<% 'pass = Request.Form("pass") IF ((Request.Form("pass") = 1) OR (Session("pass") = "pass")) THEN %> Speculative-Investor.com
   -- for the Week Commencing 10th June 2002

Forecast Summary

The Latest Forecast Summary (no change from last week)

Big Picture View

Here is a summary of our big picture view of the markets. Note that our short-term views may differ from our big picture view.

Bond yields (long-term interest rates) will move higher during 2002.

The US stock market will make new bear market lows in 2002.

The Dollar commenced a bear market in July 2001 and will continue its decline into 2003.

A bull market in gold stocks commenced in November 2000 and is likely to extend into 2003.

Commodity prices, as represented by the CRB Index, will rally during 2002 and 2003.

The oil price will resume its major uptrend during the first half of 2002.

The US Stock Market

One Third of the Dow

We are going to take a quick look at the charts of 10  stocks that are part of the Dow Industrials Index to see what messages, if any, the markets are sending. The charts are provided here courtesy of www.decisionpoint.com, an excellent resource for anyone interested in technical analysis and stock market indicators.

1. Aluminium producer Alcoa bottomed in October of 2000. Since May of 2001 the stock has been making lower highs and higher lows and is currently neither bullish nor bearish. 

2. Heavy equipment manufacturer Caterpillar has been trending higher since bottoming in October of 2000. CAT has continued to make higher highs and higher lows and can therefore be considered bullish from a medium-term perspective.

3. Citigroup has been trending lower since September of 2000 and appears to have substantial downside risk.

4. Exxon Mobil has made a series of lower highs since peaking in October of 2000. It has trended higher since last September but is presently in danger of breaking that trend.

5. General Electric, the world's largest company in terms of market cap, has a decidedly bearish chart. If support at the September-2001 low gives way, as it is likely to over the coming months, then a drop to the 1998 low (near $23) would be in the cards.

6. The retailers rebounded strongly following last September's plunge, but in Home Depot's case the rally failed to exceed the May-2001 peak. HD's chart is bearish and a drop below the September-2001 low appears likely.

7. International Paper has been in a steady up-trend since bottoming in October of 2000.

8. JP Morgan Chase has made a series of lower highs and lower lows since peaking in September of 2000. This chart is decidedly bearish and a break below the 2001 low appears inevitable.

9. Coca Cola is a company that benefits from a weakening US$ so it is not surprising that KO reversed sharply higher in January at the same time as the Dollar embarked on its downtrend.

10. Microsoft is a stock on which we recommended buying put options 2 months ago when it was trading in the high-50s. The chart is similar to Alcoa's except that it has broken below the bottom of its contracting triangle, thus signaling that the next big move will be down. A rebound to around $55 would present another good opportunity to buy put options on this stock.

The following themes are apparent from looking at the Dow stocks. Firstly, the strongest stocks are those that benefit directly from higher inflation and/or a weaker US$. Secondly, the weakest stocks are the ones that would be most adversely affected by higher interest rates. The banks clearly fall into this category as does GE due to its huge finance business and its massive debt. Thirdly, the cyclical stocks - the stocks of the companies that are sensitive to changes in economic growth - tended to bottom way back in October of 2000. This makes no sense considering that the US economy supposedly plunged into recession in March of last year. One possible explanation (the one we favour) is that the NBER (the National Bureau of Economic Research) goofed when it declared a recession last year. Our view is that the recession lies in the future. How far in the future? At this stage we think next year is a likely candidate, but our view could change depending on the performance of leading indicators. With the ECRI's Weekly Leading Index having just hit a 17-month high (see chart below), a recession this year is extremely unlikely.

Current Market Situation

Strength in small cap stocks has, over the past year, been a major element of the bullish case. The S&P600 (an index of small cap stocks) reached an all-time high during the first half of May before dropping sharply over the past few weeks. At this stage it is possible to argue that the recent 10% decline in the S&P600 was simply a pullback within an on-going bull market since important support was not breached.

Below is a decisionpoint.com chart showing the NASDAQ100 Index (NDX) and the NASDAQ100 Volatility Index (VXN). The VXN normally moves in the opposite direction to the NDX, but the scale on the VXN chart has been reversed so they appear to be moving in the same direction. Volatility is a sentiment indicator - it tends to rise when traders become more fearful and falls when they become more complacent. As such, volatility usually reaches a peak near important bottoms and troughs when the market is near a peak. The interesting thing at the moment is that while the NDX is within spitting distance of last September's low the VXN is where it was prior to start of last September's plunge. 

What we are seeing in the current NDX-VXN relationship is consistent with what we would expect to see if the NDX was about to break down to a major new low. It is not what we would expect to see if the NDX was about to complete a successful test of its September-2001 low. The only question is, do we get a 1-2 week 'pause to refresh' before the plunge or do we plunge right away? 

We've recently been anticipating a short respite prior to the next major decline and continue to do so even though the market seems incapable of rallying for more than a few hours. We just get the impression that selling pressure has been temporarily exhausted and that in the absence of terrible news (such as we got from Intel late last week) the market will stabilise for a while. We already have MSFT and Dow put options in the TSI Portfolio and will look for an opportunity to add a position in JPM put options.

Commodities

John Gross, publisher of the Copper Journal newsletter, earlier this week made the following comments regarding copper:

"Technically, I believe it's overbought. The market has not been driven by any kind of turn in demand. The fundamentals overall are still weak, as evidenced by BHP's production cutback, and I'm inclined to view this [the recent rally] as an overreaction."

Below is a weekly chart of copper futures. We don't have any particular view on the short-term direction of the copper price although last week's breakout to a 12-month high was certainly a positive technical development. Taking a 6-12 month view we are extremely bullish on copper. A much higher copper price will be a natural result of the massive inflation of the past 18 months and a considerably weaker US$.

Below is a chart showing the zinc price since 1998. Whereas copper's price action over the past 8 months has been bullish, the zinc market is yet to show any signs of life. We expect this to change and are bullish on zinc taking a 12-month view.

We currently have exposure to zinc via Apex Silver (AMEX: SIL). Apex's development-stage San Cristobal project is one of the world's best mining assets. It contains a high-quality reserve of 470M ounces of silver and 8.8 billion pounds of zinc, meaning that each Apex share gives an investor exposure to 14 ounces of silver and 255 pounds of zinc. That is the sort of leverage we want in a commodity stock! The Apex stock price under-performed the pure-play silver stocks during the recent rally in gold and silver shares, but Apex's leverage to the zinc price will eventually become a positive (we expect the base metals to out-perform the precious metals next year). In the mean time, Apex offers good relative value at its current price even if we assume zero value for its enormous zinc reserves. From a technical perspective the recent sharp pullback has simply brought the stock back into its previous upward-sloping channel.

The coal price has performed poorly over the past 8 months both in absolute terms and relative to the price-performances of the other 'energies' (oil, natural gas). Below is a chart showing an index of coal prices over the past 12 months (source: www.globalcoal.com). Since prices within the energy complex will tend to move together due to substitution (when one form of energy becomes expensive the major users will substitute another form), we think that coal currently presents an interesting opportunity. We have exposure to the coal price via MIM Holdings (ASX: MIM) and BHP Billiton (ASX: BHP).

Below is a weekly chart of crude oil futures. Over the past month the July contract has fallen by almost $4 and is probably close to a low, although further substantial weakness in the stock market would be a short-term negative for oil. July crude closed at $24.75 on Friday and should find support somewhere between $22 (the breakout area from earlier this year) and $23.20 (the 200-day moving-average).

This week's important economic/market events
 

Date Description
Monday June 10 No significant events
Tuesday June 11 No significant events
Wednesday June 12 Fed Beige Book
Import / Export Prices
Thursday June 13 PPI
Retail Sales
Friday June 14 Industrial Production

Click here to read the rest of today's commentary

 
Copyright 2000-2002 speculative-investor.com
<% Session("pass") = "pass" Session.Timeout = 480 ELSE Response.Redirect "market_logon.asp" END IF %>