these stocks already discount a gold price of at least $400, so the risk/reward ratio is not good. If Thursday's breakout in the gold price proves to be real then these stocks could easily jump another 10% or so in the short-term, but they are likely to drop well below current levels during the next pullback. Also, be aware that gold stocks would probably be dragged lower if the general stock market completely falls to pieces. This is not something we expect to happen in the near future, but it is a risk that anyone with a large exposure to gold stocks should consider. 

To summarise the above, some of the small-cap gold stocks have no, or minimal, speculative premium built into their prices. As such, the potential rewards offered by these stocks are far greater than the downside risks. With many of the larger-cap gold stocks, however, the risk/reward ratios are currently unfavourable. For our own account we have been lightening-up on the 'majors' and have begun to place more emphasis on the 'juniors'.

Alert #99, Sep-10 2002
Notice how the risks to the South African gold producers presented by the new mineral rights legislation - risks that were supposedly going to scare away foreign investors forever - were quickly forgotten once the gold price rallied? It always happens this way. There has always been a lot more political risk associated with mining in SA than, say, in Canada, but the SA gold stocks invariably out-perform their NA counterparts in a rising gold market. They also under-perform in a falling gold market. 

Gold broke out of a 3-month downtrend on Monday by the slimmest of margins, but as discussed in the Weekly Update the likely upside in the short-term is, we think, minimal. The likely upside over the next 6 months is, however, substantial. We exited some gold stock positions late last week, but as has been the case since the final quarter of 2000 we are maintaining a large core investment in the gold sector.

Probably the most significant thing that happened on Monday was the news that the Japanese Government is considering buying 3 trillion Yen (US$25B) of stocks in order to 'prop up' the country's stock market. We will discuss this issue in more detail in Thursday's Interim Update, but clearly this latest intervention is just going to postpone the final bottom. It will, however, be a short-term positive for the Japanese stock market and, therefore, for the US stock market (assuming, that is, that the intervention goes ahead). More importantly, though, any measures that are undertaken in Japan, the US and/or Europe with the aim of supporting stock prices might backfire because they will probably have a greater positive effect on commodity prices than on stock prices. 

This should be a very interesting week in the currency market. The currencies have been consolidating over the past few weeks and are probably going to breakout, one way or the other, during the next 5 trading sessions. As discussed in recent commentaries we expect the US$ to break higher and the Swiss Franc to break lower (these would, of course, be counter-trend moves in the context of a Dollar bear market and a Swiss Franc bull market). A daily close above 108 in the September Dollar Index would be an upside breakout.

Alert #98, Sep-06 2002

The Stock Market

The stock indices dropped again on Thursday, thus confirming our suspicion that Wednesday's rally was not a genuine upward reversal. The S&P500 and the Dow Industrials closed above Wednesday's intra-day lows while the NASDAQ100 and the NASDAQ Composite closed below Wednesday's intra-day lows. The Semiconductor Index closed at a new multi-year low and, as we write, the Nikkei is testing 'round number' support at 9,000 (a new 19-year low).

The total CBOE put/call ratio peaked at a very high 1.25 at around 10.00am on Thursday then trended lower for the remainder of the day, closing at 0.89. This indicates that option traders became more complacent as the day progressed, even though many of the stock indices closed near their lows of the day (the NASDAQ indices closed right at their lows). This is a bearish divergence and suggests that the market will head lower during the first few hours of trading on Friday, perhaps following a bounce near the open due to the better-than-expected news from Intel after Thursday's close.

Gold

Our approach in a bull market is to maintain a core investment position at all times while 'scaling in' during the purges and 'scaling out' during the surges. We think the move in gold is almost over as far as the short-term is concerned, but even if it's not it is now a reasonable time to be scaling out. As such, we sold some gold stocks for our own account on Thursday and plan to do some more selling today. We won't make any changes to the TSI Portfolio at this stage other than to exit the GFI October $15 call options (Friday's opening price will be used for record purposes).

Alert #97, Sep-04 2002
Two weeks ago sentiment indicators were screaming that the stock market was near a peak and we therefore suggested buying some Dow put options. The only real question at that time was whether a pullback would be followed by a move to a new recovery high or whether the ultimate peak of the rally that had begun in late-July had been reached. We thought it was likely that the market would experience a 1-3 week pullback and then move to a new recovery high before the next major decline got started.

Whereas measures of sentiment were revealing widespread complacency just 2 weeks ago, they are now revealing fear and even a hint of panic. For example, on Tuesday the CBOE total put/call ratio was an extremely high 1.06 and the Arms index gave its highest single-day reading since March of last year (a high Arms Index reading is a sign of panic selling).

With the market having moved from being 'heavily overbought' to 'heavily oversold' we are now at a point where either an upward reversal occurs or the market completely falls to pieces and collapses below the July lows. We expect the former, although we certainly wouldn't be taking any profits on put option positions at this time. With or without a rebound to new recovery highs over the next few weeks there is a good chance that the stock indices will trade well below their current levels before the end of this year.

The Japanese Nikkei225 Index has plunged to its lowest level in 19 years. This may not have any immediate bearish implications for the US market but it is one more piece of evidence that the July low will not turn out to be a long-term or even an intermediate-term low.

Alert #96, Aug-20 2002

Stocks

The stock indices are probably very close to short-term peaks. Both the S&P500 and the NASDAQ Composite have reached our minimum rebound objectives (refer to the 31st July Interim Update) and sentiment indicators reveal a dangerous level of complacency. 

It is possible that this week's high will turn out to be the ultimate peak for this counter-trend rally. We therefore suggested the purchase of some March-2003 Dow put options in the latest Weekly Update. A more likely outcome, however, is that a 1-3 week pullback at this time will be followed by a rally to new recovery highs before the next major decline gets underway. Our plan was/is thus to take a bearish position now and add to that position if the market rallies anew in September.

Gold

In the Weekly Update we said that gold appeared to be setting up for a quick $10 move, but that the direction of the move was unclear. We also said that we would probably consider a move to 325 as presenting a short-term selling opportunity and a drop to 305 as presenting a short-term buying opportunity. At its low on Monday December gold was down $9 at $306.

Whereas the stock market is close to a short-term peak, gold is probably close to a short-term low. We expect gold and gold stocks to bounce over the next 2 weeks from whatever low is hit on Tuesday, but as discussed in the Weekly Update we don't think that a rally at this time will be sustainable. We do, however, expect a good opportunity to buy gold stocks to emerge at some point during the next 6 weeks. 

Note that the above discussion refers to trading positions in gold stocks. From an investment perspective Monday's sharp drop represents another opportunity to add to positions in the high-quality gold producers such as Harmony. Also note that, as is often the case, the gold stocks presently have greater downside risk than gold itself. In our view, longer-term investors who buy physical gold in the $300-$305 range will, at most, suffer a $10-$15 draw-down at some point over the next month. This is insignificant compared to the upside potential.

Alert #95, Jul-30 2002

The Stock Market

Yesterday's stock market rally was very impressive. The ratio of advancing stocks to declining stocks was around 3:1 on the NASDAQ and 4:1 on the NYSE. Also, the ratio of up-volume to down-volume was better than 10:1 on both the NASDAQ and the NYSE. Although we didn't realise it at the time it is quite likely that the 1-2 month counter-trend rally we've been anticipating began last Wednesday.

Market breadth was a major positive yesterday while the sharp decline in volatility (both the VIX and the VXN fell by around 17%) was a major negative. The fact that sentiment indicators such as the NASDAQ100 Volatility Index and put/call ratios have not yet confirmed an important low means that the risk/reward ratio for long-side trades is still not attractive. If, however, last week's lows are tested during the next 2 weeks and such a test is accompanied by a sharp spike in fear then we will probably suggest another long-side trading position (most likely in the QQQ or QQQ call options). Days like yesterday are also why we have recently warned that the risk of being short this market was just as great as the risk of being long.

In the latest Weekly Update we made the following comment:

"...our forecast for this year has been that a major bottom would be reached during the final few months of the year. However, the relentless nature of the short-term downtrend that began in March opens up the possibility that the low that occurs during the next few weeks will be the low for this year. This would mean that the major bottom would be postponed until well into next year. We'll explore this possibility further in future commentaries."

Unless last week's lows are decisively breached over the next few weeks we won't need to explore this possibility any further because there is little chance that an intermediate-term bottom has already been put in place. In other words, our original forecast (for a major bottom near the end of this year) is intact.

Gold

A point that we tried to make in the latest Weekly Update and that we have made many times over the past 2 years is that we are bullish on gold because we are bearish on fiat currencies in general and the US$ in particular. There are other factors, such as the huge short position in gold and the massive gold derivative positions held by some bullion banks, that will potentially add fuel to any gold market rally. However, these factors will only come into play if the gold price is already trending higher as a result of a downward-trending US$. 

On Monday another of our Australian gold stock trading positions was stopped out. Resolute Mining (RSG) closed below its sell-stop of A$0.69 and was sold at 0.68 for a profit of 84%. At current prices RSG is our favourite Australian gold stock, followed by CRS and BDG, and we will look for an opportunity to re-purchase it over the coming 2 months.

Alert #94, Jul-26 2002
This is our third market alert e-mail this week which is, as far as we can remember, a record. We try not to do a lot of these e-mail alerts because our goal is to focus on what is going to happen over the next 1-12 months, not what is going to happen over the next few hours. However, this week's incredible market action has prompted us to send out comments on almost a daily basis.

As mentioned in yesterday's Interim Update our expectation was for gold/silver stocks to consolidate above Wednesday's intra-day lows for the next month or so while gold and silver prices worked their way lower. Although the stocks we follow held above Wednesday's lows during Thursday's trading, the severity of Thursday's sell-off in gold/silver stocks was not expected. There is no change to the analysis that was presented in the Interim Update, just some words of caution. The market might just be in the process of successfully testing Wednesday's panic lows, but unfortunately we won't know whether any test is successful or not until after the fact. As such we should all be prepared for the worst. Being prepared for the worst simply means having a sizeable amount of cash relative to your equity exposure and absolutely not owning any shares (gold shares or any other shares) on margin.

The NASDAQ100 made a new closing low on Thursday, although it remained above Wednesday's intra-day low. This slide to a new closing low, however, once again failed to generate a substantial increase in the level of fear. For example, the VXN did not exceed 70 and the volume of QQQ call options was more than double the volume of QQQ put options traded. This means that we still haven't reached a low-risk buying point. Our advice, which is still applicable, has been to not have a large commitment to either the 'long side' or the 'short side' of this market (the market is so oversold that being 'short' is equally as risky as being 'long', although it doesn't seem that way at the moment).

We recently stuck a couple of toes into the shark-infested waters in the form of trading positions in Nortel Networks (NT), but our timing was obviously wrong. We never expect to buy on the day of the bottom, but we were way too early with NT. Nortel sold-off heavily on Thursday in response to news that one of its contracts (a contract to supply equipment for a 3G mobile network in Europe) is probably going to be cancelled. The contract would have provided NT with about US$80M per year in revenue for 3 years. $80M constitutes less than 1% of NT's annual revenue, but Ms Market decided that a 1% loss of business deserved a 21% reduction in market capitalisation. The market's fear is that yesterday's contract cancellation will be the first in a long line of cancellations. 

NT's market cap is now only slightly more than one-quarter of its annual revenue. NT is in no danger of going out of business any time soon (it has enough cash to survive at least until the end of next year) and we will continue to hold it. However, as noted in Market Alert E-mail #92 we won't add any more speculative long-side trades in the tech/telecom sector unless there is a large spike in the VXN. This means that we won't be making further additions to our Nortel position. Furthermore, it goes without saying (but we'll say it anyway) that the size of a trader's position in a speculative stock such as NT should be small enough that the extreme volatility doesn't cause anxiety.

Alert #93, Jul-24 2002
On many occasions over the past several weeks we've warned that the holders of gold/silver stocks needed to be prepared, both financially and emotionally, for a 30% drop in the prices of their stocks. We've also noted that the 100 level was a logical target for the Amex Gold BUGS Index (HUI) for this correction.

In terms of price the correction has now done as much damage as we had expected, although it has happened more quickly than expected. Therefore, have we now reached another buying opportunity in the gold sector?

There are no signs that the correction is over, but some of our favoured stocks have dropped to levels where they should find support. As such, although we don't think it makes much sense to be buying short-term trading positions here (we'll need to see some evidence of a bottom or an impending turnaround first), it does make sense for longer-term investors to be accumulating stock at current levels. In particular, GFI looks very attractive in the $9.50-$10.00 range and HGMCY represents excellent value at around $12.50.

In the latest Weekly Update we said we would sell NEM immediately and buy KGC on a pullback to US$1.70. KGC hit our buy price on Tuesday and has been added to the Portfolio. KGC has strong support at $1.50 and can be accumulated in the 1.50-1.70 range.

There is still no firm evidence of a bottom in the general stock market. Incredibly, a genuine panic has not yet occurred.

Alert #92, Jul-23 2002
In the Weekly Market Update posted at TSI on Sunday we said "it doesn't seem likely that a downtrend that has been as relentless as the current one is going to end with volatility at only moderately-high levels and with the small traders positioned for a rally. As such we would be skeptical of any rally that begins without there first being another sharp drop to new lows." Monday gave us another sharp drop to new lows and it is likely that the net-long position of small traders has fallen substantially over the past 3 sessions (we won't know for sure until the next COT Report is released at the end of this week). 

The OEX Volatility Index (VIX) hit a high of 49.67 on Monday and closed at 48.34. The VIX's closing high last September was 49.04 and the closing high during the 1998 panic was 48.56, so this indicator suggests that the decline has almost run its course. However, the NASDAQ100 Volatility Index (VXN) was only marginally higher on Monday. It is currently well below its peak of just 2 weeks ago and has not yet come anywhere near the levels reached last September. Also, over the past week the volume of QQQ call options traded has been much higher than the volume of QQQ put options traded. For example, Monday's trading action was downright ugly yet the volume of QQQ call options traded was almost 3.5 times the volume of QQQ put options traded. This almost defies belief, but it seems that traders in the QQQ (the QQQ is a proxy for the NASDAQ100 Index) are still more worried about missing a rally than they are about catching an additional decline.

Further to the Weekly Update we have added a second trading position in Nortel Networks (NYSE: NT) to the Portfolio at US$1.10, but we won't add any more speculative long-side trades in the tech/telecom sector unless there is a large spike in the VXN. The remaining signs of complacency mentioned above mean that now is not a good time to have, or to be making, a large 'long side' commitment to the stock market.

It is also currently not a good time to have, or to be making, a large 'short side' commitment to the stock market. In fact, with the VIX now close to 50 the potential reward in holding put options is far outweighed by the risk, so those traders who are still holding put options (or other bearish positions) should consider exiting. We will, however, retain the MSFT put options in the TSI Portfolio because this particular stock has only just commenced the next downward leg in its bear market. 

We added SWC to the Portfolio in the latest Weekly Update with the suggestion that an initial position be taken immediately with further buying being done on a pullback towards major support at $10. Thanks to SWC's 14% drop on Monday it is now very close to this major support. There are never any guarantees in this business, but the risk of loss is certainly minimised by buying a stock at a price that represents excellent value and at a time when it is trading just above long-term support.

Gold stocks were very weak on Monday and they are likely to fall further over the coming month. We recommended doing some buying of gold/silver stocks following the sharp dips in mid-June and early-July, but do not recommend doing any more buying at this time. Most of our favourite gold/silver stocks are yet to make lower-lows during this correction, but short-term trend-line support was broken yesterday in HGMCY, GFI, and PAAS. Also, AEM (not one of our favourites) fell to a new correction low. The next buying opportunity will occur when the stock prices drop to near strong support (eg, $12.50 for HGMCY) or when we get some evidence that the correction has ended, whichever happens first.

Strangely enough, both bonds and oil look like they are about to experience sharp declines. This is strange because a falling oil price is bullish for bonds.

Alert #91, Jul-12 2002
Thursday provided yet another impressive upward reversal. Eventually, one of these reversals is going to 'stick', but it probably won't be yesterday's. The two biggest positives to come out of yesterday's session were a) volume was quite heavy and b) the NASDAQ100 Volatility Index (VXN) moved above 70 during the day and closed with a 4-point gain at 69. The fact that VXN closed near its high shows that fear persisted throughout the day despite the upward reversal in stock prices, a bullish sign from a contrarian perspective. Yesterday's biggest 'negative' was the poor market breadth (the number of declining stocks was greater than the number of advancing stocks on both the NYSE and the NASDAQ).

The upshot is that Thursday's market action provided a little more evidence that we are very close to a short-term bottom, but the odds still favour new lows being reached in the very near future (the next 7 trading days) before a sizeable counter-trend rally commences. This is particularly the case for the Dow Industrials and the S&P500 (there is a greater chance that the NASDAQ indices have already bottomed).

On the basis that the major stock indices were most likely within a few days of a short-term bottom (a bottom that would hold for at least the next 1-2 months) and that the telecommunications/optical stocks were showing clear signs of having already bottomed, in this week's Interim Update we suggested buying a trading position in Lucent. However, our $1.90 bid proved way too stingy as even while the stock indices tanked on Thursday morning LU hovered around 'unchanged' at $2.15. It finished the day up 9% at 2.35. We still plan to buy LU if it pulls back to $1.90 at some point over the coming week, but based on the way the stock has recently traded the chances of it doing so are not good. Therefore, we'll need to find another long-side speculation.

A question from one of our readers prompted us to do some research into Nortel Networks (NYSE: NT). Unlike Lucent, which has already rallied by 70% from the low reached early last week, Nortel is still very close to its bear market low. NT's failure to rally with the other telecom equipment stocks over the past week is primarily due to the recent announcement that it will be removed from the S&P500 Index. As a result the stock is now trading at a discount to its peers. It is therefore set to benefit from a removal of this discount (once the irrational S&P500-related selling runs its course) as well as a counter-trend rally in the overall market. NT has a lot of debt on its balance sheet (about US$5B), but this debt is largely offset by $4.5B in cash. As such, the company is positioned to survive for at least the next 12-18 months. At its current price of US$1.44 Nortel is valued by the market at about 50% of this year's estimated revenue (it is cheap on a price/sales basis). 

Further to the above we will add NT to the TSI Portfolio at Thursday's closing price of US$1.44. This is a trading position that we will probably exit within 2 months.

Alert #90, Jul-09 2002
In the Weekly Market Update we said we'd put out an e-mail alert after reviewing Monday's delayed release of the Commitments of Traders Report. This is it.

The commitments for S&P500 futures were almost unchanged over the week ended 2nd July. The commercial net-short position dropped from 60,000 contracts to 56,000 contracts while the net-long position of the small traders was unchanged at around 70,000 contracts. This is bearish because the S&P500 Index fell by 28 points during the week in question. The fact that this 28-point decline did not entice significant short covering on the part of the commercials (the smart money) or further long liquidation on the part of the small traders (the dumb money) indicates that last week's lows are probably going to be breached before a decent counter-trend rally commences. In any case, the risk/reward ratio is not yet attractive enough to warrant entering a long-side trade.

The CBOE put/call ratio was 1.02 on Monday. This is a high reading that indicates fearfulness, but as has tended to be the case over the past 2 months Monday's high put/call ratio was the result of a low volume of call options rather than a high volume of put options. This is, therefore, more representative of a lack of optimism than a preponderance of pessimism. Note that when the put/call ratio finishes above 1 on any day there is usually some weakness in the market during the first few hours of trading the next day followed by an upward reversal. 

As far as the traders commitments for gold futures are concerned, the commercial net-short position fell from 74,000 contracts to 66,000 contracts while the net-long position of the small traders was steady at around 36,000 contracts. As is the case in the S&P500 futures market, it is bearish that the small traders in COMEX gold futures have been tenaciously clinging to their long positions in the face of an on-going price decline. We doubt that the next substantial rally in the gold market will begin until the small traders have capitulated. Capitulation, in this case, would be indicated by a drop in the small traders' net-long position to 10,000 contracts. While we wait for this to happen the best approach is to buy the sharp dips in our selected gold/silver stocks and to stand aside during the bounces.

Alert #89, Jul-02 2002
A stock we've been asked about many times over the past several months is silver/gold producer Coeur D'Alene (NYSE: CDE). Our advice has always been that CDE's enormous debt made it unsuitable as an investment and even as a trade since the company has periodically been at risk of going under. 

Until today we hadn't taken a close look at CDE since around this time last year. Prior to the April/May surge there was no reason to look closely at a small silver/gold producer with massive debt since there were other stocks that presented far more appealing risk/reward ratios. For example, why would we take on the likely aggravation of owning CDE when a company such as Corner Bay Silver (BAY) was still exceptional value? However, over the past 2 months it has become far more difficult to find good value amongst the stocks of gold and silver producers, so today we decided to take another look at CDE. 

CDE is expected to produce 15M ounces of silver and 100K ounces of gold this year. At current prices that amounts to revenue of about US$106M. This is a healthy sum since CDE's current market cap is only about $100M.

CDE's proven and probable reserves are 83M ounces of silver and 2.3M ounces of gold, or 3.5M ounces of gold equivalent. This means that CDE's gold reserves are selling for less than US$30/ounce. This is low.

CDE's major drawback, as usual, is its debt. We estimate that its total debt is around US$140M, a huge sum for such a small company. However, the company has done a good job of restructuring its debt such that almost none of it matures until at least the end of 2003. This means that CDE is now positioned to survive for at least another 18 months. For this reason CDE can be likened to a call option on the prices of gold and silver with an expiry date at least 18 months into the future. Provided we get a substantial and sustained gold/silver rally at some point between now and the end of next year the value of this call option will increase dramatically.

We are going to add a trading position in CDE to the TSI Portfolio and we will treat it the same way we treat our call option positions. In other words this is an all-or-nothing speculation, not an investment. CDE closed at US$1.74 yesterday and that's the price we'll use for record purposes. There is good support at around 1.50 and resistance at around 2.00.

In the Weekly Update we said that if the stock market headed back down immediately and broke below last week's lows it would most likely set up a good short-term buying opportunity. Monday's action moved the odds in favour of an immediate breakdown. If such a breakdown occurs today and we get a substantial spike in fear then we'll probably recommend one or two long-side trades.

The CRB futures broke-out to the upside on Monday, thus confirming last Friday's breakout in the cash CRB Index.
 

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