As noted in the latest Weekly Update, going into Monday's session sentiment indicators had certainly reached levels that strongly suggested we were within 1-2 weeks of a medium-term bottom. Also, yesterday's upward reversal in the stock market was confirmed by the action in other markets. For example, if Monday afternoon's upturn in stocks was 'real' then it should have been accompanied by an upward reversal in the Dollar and a downward reversal in bonds, which of course it was.

On the negative side of the ledger there was no real panic on Monday morning (there was no significant escalation in volatility and put/call ratios) as both the NASDAQ Comp. and the S&P500 fell to near last September's closing lows (at one point yesterday the NAS was actually 3 points below its Sep-21 close). It was almost as though everyone knew that support was going to hold. Such complacency in the face of a perilous technical situation suggests that Monday's lows will have to be breached, or at least tested, before we have a chance of seeing a multi-week rally.

So, we have some conflicting evidence with the odds, in our opinion, favouring another plunge (following a short-lived respite) before a tradable rally begins. In any case, in the Weekly Market Update we suggested exiting the Dow put options originally recommended in April if the Dow sold off sharply on Monday morning ("sharply" meaning a drop of at least 150 points). The Dow did what we asked of it and the option position was hence closed-out. The profit was around 160%. Those who did this trade should be reasonably satisfied regardless of whether or not the Dow tanks anew in the days ahead. If we get a half-decent rally over the next 1-2 months we'll probably re-purchase these put options in preparation for a drop to much lower levels during the September-December period.

The September Dollar Index fell below major support at the 108 level early in yesterday's session before recovering all of its losses by the close of trading. There is a good chance that the Dollar has reached at least a short-term low, but we expect it to trade much lower before the end of this year. 

Here is a link to a Reuters news report entitled "Foreigners don't dump US agencies despite dollar": http://biz.yahoo.com/rc/020624/financial_dollar_agencies_3.html. The general tone of the article is that there is no real cause for concern because foreign investors have continued to buy the securities of US agencies such as Fannie Mae. The way we look at it is that the Dollar has just dropped by 10% and foreigners haven't even begun to liquidate. What is going to happen to the Dollar when they do? It would be far more bullish for the Dollar if foreigners had already capitulated. The capitulation, however, is yet to come.

Gold and gold stocks reversed lower on Monday as the stock market and the US$ reversed higher. Some patience will probably be required with gold stocks over the next 1-2 months, but the 3-6 month outlook is extremely bullish. Buying gold/silver stocks during the sharp dips should continue to work well. We'll have 2 more gold stock recommendations - one Australian stock and one US stock - in the next Interim Update.

The CRB Index closed at 207.1 on Monday compared to this year's high, reached in early-April, of 208.39. Won't the deflationists be surprised when the CRB Index moves to new highs.

Alert #87, Jun-04 2002
The NASDAQ100 and the NASDAQ Composite held above their early-May lows during yesterday's stock market swoon, but the S&P500 and the Dow dropped below their recent lows (the S&P500 actually made a new low for the year). As each day passes and the market fails to mount a counter-trend rally it becomes more clear that we are going to see a major low within the next 3 months, perhaps even by the end of this month. In other words, things are coming to a head a few months earlier than we had originally anticipated. 

Yesterday's decline resulted in yet another high Arms Index reading (this means that most of the selling pressure was concentrated in a relatively small number of stocks). High Arms Index readings tend to occur during the final stages of a decline (they are a sign of capitulation). However, the decline that began in March has not yet caused a significant spike in volatility and put-option volumes remain low, so unfortunately the sentiment picture is still 'mixed'. The stage remains set for a rebound, but any rebound will likely provide only a brief respite from the downtrend.

It is interesting that both the S&P600 Index (an index of small-cap stocks) and the Dow Utilities Index (DJUI) have recently been quite weak. The persistent strength of the small cap stocks has been one of the linchpins of the bullish case over the past several months. As such, a break below important support by the S&P600 (it hasn't happened yet, but it is getting close) might lead to some capitulation in the bullish camp. 

The Utilities tend to move with bonds and, to a lesser extent, the US$. At yesterday's close the DJUI was only 10 points above the multi-year low reached earlier this year, so we could be about to get some additional confirmation of our bearish views on bonds and the Dollar (via new lows in the 'Utes').

As discussed in the latest Weekly Update, we remain VERY bullish on commodities and the stocks of commodity producers. We expect the commodity stocks in the TSI Portfolio to trade well above current levels within the coming 12 months. We would not, however, expect them to buck a powerful short-term trend in the overall market. They would be taken down in a general market debacle but would most likely bounce right back after the market reached a sustainable bottom. Since the thought of riding them down and then back up again doesn't appeal to us we are going to place sell-stops on the stocks that currently don't have them and tighten the stops on the ones that do. Here's what we'll do: 

-  Move the sell-stop for OXY to $28.90 (Monday's close was $29.56)
-  Add a sell-stop at C$9.20 for PDL.TO (Monday's close was C$10.70)
-  We consider CHK to be a core investment and do not plan to use a sell-stop. However, traders should place a stop at $6.60 (Monday's close was $7.25).
-  Our sell-stops for MIM and BHP will remain at A$1.14 and A$10.25 respectively.

Note that the above sell-stops will be activated on a daily closing basis only.

-  SWC broke below its 50-DMA yesterday and we are going to sell it immediately (for a small profit). SWC is excellent value at its current price and we will probably return to it in the future, but the short-term downside risk in this market is significant.

Gold stocks are continuing to benefit from weakness in the overall stock market (as has been the case since last September) and are likely to reach an intermediate-term peak at around the same time that the stock market reaches an intermediate-term bottom.

The Gold Fields October $15 call options mentioned in the Weekly Update traded at our suggested buy price ($1.90) on Monday morning so we will add them to the Portfolio at that price. There was decent volume in the options at and around this price so anyone who wanted to 'get set' should have been able to do so.

In the Weekly Update we noted that we would exit our trading position in Northern Dynasty (NDM) if it closed below its 50-DMA for a second time. This occurred on Monday.

Alert #86, May-29 2002
Yesterday's Market Alert e-mail suggesting the purchase of BZA shares and SIL call options was a first - it was the first market alert that we have ever sent during the US trading session. We had planned to mention the BZA shares and the SIL options in this Thursday's Interim Update, but the market was moving so quickly we decided not to wait.

For anyone that doesn't already have a large commitment to gold and/or commodity stocks another company that is worth buying near its current level is Crew Development Corp (CRU.TO). Here is a brief description of Crew from one of its press releases:

"Crew is an established, multi-commodity, Canadian mining company with operations
in Africa, Canada, Greenland, Norway and the Philippines. In addition to a variety of
projects that are at various stages of development and discovered by Crew, the
company controls seven producing mines through its southern African subsidiary.
Crew's strength stems from this diversified, solid, broad base of projects. The
company is well positioned to focus on specific projects, and to respond to
changing market forces. Crew shares are listed as CRU on the TSE (Canada) and
OSE (Norway), as KNC on the Frankfurt Exchange (Germany), and as CRWVF on the
OTC BB (USA)." 

Information on its various projects can be found here: http://www.crewdev.com/overview/overview.htm

Crew is a general commodities play, an energy play (through its 87% interest in the South Meager Creek Geothermal Project), and a gold play (through its 82% interest in the Nalunaq gold project). Its stock price has been very weak over the past year, possibly due to the company's complex structure and diversity, but it is now showing definite signs of strength. The market might be starting to realise that the cash-flow generated by the high-grade Nalunaq gold project in Greenland over the next few years will probably be greater than the current market cap of the entire company.

We weren't intending to add any more gold or commodity stocks to the TSI Portfolio in the short-term, but will add CRU if it becomes available at C$0.53. This should not be considered as a 'buy limit' (the stock closed at C$0.55 on Tuesday and represents very good value near that price). We suggest setting an initial sell-stop at C$0.41.

Alert #85, May-28 2002
Those who already have sizeable positions in gold and silver stocks should not be doing any further buying at this time and should, in fact, be looking for opportunities to take some profits. However, we do understand that some of our readers do not yet have substantial exposure to gold and silver stocks. Here are a couple of ideas for anyone who feels the need to increase their exposure to gold and silver.

1. Buy American Bonanza (CDNX: BZA), a small Canadian gold exploration company. We'll provide some details on BZA in Thursday's Interim Update. When we checked about 15 minutes ago BZA was trading at C$0.17-0.18. 

2. Buy Apex Silver January-2003 $17.50 call options (SIL AW-A). Last we checked the bid/ask on these options was 2.00/2.25. These are very thinly traded so be careful. If we are wrong about silver then these options will expire worthless, so only buy with money you are prepared to write off if things don't go according to plan. If we are right about silver then these options will increase in price by several hundred percent over the coming 6 months.

We will add the above-mentioned trading positions to the TSI Portfolio.

Alert #84, May-27 2002
Placer Dome (PDG) has launched a takeover bid for Australia's largest gold producer Aurion Gold (AOR). It is an all-stock bid that, based on PDG's closing price on Friday, represents a 30% premium to AOR's pre-bid price. Both PDG and AOR are 'heavily hedged' producers.

Following the decline in the gold price and gold share prices during US trading on Friday the Australian gold shares would almost certainly have traded lower today if not for PDG's offer for AOR. As it is, the PDG offer has boosted the entire sector and most of the gold shares we follow are up by 5%-10%.

We hold a few Australian gold stocks and we expect all of them to trade significantly higher over the coming months. However, as traders we always like to take some money off the table when our stocks are pushed higher by what we consider to be uninformed speculation. We consider today's buying to be uninformed because it is reactionary rather than anticipatory. As such, we are going to take some profits in the Australian market today. 

PDG have said that if the bid for AOR is successful they will reduce AOR's enormous hedge book (AOR's hedges presently cover about 80% of reserves). So, we are seeing a continuation of the moves towards consolidation and away from gold price hedging. 

Alert #83, May-21 2002
We usually only issue these Market Alert e-mails when something happens that is at odds with our most recent commentary or when something very significant happens. Nothing of that nature happened on Monday, but the purpose of this brief message is to note that something significant is probably going to happen today in the silver market.

Gold and silver were strong on Monday with gold making a new 2-year high. However, silver once again failed to break above the resistance area (4.70-4.80) that has halted every rally over the past 18 months. July silver closed at $4.78 so we are only 3 cents away from a major upside breakout. Either this rally will fail over the coming few days and the silver price will begin another period of consolidation in preparation for its next assault on 4.80, or silver bullion will confirm the extremely bullish price action that has been evident in the stocks of silver producers/explorers over the past 6 months. It looks very much like the silver shorts are about to be skewered, but we should expect them to put up one heck of a fight.

With regard to the stock market, in the Weekly Update we said "if the market pulls back during the first half of this week (it probably will) we might even suggest another long-side trade". The market is pulling back as expected, but we haven't been able to identify any short-term trades with suitable risk/reward ratios. Investors should continue to use periods of weakness in the general market to accumulate our selected commodity-cyclical stocks.

Alert #82, May-15 2002
Yesterday's stock market advance was on good volume and the major indices closed above last week's highs, thus providing some evidence that last Wednesday's Cisco-inspired rally was more than just a 'one day wonder'. How much more is yet to be determined. At a minimum the S&P500 is likely to move up to around 1120 (it closed at 1097 on Tuesday) to test its 50 and 200-day moving-averages. However, with volatility indices at low levels and with the smart money positioned for further downside we suspect that the market is 1 week into a rally that will only last for 1-3 weeks. 

We only ever suggest trades in our TSI commentaries that have an expected holding period of at least 1 month, but changes in the market will sometimes prompt us to recommend exiting a trade earlier than was originally anticipated. Such is the case with the QQQ July $35 call options suggested at the beginning of last week. We had expected to hold these options for 1-2 months, but instead will sell them now for a profit of around 150%. Although the market is likely to make some additional gains over the coming 2 weeks the risk/reward ratio for those trading on the long-side is not attractive. We will rely primarily on our commodity-cyclical stocks to give us exposure to any further upside in the general market.

To reflect our expectation that the stock market will trade at much lower levels prior to the end of this year the TSI Portfolio includes MSFT Jan-03 $45 put options and DJX (Dow Industrials) Dec-02 $92 put options. These put options have now fallen back to near the prices they were trading at when we first suggested them, so the current rally is providing another reasonable opportunity to establish what we have referred to as a "medium-term bearish position". If the market maintains its upward bias for a while then these puts will get much cheaper, so averaging-in to a position over the next few weeks is probably the way to go. The same applies to investments in short-selling mutual funds such as BEARX.

Gold stocks have been trading like S&P500 put options so it is not surprising that they were trashed during Tuesday's stock market (and US$) rally. We expect that the duration and magnitude of any correction in the gold stocks will mirror the duration and magnitude of the stock market's rebound. We are not anticipating big things from this stock market rally and therefore suspect that the pullback in most of the major gold stocks will be limited to 10%-20% (the more speculative stocks have greater downside potential). As explained in recent commentaries we would emphasise silver stocks over gold stocks for any new buying at this time with BAY.TO and SIL being our favourites.

Alert #81, Apr-30 2002
In the latest Weekly Update we said that a tradable rally in the stock market would probably begin at some point over the next few weeks, but that we wouldn't recommend any long-side trades until there were signs of panic/capitulation or signs of strength. Although the market has become extremely oversold by some measures the decline since the March peak continues to be orderly with no evidence of market-wide panic. Panic/capitulation has, up until now, been restricted to the shareholders of companies such as Worldcom, Tyco, Qwest and AOL. We are, however, just beginning to see some signs of strength, albeit subtle ones. For example, the NASDAQ Composite and the NASDAQ 100 indices were barely lower on Monday. In addition, tech bellwethers Microsoft and Cisco were up on the day.

The stock market appears to be in a similar position now to where it was during the first week of September last year. We get the impression that selling is almost exhausted, at least in the large-cap tech stocks that led on the way down (selling pressure seems to be shifting to the Dow), while from a technical perspective the market is poised at the edge of a precipice. The most likely outcome is that the market will regroup, rather than plunge, but this is not a time to be placing large bets on either the long-side or the short-side. It is, however, time to begin favouring the long-side over the short-side as far as the next 1-2 months are concerned (much lower levels are still expected to be seen before a long-term bottom is in place).

In Sunday's commentary we suggested that investors use the current weakness to buy, or add to existing positions, in Australian resource companies BHP and MIM. BHP, in particular, looks to have minimal downside risk near current levels. The stock has been hit hard over the past week because March-quarter earnings, which are reported tomorrow, are probably going to be lower than previous estimates. However, even based on the new (lower) estimates the stock is trading at slightly less than 10-times this year's earnings, a very low earnings multiple for one of the world's premier mining/resource companies at this early stage of the commodity-price cycle. BHP also trades on the NYSE.

The stocks of almost all companies involved in the telecommunications industry have been slaughtered over the past 6 weeks, but our LightPath Technologies (NASDAQ: LPTH) continues to hold up quite well. LPTH bottomed at the beginning of March and has since been edging higher. LPTH is a long-term investment for us, but it should also provide a good short-term gain once the overall market turns higher. 

There is a reasonable chance that the gold price will move up to 320 in the near-term, but our view remains that such a move would complete the upside for the next few months (although from a longer-term perspective it would just be a preview of what is to come). In line with our goal to scale-out of gold stock trading positions during the current rally we will immediately sell gold/silver exploration company Minefinders Corp (TSE: MFL). The stock has more than doubled since we added it to the Portfolio in mid-February.

On Monday one of our core gold stock investments - Harmony Gold Mining - reported excellent financial results for the March quarter. If we annualise Harmony's latest earnings we find that the stock has a P/E ratio of 10.6. In other words, Harmony still represents good value despite the huge run-up in its stock price over the past 6 months. The stock fell $1 after the results were reported due to profit-taking by traders who had  taken positions over the past few weeks in anticipation of good news.

Alert #80, Apr-17 2002
Over the past week and a half the stock market has followed a pattern of alternating up and down days, so with Monday being a down day Tuesday's rally was in-line with this pattern. The rally certainly was impressive in terms of percentage gains and participation (breadth was strongly positive), but then again we've seen a lot of impressive one-day moves in both directions over the past few months that were quickly reversed. 

The biggest positive from a technical standpoint is not Tuesday's rally in the US market but the action in the Japanese stock market. Today's rise in the Nikkei225 decisively broke the downtrend that began in early-March and suggests that the Nikkei is on its way to a new post-September high (somewhere above 12,000).

In the latest Weekly Update we explained why we thought it was almost, but not quite, time to turn short-term bullish on the stock market. One of our concerns was that the Nikkei was still mired within its short-term downtrend. However, that concern has been removed for the moment. Our other concerns - the low volatility readings and the huge commercial net-short position - remain.

So, was yesterday's rally a one-day affair or something more sustainable? With a) some sentiment indicators having reached oversold extremes, b) the upside breakout in the Nikkei, and c) the broad nature of the advance, the odds favour a continuing upside bias over the remainder of this week. We do not, however, think that this is the beginning of a multi-month advance.

A few weeks ago we suggested taking advantage of any periods of general market strength over the ensuing few months to accumulate a medium-term bearish position via put options/LEAPS or investments in bearish mutual funds (eg, the Prudent Bear Fund). If this rally extends for a few more days it would provide a reasonable opportunity to add to, or initiate, such a position.

We continue to like the commodity-cyclical stocks as a way to participate in any stock market upside with minimal, or at least manageable, downside risk. Two weeks ago we also suggested a tech stock - LightPath Technologies (NASDAQ: LPTH) - as a reasonable investment. We like this stock under $2 (LPTH closed at $1.81 on Tuesday). So, it seems, do the company's insiders.

Gold and gold stocks have held up quite well over the past 2 weeks, but the above-mentioned break in the Nikkei's downtrend increases the short-term downside risk in the gold market. Weighing against this negative short-term influence is the longer-term positive influence on gold-related investments of the Dollar's deteriorating fundamental and technical position. We've noted that one final push higher by the Dollar appeared likely before a major downward move got underway, but the situation for the Dollar is precarious. A daily close in the euro above 88.40 (basis the June futures) will be our signal that a substantial Dollar decline has begun.

As mentioned on many occasions in the past, we strongly suggest differentiating between gold-stock trading positions and investment positions. Sell-stops should be set for trading positions and profits taken during the periodic surges (such as occurred recently). The separate investment position is crucial because the upside risk in the gold market is enormous (it will make no sense to give-up your total position for the sake of some short-term trading profits as long as the underlying financial-market trends remain 'gold bullish'). 

Alert #79, Apr-12 2002
In yesterday's Interim Update we said we expected the stock market's rebound to run out of steam within the next few days and be followed by a drop to new lows. As it turned out the rebound ran out of steam immediately. On Thursday the S&P500 closed at its lowest level since late-February and the NASDAQ100 closed at a new low for the year.

Thursday's action showed the first real signs of panic with downside volume being about 6-times greater than upside volume on both the NYSE and the NASDAQ. Panic is something that has been absent over the past month as the indices have worked their way steadily lower. The latest AAII sentiment survey also indicates a healthy level of fear with bears now outnumbering bulls by a margin of 33 to 28. As such we need to be on the alert for signs of a change in the short-term trend from down to up. 

Although the market is approaching oversold extremes by some measures we doubt that a sustainable upturn in the US market will occur, regardless of how oversold the market gets, until the Japanese stock market breaks out of its own short-term downtrend. The Nikkei225 closed down 184 points today at 10,963 after hitting an intra-day low of 10,896 and is now very close to critical support. 

Monday was an up day for the stock market, Tuesday was down, Wednesday was up, Thursday was down, so perhaps Friday will be up. Whether it is or not the downtrend will probably now continue until the end of next week.

The commodity-cyclical stocks continue to hold-up very well during this downturn. Most of the commodity stocks we follow were only marginally lower during Thursday's trading in the US while MIM and BHP were both flat during today's trading in the Australian market. This suggests to us that the recent decline in commodity prices is a bull-market pullback and that the stocks of the commodity producers will out-perform during the next stock market rally.

Gold stocks were mixed on Thursday in the US and weak in Australia today. The Nikkei's on-going slide is a big positive for gold and the prospect of a quick surge to 320 is still very much alive. Our overall view, however, is that April will provide a medium-term peak in the prices of gold and gold stocks.

The situation in the Middle East continues to simmer away. It is not a situation that can be resolved through negotiation since several leaders of the Arab world have, as their goal, the destruction of Israel. We will therefore continue to account for potential developments in the Middle East in our financial market forecasts.

Alert #78, Apr-09 2002
Yesterday's stock market action was quite extraordinary. The market gapped-down at the open on the back of a huge earnings/revenue miss from IBM (more on this below) and a surging oil price (courtesy of Iraq's announcement of a one-month oil embargo). However, within the first hour of trading it became apparent that we were going to see a generally positive day because there was absolutely no follow-through to the knee-jerk selling that occurred at the start of trading. Most of the major indices closed with small gains on a day that, based on the pre-market news, looked likely to yield substantial losses.

Yesterday's price action was certainly quite bullish, not just in the stock indices but also in some bellwether stocks such as Cisco (CSCO broke below support early in the day but rallied to close above support). Furthermore, at yesterday's low the NASDAQ100 was within 3% of our downside target for the current pullback. So, was that it ("it" being the end of the decline)? We doubt it. We are ready and willing to turn short-term bullish on a dime if the conditions warrant us doing so, but we can't find any reason to be bullish outside of yesterday's price recovery. In particular, the Japanese Nikkei225 Index remains in a short-term downtrend and is once again approaching important support in the 10,800-11,000 range (it fell 238 points today to close at 11,114). The Nikkei has been such an accurate leading indicator of the US market over the past 15 months that we cannot ignore its on-going slide.

The bottom line is that Monday's upward reversal in the US stock market might have marked the start of a 2-3 day rebound, but we do not think the conditions are yet ripe for a substantial rally.

As has been the case since last September we expect the commodity-cyclical stocks to continue to show good relative strength over the coming months. We suggest that investors use the current stock market weakness and the pullback in commodity prices to establish positions, or add to positions, in these stocks. Two of our favourites are copper/coal producer MIM Holdings in Australia (ASX: MIM) and natural gas producer Chesapeake Energy in the US (NYSE: CHK).

The overall stock market might have shrugged-off the downward revisions of IBM's quarterly earnings and revenue, but IBM itself did not and ended the day down 10%. For the past several years IBM has used creative accounting to report healthy and consistent earnings-per-share growth despite have minimal revenue growth. Yesterday's admission that the past quarter's earnings and revenue are going to fall way short of previous estimates indicates that it has either run out of tricks (there is no longer any scope in its books to 'manufacture' earnings growth) or that the new CEO is taking a more down-to-earth approach. Either way, IBM is likely to be a short-seller's dream over the next 12 months as every rally will present another good opportunity to bet against this stock.

Alert #77, Apr-03 2002
As explained in the latest Weekly Update our analysis of sentiment in the gold market indicated that a short-term peak had either already occurred or would occur during the first half of April. This was consistent with our forecast for a run-up by gold and gold stocks into the first half of April followed by a 2-3 month correction/consolidation. As also noted in the Weekly Update there were a couple of indicators that suggested we could see a bit more upside before heading lower. One of these was the gold/TGSI ratio (the ratio was still showing that gold stocks were out-performing the bullion) and the other was the continued widening of the yield spread. However, one of these indicators - the gold/TGSI ratio - was removed as a 'positive' on Tuesday (most gold stocks experienced downward reversals despite the new closing high in the bullion price).

Gold stocks have made a few downward reversals since the beginning of this year that initially looked significant but turned out to be just brief interruptions to their up-trends, so we won't yet attribute too much importance to yesterday's reversal. Furthermore, the gold price still has a reasonable chance of moving up to around $320 in the near future and such a move would no doubt rejuvenate the gold shares. However, for the reasons outlined in our weekly commentary we think the probability of gold moving much higher than 320 at this time is low. Therefore, the remaining upside in the gold shares does not appear to be great and we recommend that you take action now to lock-in some profits on trading positions (leave a core investment position intact). 

There are a number of ways to lock-in profits. Firstly and most obviously, do some selling and remember that selling doesn't have to be an all-or-nothing decision. We usually prefer to scale-in and scale-out of positions, not expecting to buy at the exact bottom or sell at the exact top. Secondly, tighten protective sell-stops on trading positions so that a moderate decline will take you out but a quick resumption of the rally will leave you in. Thirdly, those experienced in trading options could purchase put options to insure their gold-stock holdings against losses.

As far as the TSI Portfolio is concerned, we will move the sell-stop on DROOY up to $3.50 (the stock will be sold immediately if it closes below $3.50) and sell Australian junior producer St Barbara Mining (the only non-performing gold stock in the Portfolio). 

In the 18th February Weekly Update we said that we would add Stillwater Mining (NYSE: SWC) to the Portfolio if we could buy it for around US$14. SWC closed at $18.72 on Monday and then traded as low as $14.10 on Tuesday before closing at $15.47. The cause of yesterday's sharp drop was news that the SEC is questioning SWC's calculation of its probable palladium and platinum reserves. Details can be read at http://biz.yahoo.com/djus/020402/200204022355000932_1.html. Two independent consulting firms have verified Stillwater's calculations so the probability of a substantial reduction in reserves as a result of this query appears to be low. If, however, a substantial reduction does occur then SWC would probably drop to long-term support in the $10-$12 area. We will add SWC to the Portfolio now and also add the July $20 call options if they become available at $0.50. Needless to say, there is a significant and non-definable risk associated with this stock (the SEC's course of action is unknowable), but with 12% of the company changing hands during Tuesday's trading and with support at $14 holding firm it is a reasonable speculation. Short-term traders should sell immediately if the stock closes below $14.

In the latest Weekly Update we suggested taking profits on the CHK July $7.50 call options (originally recommended in early-March) if CHK traded up to around $8.00. CHK traded at $8.00 on Monday and Tuesday and  the options were sold for $1.00, thus realising a profit of 150%. Those who own the stock should continue to hold since the upside potential is still excellent.

Alert #76, Mar-22 2002
Most of the major gold stocks are in medium-term up-trends and short-term downtrends. In this week's Interim Update we included charts of 3 prominent gold stocks - ABX, NEM and HGMCY - that showed these short-term downtrends. The way the stocks traded on Thursday suggests that we had the lines drawn in approximately the right places. 

Here's what happened on Thursday:
a) ABX had no room to move higher without breaking its downtrend, so after edging higher early in the session it reversed and ended the day with a small loss.
b) NEM needed a close of around 25.30 or higher to effect an upside breakout. After trading as high as 25.75 it closed at 25.24. Close, but no cigar.
c) HGMCY needed to close above 10.20 to achieve a breakout. It peaked at 10.13 and closed at 9.92.
d) AU (Anglogold) was in a similar situation to ABX going into Thursday's session in that any strength would have created an upside breakout. It also closed with a modest loss.

There is now almost no room for the major gold stocks to move even modestly higher without achieving upside breakouts. This means that we are either going to see breakouts over the next 2 sessions or the short-term downward-sloping channels will hold. Which way will the gold stocks break over the next 2 weeks? We don't know (it looks like a 50/50 proposition to us), but we have suggested a short-term trading plan (see the 18th March Weekly Update). If the short-term channels hold then reasonable targets for the ensuing pullbacks for ABX, NEM and HGMCY would be 16.40, 22.80 and 8.00.

As was the case with the gold stocks, technical support/resistance levels also held sway in the stock and bond markets on Thursday. The S&P500 dropped below its 200-DMA only to recover and close above it. The NASDAQ Composite rallied to within a few points of its 50-DMA and its 200-DMA, then stopped. And bonds fell to within a hair of last week's low before once again reversing higher in what looks like a successful test of the recent short-term bottom. All in all, an uneventful day.

Alert #75, Mar-15 2002
Things are getting very interesting. Bonds fell sharply again on Thursday and are now only marginally above the intra-day lows reached in early-December. Bonds are extremely oversold, sentiment towards them is very pessimistic and they are hovering just above major support, so either they reverse higher from near current levels or they crash.

Our current short-term forecast for the stock market is that a pullback over the next few weeks will be followed by another rally lasting anywhere from 1 to 3 months. However, for the stock market to have any real hope of maintaining its upward bias for a few more months the bond market must put together a decent rally over the next 2-3 weeks. It will be all but impossible for stock indices to extend their gains unless the bond market can provide a temporary respite from the downward pressure created by rising interest rates. Note that our big picture view is for stock and bond prices to trade at much lower levels before this year is out, but the question we are wrestling with now is: when will the major decline in each market begin? 

The current situation is made even more interesting by the fact that the Fed meets next Tuesday to decide on the 'appropriate' monetary policy. The Fed won't start hiking short-term interest rates yet but they will have to throw the bond market a bone, perhaps in the form of a strongly-worded announcement asserting their continued vigilance in the fight against inflation. How the world's greatest promoters of inflation can ever represent themselves as inflation-fighters without provoking uproarious laughter throughout the land is beyond us, but anyway...

In addition to the bond market swoon there were a couple of other interesting developments on Thursday. Firstly, the Swiss Franc broke-out from its 6-month downtrend. So now we have upside breakouts in the Yen and the SF and a downside breakout in the Dollar Index. The euro remains within its downtrend, but evidence continues to build that the Dollar has peaked. Secondly, the yield spread (the yield on the 30-year T-Bond minus the yield on the 13-week T-Bill) closed at 4.01% on Thursday, a new multi-year high. We've discussed the positive correlation between the yield spread and gold stock prices many times over the past 18 months, most recently in the 11th March WMU when we noted that a move above 4.0% would suggest that another rally in gold stocks was close-at-hand. Yesterday's movements in interest rates may well be the reason that gold stocks were able to ignore a $2.80 fall in the gold price.

Alert #74, Mar-08 2002
There were some spectacular moves in the commodity and bond markets on Thursday. For example, April crude oil was up by $1.60 (7%) at one point before settling back to close the day with a gain of 56c. Natural gas futures held most of their gains and finished more than 7% higher on the day. With energy prices rocketing higher bonds plunged (bond prices tend to move counter to energy prices). 

There was also plenty of action in the currency market with the Dollar Index dropping below important support thanks mainly to a 3% up-move by the Yen. In the latest Interim Update we said that the best case for the Dollar Index now appeared to be a re-test of the January high. Thursday's trading means that even a re-test of the January high might be out of the question and that any rally over the next few weeks would be to a lower-peak. Both the euro and the Swiss Franc have almost, but not quite, broken above their post-September downtrends, meaning that if the Dollar is going to rally one final time before it embarks on a major decline then the rally must begin immediately.

Oil equities did not respond to yesterday's oil price surge (the AMEX Oil Index was flat throughout the day), suggesting that the oil market has just made a short-term peak. Also, with the euro and the SF having just moved to within spitting distance of important resistance and the bond price near major support there is a good chance that bonds and the Dollar have, or are just about to, make short-term bottoms. Either that or they are about to crash.

With bond prices and the Dollar falling on Thursday it would have been normal for gold and gold stocks to have rallied, but the gold price fell $3 and gold stocks had a very bad day. This is not a concern. A falling Dollar and a rising yield spread (long-term interest rates rising relative to short-term interest rates) put upward pressure on the gold price and the prices of gold stocks, but the reaction is often not immediate. Gold and gold stocks are in a bull market, which means that buying the large dips that occur from time to time will work well. We added to our gold stock trading position in the Australian market today and plan to do some more buying on Monday (in the US and/or Australia) if the weakness persists. 

In "The Daily Reckoning" today there was an interesting discussion on price-to-sales ratios that we've copied below. In our commentaries we've explained on several occasions why we think the price-sales ratio is a better indicator of overall market valuation than the more popular price-earnings ratio. We also used a price-to-sales analysis to arrive at our 12-month target of 800 for the S&P500. In addition to the reasons given below, we prefer the P/S ratio to the P/E ratio because in a major profits-downturn such as we are now seeing there is a distinct possibility that the P/E ratio will reach its peak at around the time that stock prices are bottoming. For example, when the Dow Industrials was scraping along the bottom during 1932-1933 its P/E ratio was higher than it had been at the peak in 1929.

Best wishes,
Steve Saville

Extract from the 7th March issue of The Daily Reckoning (http://www.dailyreckoning.com):

*** Steve Suggerud of the Oxford Club investment team 
notes that P/E ratios are notoriously unreliable. He 
proposes Price to Sales ratios as a substitute: "The 
Price-to-Sales (P/S) Ratio simply compares the price of 
a stock to the company's sales for that year. But this 
is why it may be a better guide to determining the 
'true' value of a company: it's much harder to fudge the 
top line (sales) than the bottom line (earnings). 

"Wal-Mart's stock market value is about $280 billion, 
while sales over the last year were about $200 billion. 
So Wal-Mart is trading at a P/S Ratio of 1.4. But what's 
this mean? 

"Well, historically, stocks on average have traded for 
just under one times sales (0.9). So, at 1.4, Wal-Mart 
is expensive by historical standards but it's still 
cheaper than most stocks today. And, in fact, you may be 
willing to pay that premium for Wal-Mart because it is a 
successful company, especially given some of the real 
dogs out there today. 

"Crunching the numbers," Steve continues, "the P/S Ratio 
turns out to be a very valuable indicator. Not 
surprisingly, if you buy stocks when they are 'cheap' - 
based on this ratio - you do much better than if you buy 
when stocks are expensive.

"Specifically, if you buy the S&P 500 index when the P/S 
ratio is below 0.9, history tells us that five years 
later, you'd be up an average of 81%. This works out to 
an annualized return of 12.6%. However, if you buy when 
the P/S ratio is above 0.9, five years later, your 
average annualized return would be 4.7%. (A 'buy and 
hold' strategy for the S&P 500 over last 50 years would 
have produced about 8.6%.) 

"By this measure, today stocks are expensive. A 
conservative estimate of the up-to-the-minute Price-to-
Sales Ratio would be 1.3 - or about 40% higher than the 
0.9 historical average. Stocks aren't cheap. Unlike Wal-
Mart, Cisco for example trades at 5.7 times sales - 
nearly 500% over-valued by the "one-times sales" rule of 
thumb. Intel trades at 7.6 times sales. And Microsoft 
trades at over 11 times sales. GM, on the other side of 
the coin, trades at a scant 0.17 times sales." 

Alert #73, Mar-04 2002
There are some weird and wonderful things happening in the markets at the present time. The Japanese stock market gained another 6% today and has now risen by 21% over the past 4 weeks. In late-January the Nikkei225 broke decisively below the bottom of a 4-month trading range and appeared to be headed far below its September-2001 panic low. However, it has just completed an incredible turnaround, moving decisively above its 200-day moving-average and the top of its prior trading range. Whether the result of government meddling or not, the price action certainly is bullish.

With volatility indices hovering just above 12-month lows it is difficult to envisage the major US indices extending last week's bounce beyond the next few days, but we get the impression that betting against the stock market at this time would be akin to stepping in front of a speeding freight train. As such we are going to cancel our recommendation to buy QQQ put options, at least until we see how the next few sessions pan-out.

Rather than buying QQQ put options, we think that a better trade (a trade with just as much potential upside but less risk) at this time is to buy call options on some of the large gold mining stocks. Gold mining stocks should do well during a general stock market downturn (as they have done over the past 2 months), but would also likely be beneficiaries if the inflationary tide that has been gradually rising over the past year starts to lift all boats. As noted in yesterday's Weekly Update, it has been the stocks of companies that stand to benefit the most from higher inflation and/or a falling US$ that have shown the greatest strength over the past few months. To reflect this recommendation we will immediately add a trading position in Barrick Gold July $20 call options (ABX GD-E) to the Portfolio at $0.95.

Since Sep/Oct last year we've been suggesting that investors accumulate the stocks of the major commodity producers. These stocks won't be immune to a large decline in the overall stock market, but we expect them to out-perform most sectors of the market regardless of whether the stock indices rise or fall. To date we've focussed on the large and mid-cap companies (these tend to be the first-movers in a new bull market), but we plan to move down the food chain (start buying some of the smaller commodity producers) if/when the evidence of a commodity-market turnaround becomes more conclusive. Two stocks we've recommended over the past several months are MIM Holdings in Australia (ASX: MIM) and Chesapeake Energy in the US (NYSE: CHK). Both stocks remain investment-grade buys at current levels. We are also going to add a trading position in CHK July $7.50 call options (CHK GU-E) to the Portfolio at $0.40.

Alert #72, Feb-27 2002
Someone who relies on the mainstream financial press for explanations as to why things happen the way they do probably thinks that Tuesday's small decline in the US stock market was the result of a slightly weaker-than-expected report on consumer confidence. However, someone who understands that the action in the stock market is part of a much bigger picture would most likely have a totally different impression.

On Tuesday there was strength in oil, gold and the US$ and weakness in stocks and bonds. This single day's action might just be noise, but the inter-market moves were unusual enough compared to what would be 'normal' that they warrant our attention. In particular, the simultaneous strength in oil and weakness in stocks could be very significant. As too could the simultaneous strength in the gold price and the US$. Taken together these moves are possibly warning us that the simmering situation in the Middle East will reach its boiling point over the next several weeks. We'll elaborate in tomorrow's Interim Update.

The Japanese stock market was up another 3.6% today (basis the Nikkei225). It has now negated the late-January breakdown and moved backed to the middle of the range in which it has traded since last October. The Japanese Government's latest anti-deflation plan, scheduled to be released later today, apparently includes new rules to limit short-selling (and thus caused a good deal of short-covering today). If so, then this would be yet another stroke of idiocy on the part of Japanese officialdom. Removing short-sellers from any market removes a source of liquidity and a natural source of buying during a market decline (short-sellers can only realise a profit when they close-out their trade by buying-back what they have sold). It just seems to be more of the same in Japan - it looks like the strategy, if you can call it that, is to prop-up the Nikkei for a few more weeks in the hope that things will magically get better.

Last week we took profits on QQQ put options and, as previously advised, were planning to buy a different series of QQQ puts this week. We will add the QQQ April $33 put options (QAV PG-E) to the Portfolio if we can buy them at $0.80 or lower (they traded mostly in the $1.00-$1.20 range on Tuesday).

In the latest Weekly Update we mentioned that another run-up in gold and gold stocks was a distinct possibility before an extended correction got underway. Tuesday's action certainly increased the probability that gold will move up to at least $320 over the next few weeks.

Alert #71, Feb-22 2002
Was yesterday was an ugly 'down' day in the stock market? It certainly was for the owners of large-cap tech stocks as evidenced by the 4.3% fall in the NASDAQ100 (an index dominated by the large-cap techs). However, for the owners of stocks in the cyclical sectors of the market it probably felt like quite a good day. For example, Commodity-Related Equities were up 1.3%, Transports were up 0.6%, the Oil Service sector was up 3.9% and the Cyclicals Index was up 0.4%. 

It is always dangerous to form conclusions based on a single day's trading, although yesterday's action was consistent with a theme that has been running through the market for the past 2 months. That theme is that the economy is going to recover this year and there are many stocks that are going to benefit from the recovery, but a return to modest growth does not give investors a reason to pay 7-to-15 times annual sales for a company. We plan to revisit this theme in the next Weekly Update.

While weakness in the major tech stocks pushed the NASDAQ to a new correction low on Thursday, the S&P500 and the Dow held above Wednesday's lows. Furthermore, the Japanese Nikkei225 Index held onto all of yesterday's large gain and edged a bit higher today, so the Japanese market continues to be a short-term positive influence on the US market. As such, we still expect some sort of rebound in the stock indices over the coming week before the next serious decline gets underway.

The strong Dollar has done a wonderful job of masking the effects of inflation during the massive US credit expansion of the past several years, but what is going to happen when the Dollar starts to fall? Won't the widely-watched CPI start moving relentlessly higher? The answer is no, the CPI won't move appreciably higher because it won't be allowed to move higher. In the 'if it wasn't so disgusting it would be funny' category the Bureau of Labor and Statistics (BLS) is going to begin reporting a "supplemental" CPI, to be called the "chained CPI", that it says will provide a better cost-of-living measure. This is deemed necessary because the conventional CPI apparently overstates inflation! You can read all about it here: http://biz.yahoo.com/rb/020222/business_economy_statistics_dc_1.html

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