- 28 February 2001
Economy
and Fed Watch
Economic Update
In the latest WMU we included a chart
of the Cyclicals Index and noted that the Index was sitting right at its
50-day moving-average and its up-trend line. In other words, it was right
at critical support (all pullbacks since last October had halted at the
50-DMA). The Cyclicals rallied strongly on Monday and then held their ground
during the Tuesday/Wednesday sell-off in the market, thus keeping their
up-trend in tact and providing further evidence that the economy is not
as weak as many people suspect. Until the cyclical stocks turn lower, which
would be confirmed by a decisive break below the 50-DMA, we will give the
US economy the benefit of the doubt.
Today (Thursday) we get the widely-watched
NAPM (National Association of Purchasing Managers) survey results. Although
the latest NAPM survey (February) is likely to reveal continued economic
weakness, it will probably show an improvement from January and show less
weakness than the consensus forecast currently indicates. The dilemma facing
the stock market is that most traders/investors on the 'long' side want
to see economic data that will encourage the Fed to cut rates (data that
reveals substantial weakness) and, at the same time, they want to believe
that company earnings have bottomed. There is, therefore, a conflict.
More words of wisdom from Uncle
Elmer
During his testimony on Wednesday Alan
Greenspan implied that there would be no inter-meeting rate cut, at least
not in the immediate-term. Wayne Angell ("the entertainer") had previously
assured the market there would be a rate cut this week but, ironically,
those same assurances probably eliminated the prospect of a cut.
It is rare for us to agree with the
Fed Chief, but in this case we do. A rate cut at this time would be counter-productive
if done for the benefit of the stock market (it was, until yesterday, too
widely anticipated to have had any positive impact) and is not required
as far as the economy is concerned. Having quelled the inter-meeting rate
cut expectations, Greenspan & Co. now have a genuine opportunity to
surprise the market if they wish to do so in the near future, thus getting
more 'bang' for their rate-cut 'buck'.
The US
Stock Market
Current Market Situation
From the Feb-27 Market Alert e-mail:
"A
rally into Wednesday (the end of the month) and then a reversal lower during
the first 2 days of the new month would suggest that the market's decline
will continue throughout March. This would be a very significant divergence
from the early-1990s Nikkei pattern and would obviously be short-term bearish.
It would, however, have longer-term bullish implications as the ultimate
bottom would most likely be brought forward by 12 months (from October
2002 to Sep/Oct 2001)."
Further to the above, a continuation
of Monday's upside activity on Tuesday and Wednesday would have been short-term
bearish because it would have set the market up for a renewed decline in
March. However, the fact that the market reversed lower on Tuesday and
dropped into month-end sets up the potential for a rally over the next
few weeks. Note that a rally over the near-term keeps the early-1990s Nikkei
comparison alive and potentially has longer-term bearish implications by
postponing the ultimate bottom.
We expect a reversal higher during
the next few days. The QQQ call option trade suggested over the past week
is still suitable for aggressive traders experienced in this type of trade
(with the option price dropping to around $2 late yesterday it is even
more suitable). We will also add one more tech stock - Avanex (NASDAQ:
AVNX) - to the Portfolio. AVNX closed at around $19 yesterday, down from
a 52-week high of $273. Similar to LightPath Technologies, which we mentioned
in the Feb-14 IU, AVNX is not a 'value' investment in the traditional sense
(even at its current price). It has, however, developed technology that
will play a central role in the expansion of optical networking capacity.
In short, AVNX has developed a product that allows thousands of separate
signals to be simultaneously transmitted along a single strand of optical
fibre. As is the case with LightPath, the major telecom equipment suppliers
are demonstrating their acceptance of AVNX's technology in the best possible
way - by issuing purchase orders. This is an extremely volatile stock and,
in the short-term, it could quite conceivably drop by 50% or rise by 100%.
There's always a bull market somewhere
While a lot of people are focussing
on the last boom, the next boom is well underway. Below is a chart showing
Australia's All Resources Index (an index of Australian commodity-oriented
stocks). We like some technology stocks as long-term investments and occasionally
as trades, but we also acknowledge that buying tech stocks at this time
is akin to swimming against a very strong current. Investors in resource
stocks, however, are presently swimming with the current. We have 3 non-gold
resource stocks in the TSI Portfolio (Cameco, Western Mining and Occidental)
and would have more except for the fact that we are overweight the gold
sector.
Gold and
the Dollar
Current Market Situation
With regard to our gold investments,
we are in the early stages of a campaign that should last a minimum of
another 12 months. As such, as long as the underlying trends towards higher
inflation and a weaker Dollar remain in place there should be no reason
for investors to disturb longer-term gold stock positions (except to switch
from the lesser-lights, such as PDG and ABX, to the brighter-lights such
as HGMCY and GOLD). In addition to maintaining a core investment we will
also be attempting to trade the major swings in the gold market. Unlike
investments, trading positions will be kept on a tight leash - sell-stops
will be used to limit losses and profits will be taken during price surges.
Further to Market Alert #27, we added
a second trading position in DROOY at $1.06 on Feb-28. A sell-stop has
initially been set at $0.83. We also took advantage of a pullback in the
Australian gold stocks over the past 2 days and added Lihir Gold (ASX:
LHG) to the Portfolio at A$0.62 (the initial sell-stop is set at A$0.53).
LHG's leverage to the spot gold price is far greater than any of the other
large or medium-sized Australian gold producers.
The XAU is currently overbought and
may have commenced a pullback. This is not the ideal scenario, but is also
not unusual. We would be concerned (and may exit trading positions) if
the XAU closes below its 200-day moving-average (presently at 50.8) on
2 consecutive trading days.
Gold interest rates dropped sharply
on Wednesday, suggesting that the shortage of physical gold is being addressed
(the central banks are adding liquidity). There was also a nice upward
reversal in silver.
Bond Market
Update
We turned short and medium-term bearish
on bonds on Jan-08. We then went short-term neutral (and remained medium-term
bearish) on Jan-31. It is now time to reinstate our short-term bearish
view.
As we write, the June T-Bond Contract
is trading at 105-20/32. The Jan-03 peak, which occurred just prior to
the Fed's surprise rate cut, was 106-20. A rally to new highs seems highly
improbable due to:
a) Strength in the cyclical stocks
(bonds and cyclical stocks are inversely correlated)
b) Strength in Australian resource
stocks (telling us that a sharp drop in commodity prices is not on the
cards)
c) Signs of life in the gold price
d) A likely upward reversal in the
stock market
e) The on-going rapid expansion of
the US money supply
f) The A$-Bond relationship (refer
to the latest WMU)
Oil Update
We are almost, but not quite, ready
to turn short-term bullish on oil. Oil is potentially bottoming at the
moment, but we will need to see how it finishes the week and also receive
some confirmation from other markets (eg, an upward reversal in the stock
market would be bullish for oil).
Changes
to the TSI Portfolio
LHG, DROOY (2nd trading position) and
AVNX added to the Portfolio.
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