Alert #148, Aug-25 2005

Alert #147, May-04 2005

Alert #146, Apr-20 2005

Alert #145, Apr-15 2005

Alert #144, Mar-23 2005

Alert #143, Feb-14 2005

Alert #142, Nov-24 2004

Alert #141, Nov-03 2004

Alert #140, Oct-26 2004

Alert #139, Aug-11 2004

Alert #138, Jun-30 2004

Alert #137, Jun-06 2004

Alert #136, May-28 2004

Alert #135, Apr-21 2004

Alert #134, Apr-14 2004

We got away from the markets for several days over the Easter period and are still in the process of catching up with the happenings of the past two days. However, we thought we'd fire out this e-mail with our initial response to Tuesday's market action and then follow up with a more measured response in tomorrow's Interim Update. 

The impression we get is that Tuesday's moves in the equity, gold and commodity markets were primarily a reaction to an upside breakout in bond yields. The breakout is marginal at this stage, but given the large downward moves in some of the rate-sensitive sectors of the stock market -- most notably the Real Estate Investment Trusts (REITs) -- it should be taken seriously.

As discussed in last week's Interim Update, rising interest rates are not a positive or a negative for gold except to the extent that the US$ is affected by the higher rates. Furthermore, the gap between short-term and long-term interest rates is far more important, as far as gold and the US$ are concerned, than the absolute levels of interest rates. The gap between 30-year and 13-week interest rates widened on Tuesday, which is a positive for gold and a negative for the US$, but the markets might be starting to anticipate some aggressive rate-hiking by the Fed.

Our view is that the Fed will be forced to play 'catch up' at some point this year, but probably not until after the signs of inflation have become even more obvious than they are right now. Two of the main signs of inflation are falling bond prices and a rising gold price.

In last week's commentary we said to be prepared for the gold price to drop to around $410. June gold actually hit a low of $405 on Tuesday before closing at $407, but this is still within the realm of a normal pullback. At this stage gold hasn't done anything that would cause us to alter our short-term bullish view. 

While the decline in the bullion price looks routine, the sharp drop in the gold stocks is of some concern. Newmont Mining has thus far not broken below critical support but the AMEX Gold BUGS Index (HUI) most certainly has. Also, the HUI/gold ratio has dropped back to its February low. With NEM and HUI/gold so close to support we'll wait to see what happens during Wednesday's trading before deciding if our short-term bullish view needs to be altered. 

Alert #133, Mar-02 2004

In the Weekly Update we talked about the failure of the US stock market to provide some confirmation of the immediate-term bearish case at the end of last week, but we didn't have any firm opinions on what this meant as far as the coming few weeks were concerned. Monday's rally, however, suggests that last week's failure to confirm the bearish case was significant and that a correction low is probably in place.

The S&P500 Index closed at 1156 yesterday, having now hit the 1155-1160 range on 9 trading days over the past 6 weeks without ever surmounting this range. Even prior to Monday's bounce there was little doubt that this resistance would eventually be breached, but there has been a serious question in our minds as to the likely timing of a breakout. As a result of Monday's trading action, though, it looks like the breakout is going to happen sooner rather than later. That is, perhaps as soon as this week rather than after a few more weeks of consolidation. 

By the way, Japan's Nikkei225 Index broke-out on Monday and in the process put in place a technically-based upside target of 12,800. The 11,000-11,200 range, which has acted as resistance for the Nikkei over the past few months, should now act as support during any pullbacks. 

Monday was certainly a positive day, but we don't want to create the impression that it's now all 'beer and skittles' as far as equities are concerned. For one thing, although the NASDAQ100 Index had a good day on Monday it still looks much weaker than either the Dow or the S&P500 Index. This is, of course, consistent with the idea that an important peak is developing. Also, an upside breakout by the S&P500 from its current consolidation pattern would project a move up to 1185-1190, or only about 2.5%-3.0% above where it is now. In other words, we are not talking about the possibility of a major advance beginning from near current levels. Lastly and most importantly, the oil price was strong again on Monday; perhaps at least partly in response to the civil unrest occurring in Venezuela (the opposition to Venezuelan President Chavez has organised strikes and violent protests). An upward spike in the oil price -- something that would almost certainly happen if there were a political crisis in Venezuela  -- would quickly de-rail any stock-market rally in the US.

The bottom line is that the market looks reasonable from a short-term technical perspective, but remains very risky and vulnerable to an external shock such as an oil-price spike.

There is no change to our overall stance in that we remain heavily net-LONG the stock market. Specifically, we have a large long position in the form of gold stocks and non-gold commodity stocks (the gold and commodity sectors have been trending with the broad market over the past 18 months) and a small short position in the form of USPIX and some Dow put options. As outlined below, however, we are going to make one minor adjustment to the TSI Stocks List.

During the week before last we decided to take a profit of 230% on half our position in Western Silver (TSX: WTC). We are now going to exit the other half for a profit of 283%, giving us an average profit on the trade of 256%. We are no less bullish about this company, but a lot of the upside potential now appears to be in the stock price.

If things go according to plan we will be exiting many of our gold and non-gold stocks into strength over the next few months. 

Alert #132, Feb-13 2004

It was difficult to leave the beach in sunny Phuket (Thailand), but we did and are now back to the normal schedule as far as the TSI commentaries are concerned (back to the business of making money rather than just spending it). Thankfully, the markets were relatively quiet while we were away (there were no multi-hundred-point daily moves in the Dow or double-digit daily moves in the gold price). In any case, thanks for your patience over the past couple of weeks.

The markets were quiet while we were away, but there were some potentially significant happenings. In particular, the downward corrections in the stock market, the gold market and the gold sector of the stock market might have ended. 

As far as the stock market is concerned, our expectation over the past month has been that a January peak would be followed by a pullback and then a rally to a new recovery high. The recent new recovery highs in the Dow Industrials Index and the S&P500 Index were therefore in synch with this view, although the preceding pullback was shorter than we had anticipated. Higher levels for the Dow are likely over the next month or so and we are currently considering whether or not to exit the Dow put options that are presently in the TSI Stocks List. Note, though, that the commodity-oriented sector of the market -- an area where we have substantial long-side exposure -- has been one of the best performers over the past year and is likely to remain a leader to the upside if the market does move higher. An argument could therefore be made for holding some put options in order to partially offset some of the downside risk in our commodity stocks even if the market appears to be headed higher.

Of more interest than the past week's new recovery high in the Dow is the lack of strength in the NDX/Dow ratio. Recall that the Dow's rally during the first quarter of 2002 was not confirmed by the NDX/Dow ratio (the Dow made a higher high in March of 2002 while the NDX made a lower high) and that this turned out to be a very important bearish divergence. Weakness in the NDX relative to the Dow is something we've anticipated would occur during the final phase of the post-October-2002 advance.

As far as the gold market is concerned, the recent downward spike to the low-390s might have created a sustainable bottom. In the 2nd February Weekly Update -- our last commentary before heading to the beach -- we mentioned that two consecutive closes in the April gold futures contract above its 18-day moving average would be a clear sign that a correction low was in place. This has occurred. 

That's all until the next Weekly Market Update, which will be posted at the usual time on Sunday. 

Alert #131, Jan-27 2004

The AMEX Gold BUGS Index (HUI) is yet to reach an oversold extreme relative to the gold price, so in this respect there is no evidence that a correction low is close at hand. However, although the correction in the gold sector has not yet achieved our minimum expectations in terms of price it has achieved our minimum expectations in terms of time. We should therefore entertain the possibility that Monday's low of 212 for the HUI will turn out to be the correction low.

In any case, it is never possible to KNOW that a correction has ended until well after the fact. The best we can do is assess risk versus reward and plan to do our buying when the upside potential exceeds the downside risk. As discussed in the latest Weekly Update there is still significant short-term downside risk in the gold sector but the risk is a lot lower now than it was a few weeks ago. And, Monday's downward spike to a new low for the move has further reduced the short-term downside risk. The upshot is that we have just reached a point where some new buying would be appropriate for those with minimal exposure to the gold sector. 

Please refer to the list included in last week's Interim Update for some ideas on specific stocks to buy. In general, though, many of the exploration/development-stage juniors look attractive at around their current prices, so investors who have a high tolerance for risk and volatility could start picking away at some of these. For investors who are more risk averse, the South African majors (Harmony and Gold Fields) look good from technical and valuation perspectives. Remember, though, that the idea during a bull market is to SCALE IN during the purges and then to take some money off the table during the surges. This means that you spread your buying and selling out over time (smart money management is an analog process, not a digital one).

To reflect our more positive short-term view on the gold sector and the superior risk/reward of the SA majors relative to their NA counterparts, we are going to add the Gold Fields July-2004 $15 call options (GFIGC) to the Stocks List at yesterday's closing price of US$1.00.

Just to be clear, there is very little evidence that a correction low is already in place. We are simply saying that the risk/reward ratio has improved enough to warrant some new buying.

Gold (the metal) has probably not yet bottomed. However, the HUI peaked more than one month prior to the peak in the gold price and a correction low in the HUI will probably PRECEDE a correction low in the bullion. In fact, a clear sign that gold stocks had bottomed would be a drop to a new low (below $400) in the gold price concurrently with a higher low being registered by the HUI.

By the way, Monday's surge in the Dow Industrials Index to above its March-2002 peak has not altered any of our views on the stock market.

Alert #130, Dec-15 2003

As everyone is no doubt aware, Saddam Hussein has been captured. Some interesting analysis and opinions regarding Saddam's capture can be found at http://www.debka.com/article.php?aid=743

When we wrote the latest Weekly Market Update we hadn't heard the Saddam news, but the commentary would have been the same even if we had. News such as this is unlikely to influence the markets for more than a few hours or, at most, a few days. After all, having a powerless Saddam holed-up in a farmhouse on the outskirts of an obscure town in Iraq or having him behind bars in US custody doesn't change the investment merits of the US$, gold, stocks, bonds, oil, or anything else. It is, of course, a public relations success for the US Government and this will give dollar-denominated assets a temporary boost.

Going into this week we were anticipating that a US$ rebound would either commence from near the current level (most likely) or following a near-term downward spike to around 85 in the Dollar Index. We were also anticipating further strength in the US stock market over the coming month or so. If anything, the probability that things will pan-out in accordance with these expectations has increased as a result of the news. In particular, there is now a greater chance that the Dollar will avoid a final downward spike before rebounding.

With respect to the stock market, the main thing to watch is whether the NASDAQ100 Index can close above its 7th November high (1453) during this week. If it manages to do so it would remove a bearish divergence that presently exists. Actually, with the Saddam news and a "triple witching" (expiration of futures, options, and options on futures) this Friday a failure to get the NDX to a new recovery high by the end of the week would be far more significant than the accomplishment of a new high. If there is any underlying strength in the market then a new high for the NDX should now be a matter of course.

With respect to the other markets, we will be most interested in seeing whether last week's upside breakout in the oil price is negated and how resilient the gold price is in the face of this mildly-bullish turn of events for the US$. We suspect that the gold price will hold in the 390s. 

As discussed in recent commentaries, a US$ rebound that begins from around the current level is unlikely to last for more than 1-2 months.

Alert #129, Dec-12 2003

This e-mail alert will be short and (hopefully) sweet.

In this week's Interim Update we said:

"A continued decline in HUI/gold combined with a daily close below 223 in the HUI would be compelling evidence that an intermediate-term peak was in place for the gold sector."

And:

"As far as we are concerned, now is NOT an ideal time for a peak in the gold sector. This is because the Dow Industrials Index has either just peaked this week or, more likely, is going to peak early next year, and the strong tendency is for gold stocks to peak a few weeks or more AFTER the Dow. It would therefore make more sense to us if the HUI held above support and proceeded to new highs over the next 1-2 months. We will, though, respect our indicators if they happen to signal that a peak is already in place."

The HUI spiked lower during the first 30 minutes of trading on Thursday, hit its 50-day moving average, and then rebounded strongly to end the day with a gain of around 3.4%. Furthermore, the HUI rallied enough on Thursday relative to gold bullion to move the HUI/gold ratio back up to its 40-day moving average. 

The bottom line is that the correction in the gold sector might not be over, but there is not yet any evidence that anything more significant than a short-term peak was reached earlier this month. Until we get that evidence we'll assume that the gold sector is headed to new highs over the coming months.

Alert #128, Nov-04 2003

The broad stock market broke out to the upside on Monday with the S&P500, the Dow Industrials, the NASDAQ Comp. and the NASDAQ100 indices all making new closing and new intra-day highs for the year. Importantly, the breakout was confirmed by a rise in the NDX/Dow ratio (the percentage gain in the NDX was three-times the percentage gain in the Dow).

Monday's upside breakout, assuming it is not reversed over the next few days, suggests that a major decline in the broad stock-market is not going to get underway until at least the first quarter of next year. This has implications for gold, currencies, commodities, gold stocks and non-gold commodity stocks which will be discussed in TSI commentaries over the next week, but in summary:

 - the probability of additional US$ strength over the coming 1-2 months has just become higher

 - the probability of a near-term break above $400 by the gold price has just become lower

 - the upward trend in the gold sector has most likely been extended by a few months (since the final thrust in the gold stocks isn't likely to occur until after the broad market has peaked). In other words, if the breakout in the overall market turns out to be 'real' then the likely timing of a major peak in the gold sector has been pushed into the first quarter of next year.

 - the short-term upside potential for non-gold commodity stocks has just been given a boost

With the gold price having broken below short-term support on Monday, today's market action will be particularly interesting. The previous support in the 378-380 range will now act as resistance and if gold can immediately move back above this price range then Monday's drop was most likely just a 'head fake'. If not then the potential head-and-shoulders bottom we mentioned in the Weekly Update will not come to fruition and gold will probably spend at least a few more weeks consolidating in the 360-380 range before resuming its ascent.

The euro is in a similar situation to gold (it needs to immediately rebound to keep alive the possibility of new highs before year-end).

By the way, if we are wrong about gold stocks moving higher over the next few months then we'll be warned via a break in the HUI/gold ratio below its 40-day moving average. At this stage, though, the upward trend is intact.

Alert #127, Sep-26 2003

One reason we like to scale-out of positions (build up cash reserves) into strength is that when sharp downward moves come out of left field, as was the case with yesterday's bearish reversals in gold and gold stocks, we don't feel an urgent need to take any action. If everything goes according to plan we'll end up doing some selling before the top, some selling at the top, and some selling after the top.

Thursday's sharp reversals in gold and gold stocks might have short-term bearish implications, but we seriously doubt that an important top is already in place. This was the first really bearish action in the gold market in at least 2 months and when a market is approaching a major peak there will typically be a few seemingly-important downward reversals before the up-trend actually comes to an end. 

We were looking for the gold price to spike up to around $410 before experiencing a correction, but it's possible that a correction began at yesterday's high of around $395. We shouldn't, however, take anything for granted because there is always the chance that we could be wrong. December gold has short-term support at its 18-day moving average (currently at 380.50), then at the May high of around 377, and lastly at the July high at 370. Ideally, the highest of these support levels will hold but the lowest level should certainly hold (on a daily closing basis) if a price decline is just part of a normal correction within a continuing short-term upward trend.

In the latest Weekly Update we mentioned that pound/euro was NOT signaling an imminent plunge in the US$. This is still the case. Yesterday's reversal in the gold market also suggests that a dollar rebound is going to occur before the June lows in the Dollar Index are decisively broken.

Here's a link to an interesting article on the potential for substantially increased gold demand from China: http://www1.chinadaily.com.cn/en/doc/2003-09/25/content_267390.htm The article mentions, amongst other things, that importing a large amount of gold would be a good way to reduce China's trade surplus and hence relieve some of the upward pressure on the Yuan. Somehow, we doubt that China's importation of a few thousand tonnes of gold per year was what the US Administration had in mind when it put pressure on the Chinese Government to address the trade imbalance.

Alert #126, Aug-28 2003

As advised in the Weekly Market Update, this e-mail is being sent in lieu of an Interim Market Update this week. We will be back to our normal commentary schedule next week.

The Stock Market

As far as we are concerned, the real surprise is that the stock market hasn't yet commenced a big move. Our expectation is that the direction of the next multi-month move will be to the downside, but as discussed in the latest Weekly Update a number of factors point to one final surge to a new recovery high occurring before a substantial decline gets started. Over the recent past, though, the market has managed to frustrate bulls and bears alike by travelling sideways (the S&P500 has closed between 991 and 1003 on each of the past 10 trading days).

The biggest short-term negatives are the weakness in the bank stocks, the potential for weakness in the Japanese bond market to spill over into the US bond market and push US bonds to new lows for the year, and the complacent sentiment. The lack of risk aversion being displayed by market participants is, however, a significant short-term positive.

There are a number of ways to assess the level of risk aversion in the markets. One way is to monitor the spreads between the yields on bonds of different quality (when investors are becoming less concerned about downside risk the interest rates on lower-quality debt tend to fall relative to the interest rates on the higher-quality debt, that is, credit spreads contract). Another way (the method on which we've focused) is to look at how the more risky stocks are behaving relative to the stocks that are perceived to be safer. We do this by monitoring the NASDAQ100/Dow ratio. Regardless of what is happening to the absolute levels of the various stock indices, as long as the NDX/Dow ratio is trending higher it is fair to conclude that market participants are becoming more willing to accept risk and, therefore, that a major decline has probably not begun (an increase in the level of risk aversion is a reliable early warning sign that a major decline has begun or is about to begin). 

After making a 'head fake' lower a few weeks ago, the NDX/Dow ratio has since rebounded and is now challenging its July peak. Also, the semiconductor stocks - probably the most over-valued group of stocks in the market - have recently been very strong. This, again, demonstrates a general lack of concern for downside risk (people who will buy the semiconductor stocks at their current prices will buy anything). 

In a nutshell, the action so far this week has not resolved anything as far as the short-term is concerned. We continue to expect that a large decline will begin in the near future, but perhaps not until after an upward burst to new recovery highs.

Gold and Gold Stocks

>From the latest Weekly Update: "We expect the gold price to move considerably higher over the next 6 months. In the short-term, though, the gold price remains in 'no man's land', needing a daily close below $359 or a weekly close above $368.80 to confirm whether the market is going to remain in consolidation for a few more months or to surge above $400 in the near future. Despite last week's pullback we think that a surge to above $400 over the next several weeks is marginally more likely."

December gold gained $7 to close at $374 on Wednesday, so unless the gold price falls by more than $5/ounce over the next two sessions we will have our weekly close above $368.80. Also, Wednesday's jump in the gold price was confirmed by a move to a new 7-year high by the AMEX Gold BUGS Index (HUI). As such, a surge to over $400 during the next several weeks is now very probable.

Further to the discussion in the Weekly Update, one of the biggest risks to the gold sector is a major decline in the overall stock market. Our expectation is that gold stocks will continue higher for at least a few weeks after the Dow Industrials Index has reached a major peak, but gold stocks aren't likely to buck the trend once the overall market begins to accelerate lower. Therefore, if last week's peak in the Dow turns out to be the ultimate peak for the rally we should see additional strength in gold stocks in the short-term, but probably not for much longer than another 2-4 weeks. A new high in the Dow during the next few weeks would, though, have the potential to extend the gold-stock rally. 

Over the past few years we've continually advocated a scale-in/scale-out approach with the gold stocks that involves gradually accumulating stock during periods of weakness (when the risk/reward is very attractive) and then lightening-up during periods of strength (after rising prices have made the risk/reward unattractive). It is an analog, rather than a digital, approach to the market in which risk/reward and an investor's appropriate level of exposure are sliding scales and all-or-nothing buy/sell decisions are avoided. 

Prices are probably headed higher in the short-term, but the time for scaling in to positions has gone. This is because the short-term upside potential of gold (and silver) stocks as a group no longer outweighs the short-term downside risk. In fact, over the next month or so we expect to be scaling out of gold stocks. How much we sell will be determined by how speculative the gold market becomes and the level of risk we perceive in the overall stock market. 

At this stage we don't know if the next peak in the gold sector will be a major peak (a peak which is followed by a 1-2 year downturn) or just another interim peak.

Currencies

In the latest Weekly Update we said "If the US$ rally is destined to continue for a few more months and to take the US$ above the 101.5-103.5 resistance range then gold should soon close below its 18-day moving average. If, instead, December gold achieves a weekly close above $368.80 then we would have some evidence that the Dollar's rally was as good as dead."

Assuming the gold price doesn't drop by more than $5 over the remainder of this week we will get the above-mentioned evidence. 

Thus far, the euro and the Swiss Franc have held above important support at 108 and 70 respectively. 

China

Here's a link to a short and interesting article about the pressure that is being brought to bear on China's government to upwardly re-value the Chinese currency (the Yuan): http://www.matthewsfunds.com/monthly_2003_08.cfm#amc

At this time there is very little chance that China's leaders will significantly increase the Yuan's official rate of exchange regardless of how much political pressure is applied by the US, Japan, and other nations. This is because it is not yet in their interest to re-value the currency. Eventually, though, it will be in their interest to increase the Yuan's exchange value because the efforts of the Chinese central bank to maintain the Yuan at an artificially low level are giving a substantial boost to the already rapid growth of China's money supply. And the high money-supply growth will, in turn, come to be perceived by the government as a major problem. In the mean time, anything more than a token re-valuation is unlikely.

Something else that needs to be considered is that although the Yuan is pegged to the US$ at an artificially low level, the Hong Kong Dollar is probably over-valued at its current US$ peg. Over the next 12 months or so a reasonable course of action from a Chinese perspective might therefore be to adjust the Yuan's fixed exchange rate to make it the same as the Hong Kong Dollar's exchange rate. This would involve upwardly re-valuing the Yuan by about 5%, a modest change that wouldn't have a significant adverse effect on China's international trade surplus but would benefit the Hong Kong economy by making HK slightly more attractive to tourists and investors from the Chinese mainland.

Alert #125, Aug-22 2003

Just a brief note regarding Thursday's market action.

As mentioned several times over the past 2 months the Swiss Franc has strong support in the 0.70-0.72 range. Yesterday's low for the September Swiss Franc was 0.7060, so at this stage we appear to be just seeing a normal pullback to support. The euro has strong support at around 108 versus yesterday's low in the September contract of 108.82.

Remember that gold typically leads the currency market, so if the support levels mentioned above for the SF and the euro are going to hold then the gold price should continue to be firm. A weekly close in the December gold contract above $368.80 would confirm that an accelerated move higher was underway (as discussed in yesterday's Interim Update) and would suggest that the SF and the euro were going to hold above support. On the other hand, a daily close below $359 would indicate that we were still in a consolidation phase. 

The gold price dropped a few dollars on Thursday and is currently in 'no-man's land' between the above-mentioned price levels. In other words, yesterday's market action resolved nothing.

Regardless of whether the gold price breaks higher or lower over the next week or two, a substantially higher price is likely over the next several months. 

Alert #124, Jul-29 2003

Gold and Silver

In last week's Interim Update we described what we thought were the two most likely outcomes for the gold price over the remainder of this year. Both scenarios were bullish, with one being an almost straight-up move from 350 to over 400 and the other being a rise to 365-370 followed by a pullback to 350-355 and then a major advance to over 400. With the gold price having moved into the 365-370 range during Monday's trading session a short-term peak has therefore most likely been put in place IF the second of the above-described scenarios is in play. Given the price action in the gold shares, we think this is likely and that gold will now pullback to around 355. Note, though, that rather than a 1-2 month pullback as shown on the chart in the above-mentioned Interim Update we doubt that any pullback at this time will last longer than 1-3 weeks. 

Silver broke above the important resistance at 4.90 last week and has just surged above last year's peak. In doing so it has probably also created a short-term peak. Obvious upside breakouts are often followed by pullbacks of sufficient magnitude to punish the 'buy the breakouts' crowd. In silver's case a pullback over the next few weeks to 4.90, or perhaps a bit lower, would be normal.

These pullbacks, if they occur as described above, would be analogous to ripples on the ocean. As far as our investments are concerned we are far more interested in the tides.

The Stock Market

If the stock market breaks upwards out of its 7-week long consolidation it would probably set a very important peak within the ensuing 2-3 weeks. A downside breakout from the consolidation would, however, potentially extend the overall advance by at least 2 months (it would depend on whether or not the pullback was able to trigger the bearish signals summarised in the 14th July Weekly Update). 

Alert #123, Jul-22 2003

Gold 

From the latest Weekly Market Update: "We will, however, assume that a correction low is in place IF August gold is able to close above its 18-day moving average on Monday (any price gain on Monday would cause this to happen). If this occurred it would suggest that gold had bottomed a few weeks ahead of the 'ideal' time for a bottom and about $10 above the 'ideal' price, but we have no problem with that." On Monday the gold price did provide the required confirmation that a correction low is in place. 

We can envisage two likely scenarios for the gold price over the remainder of this year, both of which are bullish. We'll review these in Thursday's Interim Update. In the very short-term (the next 3-6 trading days) it would be normal to see a consolidation of the recent gains.

Bonds

As per the chart included in last week's Interim Update, the trading in the 108-115 range for US T-Bonds that occurred between August of last year and early May of this year appears to be a period during which bonds were distributed from strong hands to weaker hands. On Monday, T-Bond futures plunged below the important support that existed at around the 112 level to within 2 points of the bottom of this distribution range. 

With Monday's sharp decline coming on the heels of such a large down-move over the past month it was probably a final 'blow-off' in the initial stage of a bond bear market. We expect that bonds will be trading a long way below their current level by this time next year, but that they will rebound back to 115-120 by the final quarter of this year.

The most significant aspect of yesterday's market action was, in our view, the fact that stocks and bonds were very weak at the same time. Throughout much of the past 5 years stocks and bonds have moved in opposite directions. During April-June of this year the pattern changed when stocks and bonds rallied sharply in parallel, but yesterday was the first day in a very long time when there were sharp concurrent declines in stocks and bonds. This confirms that bonds are now trading on their own merits rather than as 'anti-stocks'. 

The Stock Market

Investors' Intelligence reported on Monday that there were 531 buying climaxes in the US stock market last week (a buying climax occurs when a stock makes a new 52-week high and then reverses to close down on the week). This is the highest number of buying climaxes ever recorded by Investors' Intelligence. In fact, since the early 1990s there have only been 5 weeks with more than 200 buying climaxes. Take this any way you want, but don't take it bullishly.

Alcoa (NYSE: AA) closed below its sell-stop on Monday and will therefore be removed from the TSI Stocks List. The profit on the trade was 18%.

Gold Stocks

As a result of the bond market collapse the yield-spread made a new high on Monday. With the gold price rising $4 and the yield-spread moving above its April-May 2002 peak it is not surprising that gold stocks were very strong.

If we are right about the bond market then the upside breakout in the yield-spread won't be sustained, but the environment should remain bullish for gold stocks over the next several months due to an upward-trending gold price. 

After the close of trading on Monday Cardero Resource (TSXV: CDU) released the second set of drill results from its La Providencia silver project. The results are a vast improvement over the first set of results so there should now be a decent rebound in the CDU stock price. 

Alert #122, Jul-16 2003

The Stock Market

Nothing of note has happened in the US stock market so far this week, but that will probably change during Wednesday's trading when the market reacts to Intel's latest earnings report. 

After the close of trading on Tuesday Intel reported results that really shouldn't have been surprising, but judging by the after-hours trading action in the wake of the results more than a few traders were pleasantly surprised (Intel surged by almost 7% in after-hours trading). Given Intel's bellwether status in the market, if these gains are maintained during Wednesday's regular session then we will definitely see new recovery highs in the Semiconductor and NASDAQ100 indices and we will probably see a new recovery high in the S&P500 Index. That, however, is a big 'if'. 

Of more interest to us than how the market reacts to the Intel results is what happens with the Walmart (WMT) stock price. WMT was strong on Tuesday on the back of a slightly better than expected retail sales report and closed only 20c below its April peak. A daily close above 57.50 by WMT would suggest that the ultimate peak for the rally in the overall market was at least 6 weeks away.

Bonds

In testimony on Tuesday Greenspan confirmed that there will be nothing other than inflation in the US for as long as he sits at the top of the monetary dungpile. Or, as he so eloquently puts it, we should expect the Fed to continue "warding off unwelcome disinflation". 

Greenspan's vow to create more inflation wasn't great news for the bond market and bond prices plunged. T-Bond futures have now reached the level identified as good support in the latest Weekly Update, although they have got there faster than we had expected (we were anticipating a bit more of a rebound prior to a drop to this level). We expect bonds to experience a substantial rally following whatever low they make over the next several weeks. More on this in the Interim Update.

Gold

As we warned was likely, gold has dropped below its 200-day moving average. In the Weekly Update we said that $335 probably represents gold's maximum downside potential over the next 1-2 weeks and this remains the case. We are getting close to the ideal price for a correction low in the gold market, but are still 2-6 weeks away from the ideal time.

Gold Stocks

The major gold stocks dropped sharply on Tuesday. As mentioned in previous commentaries, the worst case we can envisage for this correction in the AMEX Gold BUGS Index (HUI) would be a drop to the mid-120s. However, there is support at 137-140 that stands a reasonable chance of containing the decline.

After the close of trading on Monday Aquiline Resources (TSXV: AQI) released the first set of drill results for its newly-acquired Calcatreu gold project (the project was formerly owned by Normandy/Newmont). The initial results were infill RC holes to the original Normandy diamond drilling and turned out to be much better than expected. Of particular note is that the grades are substantially better than Normandy's prior drilling (7g/t+ vs 3g/t), probably explainable by better recoveries using the RC drilling rather than core. This provides scope for better economics and possibly a bigger resource than the 500,000oz indicated resource calculated by Normandy/Newmont. The company will be releasing step-out holes shortly which will provide the market with a view to the expansion potential of Calcatreu. 

AQI gained 15% on Tuesday in a very weak gold market and is now up by 165% since it was added to the Stocks List in April. However, AQI is still under-valued and we will attempt to identify opportunities to accumulate the stock as they arise in the future.

Cumberland Resources (TSX: CBD) was weak on Tuesday in response to a C$25M equity-financing announced by the company (8M new shares will be issued at an average price of C$3.12/share). We think the financing was, however, very well timed because the deal was done at a time when the stock price was near a 52-week high. Our confidence that the CBD management knows what it is doing has thus been given another boost. In our opinion, CBD would be suitable for new buying below C$2.80.

The Dollar

At the time of writing this e-mail the last trade in the September Dollar Index was 97.56. In other words, the Dollar Index has almost reached our short-term target. We don't expect the Dollar to embark on another major decline during the next few weeks, but the potential upside now appears to be minimal. As such we are, as of now, short-term bearish on the Dollar.

Alert #121, Jul-08 2003

The Stock Market

Going into this week we were expecting short-term weakness in the US stock market and our aim was to monitor various indicators to ascertain whether this weakness represented the start of a major decline or simply a correction within a continuing uptrend. As discussed in recent commentaries, there was little evidence that an important peak was already in place. However, such evidence could potentially have appeared quite quickly if the market had continued its recent pullback.

Rather than weakness, stock markets throughout the world were very strong on Monday. Monday rallies are often suspect, but even though almost all of the upside in the major US stock indices occurred during the first 2 hours of trading there were definitely some bullish developments during yesterday's session. In particular, the NASDAQ100/Dow ratio moved to a new recovery high. This suggests that the S&P500 Index is still at least a few weeks away from a major peak. Also, the Semiconductor Index (SOX) made a new closing high for the move.

One possibility we haven't discussed, because it didn't seem at all likely prior to yesterday's trading, is that the stock market will surge to a 'blow-off top' over the next 1-2 months. Such an outcome would set the scene for a spectacular collapse over the ensuing months. We'll discuss this prospect in more detail in Thursday's Interim Update if the market is able to hold, or build on, Monday's gains.

The Dollar

The Dollar Index moved to a new recovery high on Monday. Our forecast, over the past few weeks, has been that the US$ would rally, but not by much. We continue to expect that the current rebound will fail at, or below, 98 (basis the September Dollar Index), versus yesterday's closing level of just below 96. 

The latest Commitments of Traders (COT) Report adds weight to our view that the Dollar's upside potential is minimal. When the US$ bounced during March, the rapid rate at which the commercial traders covered their SF short position (US$ long position) was a sign that the rally would be shallow and short-lived. Not surprisingly, the current situation is evolving in a similar way.

The latest COT Report was released on Monday and showed that the net-short position of commercial traders in Swiss Franc futures had fallen to 4,500 contracts as at 1st July. Just two weeks earlier the commercials (the 'smart money') had been net-short the SF to the tune of around 30,000 contracts, so almost the entire commercial net-short position was covered in parallel with only a 3% or so rebound in the US$. The US$ has risen further since the latest COT data was compiled, so it is reasonable to assume that the commercials are now net-long SF futures.

Gold

No change to our view. We expect gold to continue its correction with August being the most likely time for a low. Be aware, though, that there is a lot more upside risk than there is downside risk in the gold market. As each day goes by the deflation hypothesis is looking more and more absurd. In other words, as each day goes by we are getting closer to the point where a critical mass of people come to the realisation that deflation isn't a threat and isn't likely to be a legitimate issue in the US over at least the next 12 months. When that happens, gold will move above $400 rather quickly.

Alert #120, Jun-10 2003
Monday's market action was slightly bearish for gold and slightly bullish for the US$. In recent commentaries we've mentioned that we would consider a daily close in the gold price below its 18-day moving average to be a preliminary warning sign that gold had reached a short-term peak and that the Dollar Index had reached a short-term bottom. August gold closed below its 18-day moving average on Monday.

The reason we've zoomed-in on the 18-day moving average over the past few weeks is that it has acted as support and resistance on many occasions over the past 7 months. As such, it appeared as though traders in gold futures were 'keying off' this moving average. However, we don't think that yesterday's break of the 18-day moving average is of significance to anyone other than short-term traders. (As an aside, we don't think that moves above or below any moving average are ever significant, at least not in the commonly accepted sense where a break above a moving average is considered bullish and a break below a moving average is considered bearish. For example, in a long-term bull market a break below a 200-day moving average often leads quickly to a great buying opportunity because the moving-average break occurs after the pendulum has swung a long way in one direction and is about to swing back in the other direction.) Short-term traders in the futures markets, however, often use sell-stops to protect profits or minimise losses, and a logical level to place these sell-stops is just below short-term support.

Although most of our junior gold stocks were quite firm on Monday, most of the major gold stocks (with the notable exception of NEM) closed near their lows for the day and thus confirmed the mini-breakdown in the gold price.

Our view is that gold and gold stocks are either going to rocket higher in the very near future (what we've called "scenario a") or embark on a substantial advance later this year ("scenario b"). Either way, we see no reason to exit any positions in junior gold stocks at this time. 

Alert #119, Jun-03 2003
There were many impressive downward reversals in the US stock market on Monday. These reversals
might indicate that a short-term top has finally been put in place, particularly when considered
alongside the recent resilience of the gold price and the low put/call ratios (on Monday the
equity put/call ratio was once again low). As mentioned in recent commentaries our opinion is that
the next pullback will probably turn out to be a correction within a continuing uptrend, but even
if this is the case it has the potential to be quite sharp. As such, we are going to add another
bearish position to the TSI Stocks List. Specifically, we'll add the QQQ December-2003 $25 put
options (QAVXY) to the List at yesterday's closing price of US$0.90.

In last week's Interim Update we suggested buying the International Paper (IP) January-2004 $50
call options. They were trading at $0.15 at the time and can probably still be bought for around
that price. We like the risk/reward on these options given the potential for a substantial rise in
the IP stock price IF it can break the downtrend that has been in place since January of 2000. As
discussed in the latest Weekly Update, we also like the risk/reward for the Japanese stock market
at around its current level and have added iShares Japan (AMEX: EWJ) to the Stocks List. Note that
the recent addition of EWJ has the potential to be a long-term position for us.

On Monday, for the 4th day in a row, the gold price rebounded strongly off support at $360.
Keeping the gold price at or below $360 appears to be akin to keeping a beach ball underwater in
that it requires a lot of effort to push it down and it then springs back as soon as the downward
pressure eases off. Furthermore, this bullish action in the gold market probably means that the
dollar's current rebound is going to be short-lived.

As far as our gold stocks are concerned, Monday saw Golden Phoenix (GPXM) break its 1-year
downtrend and a strong rebound in Desert Sun Mining (TSXV: DSM).

Alert #118, May-28 2003
The stock market made a new recovery high on Tuesday with the S&P500 Index rising to the lower boundary of major resistance in the 950-970 range. At the same time, the June Dollar Index bounced after hitting major support in the low 90s early in the day while gold and gold stocks reversed lower. Also, for the first time in quite some time stock market strength was accompanied by a significant drop in bond prices (a significant rise in LT interest rates). This is perhaps because bonds have recently been taking their cues from the currency market, strengthening when the US$ weakens and weakening when the US$ strengthens. The behaviour of the US bond market might seem counter-intuitive, but the bond markets of the world are moving together and a stronger US$ tends to be associated with expectations of stronger economic growth (a perceived 'negative' for the bond market).

Looking at each of the major markets in isolation this is what we conclude:

1. The US$ has probably reached a temporary bottom and has the potential to bounce quite strongly even if the short-term downtrend remains intact. As such, we are no longer short-term bearish on the dollar. However, we cannot yet find any evidence that the dollar is making anything more significant than a short-term bottom. At this stage we are therefore assuming that any rebound in the near-term will be followed by a drop to a new low.

2. The US stock market has rallied about as far as it can without completely invalidating our short-term bearish view. If the market does not reverse lower during the next 2 trading days we will probably take a quick loss on the Dow put options that were recently added to the TSI Stocks List.

3. Newmont Mining broke above major resistance at $30 on Tuesday before reversing lower and closing back below this resistance. This probably indicates that a short-term top is in place for gold and gold stocks, although we don't see any signs that this could be anything more significant than a short-term top. 

From an inter-market perspective the above doesn't make a lot of sense because it appears as though gold and the stock market are going to pullback together while the dollar bounces, but hopefully the picture will become clearer in the days ahead.

In any case, the main reason for this message is to advise that we are going to take profits now on the Alcoa July $25 call options that were originally added to the Stocks List in March. Based on Tuesday's closing price of 0.70 the profit will be 100%. Note that we expect Alcoa to eventually make its way up to at least the $26-$27 range and if it does this before July the options will be worth considerably more, but given the overbought status of the market we don't like the risk/reward ratio for July call options at this time. 

Alert #117, Apr-29 2003
The S&P500 Index has just moved back to important resistance (its channel top) in parallel with a further reduction in volatility. As was the case when the stock market was rallying during the first half of last week, Monday's rally was not confirmed by bond market weakness or significant US$ strength.

As explained in the latest Weekly Update, while the least likely outcome over the next 1-2 months is a major rally there aren't yet any signs that a major decline is imminent. As such, the most likely outcome is that we'll get a couple more months of the frustrating sideways action of the past 9 months before the inevitable breakdown finally occurs. 

In the Weekly Update we said that a reasonable time to establish new bearish positions, or add to existing bearish positions, had arrived, and suggested that speculators buy mutual funds that are negatively correlated with the market or put options with at least 5 months to expiry. Taking into account the likelihood of more oscillations between support and resistance in the short-term, inverse index funds are probably a more appropriate speculation than put options at this time. This is because downside risk can be more easily managed and there is no time premium to be concerned about (if price moves sideways then an option will usually become less valuable as time passes due to the evaporation of its time premium). 

Further to the above, we are going to add USPIX to the TSI Stocks List at Monday's closing price of $40.57. USPIX is a mutual fund designed to move by twice the INVERSE of the NASDAQ100 Index (NDX) each trading day. For example, if the NDX drops by 2% on a particular day then the value of USPIX should rise by around 4% on that day. We'll set a sell stop at $38.90. In other words, all it will take is a 4% loss in USPIX (a 2% gain in the NDX) to stop us out of this position. A profile of USPIX can be found at http://biz.yahoo.com/p/u/uspix.html.

Gold's price action continues to be constructive and a move up to $340-$345 looks likely in the short-term. However, Monday's trading in the gold shares was a continuation of the lousy price-action that began last week. In the Weekly Update we said that pruning of trading positions in gold shares would be appropriate given the recent pronounced weakness in the shares relative to the metal. It is certainly possible that the recent poor performance of the gold stocks relative to the metal will turn out to be a false alarm, in which case any stocks that are sold now could be re-purchased following a rise in the Amex Gold BUGS Index (HUI) to above last week's high (131.5).

Note that the short-term outlook for gold stocks would turn decisively bearish if the gold price moves up to 340 or higher over the next week or so while the HUI fails to make a new recovery high (above 131.5).

Alert #116, Apr-23 2003
We are currently at a very interesting juncture. As mentioned in the latest Weekly Update, the top of the channel in which the S&P500 Index has been travelling since the first quarter of 2000 lies at around the 920 level. In other words, at the close of trading on Tuesday the S&P00 was within 1% of its channel top. At the same time, sentiment indicators are revealing extremes of bullishness. This tells us that the market could be close to a very important peak (a peak from which a major decline will begin).

Also supporting the idea that an important peak is at hand is the fact that Tuesday's stock market surge was not confirmed by other markets. For example, bonds were flat and the US$ was weak.

Further to the above, a pullback is likely to begin very soon (the next day or so) and this pullback will POTENTIALLY evolve into a major decline. Whether it does or not will be determined by the behaviour of sentiment indicators relative to price action (a small decline that generates considerable fear would be bullish whereas a moderate decline that generates no fear would be bearish).

As far as our trading positions are concerned, here's what we suggest:

*Lucent (LU) has broken out to the upside as expected.  We will now increase our sell stop on this position from 1.38 to 1.47. 

*We had suggested exiting the Alcoa July $25 call options if they traded up to US$0.70, but no longer think this is the best course of action. We will leave these options in the Stocks List for now for two reasons. First, to provide some leveraged exposure to the market in case a short-term pullback in the S&P500 is followed by a break of the 3-year downtrend. Second, because AA is consolidating nicely just below its 200-day moving average.

*We had suggested exiting the June $24 QQQ put options if the NASDAQ100 Index closed above 1105. We will now wait to see how the next pullback unfolds before deciding what to do with this position.

Our short-term outlooks for gold and gold stocks are unchanged, that is, we expect them to remain strong over the next few weeks.

In the currency market, a daily close of 73.50 or higher by the June Swiss Franc futures would confirm our view that a move to new highs (new lows for the US$) was underway.

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