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Henning, The Curmudgeon
Woody Allen was right
Thomas Henning: "The Bond Market has started a cyclic bear market as it has cracked downward from 123 to 104. Do take a look at the weekly Bond Chart in my article in this issue.
Meanwhile, the Fed-babbling propagandists gathered on the Financial T.V. cesspool waiting breathlessly for Big Al and the Fed to go through their charade determining whether rates will be lowered or raised or who cares.
After this grand Fed announcement, this gang spewed forth a pile of irrelevant Fed-babble, The question arises as to what makes these people tick. While the obvious answer is that they must go down to the lowest common denominator so as to sell advertising, I suspect that this noise is a manifestation of Woody Allen's suggestion that man cannot live in the world of reality, he needs mythology. Unfortunately, for the sheep, the markets do not do mythology but instead reflect reality, the ebb and flow of money. Welcome to the food chain.
The Stock Market has been grinding sideways for a couple of months and has legged upward with internals which have recently turned soft, not confirming the external strength-Advance/Decline Breadth included.
Nonetheless, the uptrend, while terminal is there but closes below Dow 8975/Transports 2525 would suggest that the day of reckoning is at hand.
The Gold Complex has been trying to give birth to a bull cycle. The XAU has marginally closed into new high ground (bullish), but the spot gold has to confirm above 385.
A bit of perspective. The Dollar Index is a mess having legged down from 120 to 92 and is consolidating the 23% decline. The Bonds have legged down from 123 to 104. A close below 92 by the Dollar Index would put downside pressure on the bond market and upside pressure on the gold complex. If a corresponding breakdown in the stock market occurs, my hunch is that a gold panic could evolve. We'll see."
THE CONTRARIAN'S VIEW
132 Moreland St., Worcester, MA 01609.
1 year, 11 issues, $39.
Next downswing to begin in the fall
Nick Chase expects marginal new rally highs in early September. "After that I expect the next major deflationary wave to hit stock prices, with the Dow descending at least into the 6000s, and possibly into the 4000s, and the Nasdaq into triple digits, by mid-2004."
THE DINES LETTER
P.O. Box 22, Belvedere, CA 94920.
1 year, 17 issues, $195.
TDL's Seasonalities: September
James Dines: "Stocks: Based on the Dow-Jones Industrial Average (DJI), there have been 14 rising Septembers and 28 downers since 1961, for a 2-to-1 bearish bias. Taking both the S&P and DJI back farther, in the last 53 years, Septembers show more average monthly declines than any other month of the year.
Labor Day: Our Research Department also reports that if the market declines in the four-day week following Labor Day (starting September 2 this year), one should postpone buying for one month. It worked splendidly in 1994, 1998, 1999, 2000, 2001, and 2002, when postponed buying provided buyers with prices near the bottom in all six Octobers. On the other hand, if there is a gain in that four-day week, buy because the market will probably keep going higher. This was true in 1993, 1995, 1996 and 1997, when the market posted a gain in the week after Labor Day and continued to rise in subsequent months.
Golds: Septembers are favorable for the gold shares as measured by DIGSA (the Dines Gold Stock Average). Since 1968 there have been 20 up, 14 down, and one neutral. Silver shares in DISSA (the Dines Silver Stock Average) have been less bullish the last 22 years, with 12 up and 10 down. The fourth quarter is often a good time to start accumulating precious-metals shares in anticipation of the positive Seasonalities of the first quarter, when gold and silver shares usually rise, By Dinesism #9: the Dines Rule of Gold Seasonality (DIRGS)."
OPTION ADVISOR
1259 Kemper Meadow Drive, Cincinnati, OH 45240.
Monthly, 1 year, $200. www.SchaeffersResearch.com.
Short-term Bullish and Long-term Bearish
Bernie Schaffer: "I'm short-term bullish and long-term bearish. I am long-term bearish in the sense that I believe the blue chips have not seen their ultimate bottom in the bear market. While I see further gains in the short term, I recommend that you keep an aggressive cash level of 25 to 50 percent and some serious exposure to gold stocks while you play the stock market rally through the aforementioned "risky" names. And all the while, remember that these are extremely uncertain times and no one me included has all the answers. Above all else, be especially wary of those who claim (i.e; pretend) to have these answers."
The Peter Dag PORTFOLIO STRATEGY & MANAGEMENT
65 Lakefront Dr., Akron, OH 44319.
1 year, 24 issues, $389.
What the indicators are saying
George Dagnino: "The stock market continues to go nowhere. The S&P 500 has been hovering between 970 and 1000 since early June in a typical summer pattern. The next several weeks could be critical. Let's see what our indicators are saying.
Fundamental Indicators. The most bearish trend for the market is the sharp rise in bond yields. Changes in yields and in stock prices are highly correlated. It would be very unusual for the market not to correct after such a major move in yields. The dollar is holding up, which is good news. Liquidity, meanwhile, is rising rapidly, keeping the market in a holding pattern.
Technical indicators. The advance-decline line is in a major rising channel and remains bullish for the long term. In the near term, it is consolidating. Volatility remains very low, seen only at market tops. Volume is bearish as the market remains heavily overbought.
Sentiment indicators. The specialists are very bullish for the long term. Their low short position is similar to that experienced in 1995. the put-call ratio, however, is bearish for the next several weeks. Investors remain unusually optimistic, a bearish configuration.
Seasonality. The market is facing the two most critical months of the year. The odds favor stocks to continue to follow closely the seasonality pattern.
Attractive stock sectors. Real estate, homebuilding, S&L, and precious metals are the sectors that offer the greatest safety and highest opportunities.
Investment implications. In the near term, the market will continue to go nowhere. The odds favor a correction in the coming weeks."
CROSSCURRENTS
2 N. Tamiami Trail, Suite 1200, Sarasota, FL 34236.
1 year, 22 issues, $169.
Bear market rally
Alan Newman: "According to our work, this is still a bear market rally within the framework of a tremendous bear market, likely to be the worst of our lifetimes. That prices have been in a rising mode since March (or arguably, since October) does not change the impact of what we see on our charts. Our dollar weighted A/D volume measurement is still having a very rough time with the "new resistance" that was once old support. The huge head-and shoulders pattern targets the bottom of the arrow, well below both the October & March lows. In retrospect, there was clearly irrational exuberance when Fed Chairman Alan Greenspan uttered those words in December 1996 at Dow 6437. If the mania was in place then, it certainly is now. If the consumer needs to retrench, so do stocks!
Sell signals for our emotional studies did not have the expected impact and the consolidation since had produced nothing new or dramatic. We're still impressed by the amount of time the 21-day incarnation spent in negative territory, showing too many bulls. Although this reading is technically neutral, our interpretation is that there is still way too much bullishness, or at best, complacency, for the upside to make much sense. The huge amount of time spent in bullish sentiment mode would best be "worked off" by a substantial correction.
Volatility studies still point to very decent odds for a fairly dramatic resolution of the tight trading range. Although the Dow and Nasdaq did indeed, break above their recent highs, volume has been at best, cool to lukewarm. Episodes like the one currently underway typically resolve to the downside with 10%-15% moves and in fact, such a move would not hurt the bull case at this point in theory. A 50% retracement of the move since March would take us back to about SPX 902, a target even the bulls should respect as a best case. Our worst case is still 680 but obviously, the odds have declined a lot.
We must note that in most recessions, the rate of household bankruptcy filings usually falls as most folks simply stop spending. But in the most recent recession, bankruptcy filings continued to surge according to the American Bankruptcy Institute, and set new records in 2001 and 2002. And a record1.65 million cases have been filed in the U.S. courts in the 12 months through June 2003, up 9.6% from the year before! The debt picture is scary!
Peter Eliades, who writes the Stockmarket Cycles newsletter (www.stockmarketcycles.com/), has shown how important August has become as a turning point in the last 16 years.
- August 25, 1987 the exact top prior to the crash.
- August 23, 1988 low has never been returned to.
- August 24, 1995 low has never been returned to.
- August 19, 1998 top preceding 18% plunge in 2 weeks.
- August 31, 1998 important market bottom.
- August 31, 2000 2 days before all time high
- August 24, 2001 end of rally, market drops 22% in under a month.
- August 22, 2002 exact rally top, market drops 21% in under a month."
STOCK TRADERS ALMANAC INVESTOR
184 Central Ave., P.O. Box 2069, Old Tappan, NJ 07675.
Monthly, 1 year, $295.
Recurring patterns
Yale Hirsch: "As we have just sent the 2004 Stock Trader's Almanac to press, it's interesting to look back at the past year and see so many market patterns repeating themselves. It's such a reassuring feeling when the market does what you think it might do. Some interesting recurring patterns:
- Expiration weeks, which end on the third Friday of the month, have been up six straight months, February through July, and have gained more Dow points than all the other weeks combined. Iraqi War anticipation overrode all other influences.
- Weeks after expiration were down five out of the past six months and have lost a greater percentage of points than the other weeks combined.
- Mondays of expiration weeks have been up nine months in a row, including August. Yet, does it have to do solely with the trading of options and/or futures? Perhaps it has to do with the fact that people with 401(k) plans tend to get paid twice monthly, at the beginnings and middles of months. This causes an inflow of funds to those managing such funds. As there are 21 trading days per month on average, expiration Mondays tend to fall on the 9th, 10th, or 11th day of months, when lots of cash need to be invested. Tough call!
- Week before Thanksgiving has seen the S&P move up eleven years in a row. This is one of the great and loving family-gathering times of the year. Could that spirit influence traders and money managers who might be selling short or dumping stocks to postpone those actions as they prepare to journey home to loved ones?
- Market patterns following two Gulf Wars have been remarkably similar, though twelve years apart. In January 1991, we began to oust Saddam's forces from Kuwait, three months later the Dow had climbed 21.0%. This year the war began after the Dow close of 7524.06 on March 11 and moved up eight days in a row. By its high on June 17, the Dow had risen 23.9%. From their midterm October bottoms, the gains were 27.0% in 1991, and 28.0% in 2003. By yearend 1991, the Dow gained an additional 5% and in election year 1992 the gain was a mere 4.2 %. If we continue along similar lines, we could get into the 9800-10000 range by the end of the year, and near 10500 in 2004.
Wall Street's FREE LUNCH now served late December.
In our 1970 Stock Trader's Almanac, I noted some interesting research from Portland State investment Analysis Center, directed by Shannon P. Pratt. In it, undergraduate Larry E. Shaffer showed that stocks not rated by Standard and Poor's out performed rated ones during the December 15th-Febuary 15th period. As the proverbial light bulb flickered, I began to pick the NYSE new lows on December 15 and showed hot they trounce the NYSE composite index three to one on average by February 15th. We kept this up through the years, but recently noticed that stocks kept hitting newer lows into the last week of December. So, four years ago we began choosing them later and gave ourselves a pat on the back for changing the "free lunch" strategy. Then, two years later, we observed these gains were slipping somewhat by February, so we scored some amazing gains in just three weeks time. Do this continuously for five years, pyramiding along the way, and you end up owning the world."
THE LANCZ LETTER
2400 N. Reynolds Rd., Toledo, OH 43615.
1 year, 15 to 17 issues, $250.
Interest rates: Digesting recent rise
U.S. Dollar: Showing strength
Alan Lancz: "After the fastest rise in rates in almost 40 years, interest rates should settle as the economy can not take dramatically higher rates just yet. The consumer remains one of the key components to the U.S. economic recovery and the Fed does not want to detour one of the economy's bright spots.
The U.S Dollar has continued its recent rally establishing four month highs versus the Euro. Since we feel further gains will be much more gradual, we do acknowledge that further highs may continue through the balance of the year."
STREET SMART REPORT
169 Daniel Webster Hwy., Meredith, NH 03253.
1 year, 17 issues, $250; www.StreetSmartReport.com.
Market in most negative period of the year
Sy Harding: "There has been an impressive growth surge in the amount of selling by corporate sellers.
According to Thompson Financial, insiders are selling $25 worth of stock for every $1 they are buying. Lou Gerber, Director of Insider Research at Thompson Financial says, "Anytime it's been above $20, it's usually been bearish."
This is only the second time in the last ten years that the indicator has been over $20 for 3 months in a row. The last time was July, August, and September of 2000. (Six months later the S&P 500 was down 23%, the Nasdaq down 54%).
The market is now in what has historically been the most negative three-month period of the year, particularly for the Nasdaq, August through October.
A buy signal for gold was triggered on July 23rd. Our upside target is $390, the upper limit of the 10% trading band that has confined gold's trading for years.
We continue to trade the intermediate-term moves in gold, as it is so volatile. But long-term, the 20-year bear market in gold has ended."
Editor's Note: Sy Harding has consistently been ranked a Top Timer for the past 13 years. Most recently, Harding was ranked the #1 Gold Timer for the last 12 months by Timer Digest, a newsletter which tracks the performance of investment newsletters.
GLOBAL INDICATORS
published by The George Washington University
710 21st St., NW, Ste. 206, Washington, DC 20052.
www.sbpm.gwu.edu.
Economy: Key topic for elections 2004
William Handorf: "The U.S. economy shows unmistakable signs of moving from recovery to expansion. The manufacturing sector reports increased sales, export orders and backlogs. Retail spending with and without volatile automotive sales is strong. The housing market is breaking records for sales and starts, and encouraging other sales of furniture, carpeting, appliances and housing-related merchandise. Fiscal policy is very stimulative as defense spending soars, tax rebates arrive and withholding tax rates decline. Monetary policy is accommodative as the Federal Reserve keeps short-term interest rates low and money growth plentiful. The financial markets concur with the upbeat assessment; stock prices are up over 13 percent in 2003 while U.S. Treasury note yields have surged by about one percent in the past two months. Prices are increasing between one and two percent and inflation remains well behavednot too high nor too low. The U.S. dollar has stopped losing value to other global currencies; indeed, the dollar appreciated against all major currencies to include the euro, the pound sterling and the yen during August trading.
Despite the overwhelming positive results from periodic economic indicators and the financial markets, problems remain. Jobs continue to be lost month after month. People unable to locate work have become discouraged and left the market. Consumer confidence is low and declining. Higher mortgage interest rates will wipe out a major source of cash flow for households and retard the sizzling housing market. If the U.S. is to move from a lethargic recovery to robust expansion, consumer spending must remain strong (e.g., above three percent real growth on an annualized basis), and business investment must recover from several consecutive years of losses. Consumer spending and business investment must be sufficiently vigorous to encourage firms to hire new workers in excess of 100,000 new jobs per month. The economy will remain a key topic among those seeking the presidency of the United States in 2004."
GROWTH STOCK OUTLOOK
P.O. Box 15381, Chevy Chase, MD 20825.
1 year, 24 issues, $235.
Profound changes over the next 25 years
Charles Allmon: "For most of you reading this, profound changes lie ahead over the next 25 years. So plan now, and advise your children what to expect where the growth will be, where the best job opportunities might develop. Most important of all, perhaps, where is "quality of life" likely to be most desirable? Let's turn back more than a decade, when I first mentioned in this service that the 25-45 age group was shrinking and would not grow again until the 2012-2015 period. The earlier projections and forecast held fairly close to schedule. Thanks to the slow growth of the 25-45 age group from about 1990, the unemployment level today is a modest 6.3%. Without that skimpy growth in 25-45 year olds in recent years, the unemployment level today likely would be well over 8%, with explosive political consequences. So listen up, because the ramifications ahead are cast in stone and unlikely to change.
By 2025, the Hispanic market will double to 70 million and account for over 19% of the U.S. population. The U.S. Black population is projected to remain fairly stable, around 13% of the population. The U.S. Asian population will expand to 6.7%, not quite double the present population, which is under 4%. They're expanding rapidly too. You would be well advised to tell your grandchildren to begin studying Spanish at an early age. They'll need it when half the U.S. population are Spanish speaking around 2065.
By 2025, the U.S. population will exceed 350 million people. They'll need more water, food and land. Food production will grow in importance. Water could well be rationed in many areas. I would think that Las Vegas, Nevada will be squeezed severely for water, a prime example of where spigots probably will run dry in the future. No doubt jobs and people will migrate to areas with a dependable water supply. Bozeman, Montana, for instance, is expected to double in size over the next 20-25 years. Some rural areas today will sprout small cities of 25,000 people. Water will be more important than ever a quarter century hence.
The political ramifications?? When you look at those double-digit gains in oldsters, count on our population becoming more conservative in voting habits. As for Social Security, in 1940 actuarial skeptics were forecasting that the proposed system would self-destruct in time because it was actuarially unsound from the outset as demographics kicked in after the turn of the century (just passed). They were right on. I would guess the Social Security retirement age of the future will be 71 years, or higher. No one will be collecting anything before age 71. No more free lunch!
Which states will see the most rapid growth in certain areas? Try Texas, Florida, Arizona, Nevada, Utah, and North Carolina. Quality of life might be best in certain areas of these states: Ohio, Pennsylvania, Oklahoma, New York, Montana, and Wyoming. Population growth in these six states will be slower than anticipated in the fastest-growing states."
THE CHARTIST
P.O. Box 758, Seal Beach, CA 90740.
1 year, 17 issues, $175. www.TheChartist.com.
Overvalued or Undervalued?
Dan Sullivan: "Is the current market overvalued or undervalued?" We were around in 1947 but we were just kids and didn't have a clue about the stock market. We can only surmise that investors then were still in shock from the Great Depression and still didn't have a lot of trust in any financial institution be it banks or brokerages and thus stocks were dirt cheap. Of course there was little in the way of savings or retirement plans a la 401K's, IRA's or defined contribution plans to buy stocks. Finding a 2-cent return coke bottle was a big deal in those days. The investment of choice or necessity was starting a family and kick off of the great baby boom. There were things way more important than the stock market.
Fast forward to today. The baby boomers are nearing retirement. They are worried about their investments. Wealth has been accumulated in homes and in the financial markets, and return "on" their money and "of" their money has growing importance. Perhaps the proper question should be, "Where will my investment be treated best?" along with "Is the market overvalued or undervalued?" With a risk free investment yielding .93% and the S&P 500 earning yield of 3.02%, our valuation models says the S&P 500 is undervalued. Our model is based upon trailing 52-week reported earnings yield compared with treasury bills.
The Fed model compares the forecasted 12 months ahead operating earnings of the S&P 500 with the earnings yield of the 10-year treasury note. Standard & Poor's estimate of these earnings are $55.39, which would put the projected earnings yield of the S&P 500 at 5.53%. The 10-year note currently yields 4.51%, which would say the S&P is 22.67% undervalued.
Based on these two similar models, we can say in the short-term the market is undervalued. A continued rise in interest rates and/or a decrease in earnings could reverse the models.
The best scenario down the road would see interest rates stable and an improvement in overall spending and profits.
The time-tested market adage: "Don't fight the tape" is good advice. Following it will more than often than not keep you on the right side of the market. It has been our experience, over the 34 years that we have been publishing, that attempting to predict the market by forecasting interest rates or the economy will only lead to poor investment results."
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