For the week of 07/29/2002
I am going to change from the usual format this week, as you will see below.
First, let's talk about gold and gold stocks.
As you may know, I had a modest gold stock long going into Monday morning, and the blast down below 70 in the XAU carried into wave 1 up of the advance from the November 2001 lows, thereby causing the entire advance to be corrective. I bailed and watched from the sidelines for the rest of the week.
It appears that the hedge funds abandoned the reflation bet as we see sharp declines in all the commodity based stocks, including the oils, oil service, and basic materials. There can be no denying that the smart money suddenly likes the deflation bet.
At the same time, there were extenuating circumstances in the gold stocks. Because S&P kicked ABX and PDG out of the S&P 500, we had nearly a billion dollars (at announcement prices) of supply to absorb. That is a lot of new cash to demand of the small band of gold stock investors during a correction. While ABX and PDG are hedgers and have underperformed, they nevertheless have reserves and trade at certain valuations relative to other gold stocks. As those two stocks hit new 52 week lows at the end of the week (and they were the ONLY gold stocks to hit new 52 week lows), the prices of the rest of the pack adjusted downward.
We now have PDG trading at $8, within a whisper of its all time lows. And at the same time, the correction in gold has been mild, as we are still trading above $300. Further, the upward correction in the dollar has been modest so far. In addition, on Friday we touched the longer term rising trend line draw off the November 2000 and 2001 lows at 55, while open interest on the comex gold contracts has been falling nicely, suggesting that some of the speculative fluff might be coming out of the futures market. Thus I took on a small long position in the gold stocks at the close, anticipating a short bounce.
If the delation fears which gripped gold this week are right, then it seems that further dollar weakness is in the offing.
We have a clear case in which the NDX is losing its downward momentum on the weekly charts, while the SPX is gaining downward momentum. Thus, it seems appropriate to focus on the S&P 500 this week.
Several things are important about the above chart.
First, we have a 14 week RSI dipping below the 30 line and hitting a new low. This is a very reliable indicator of a short term bounce. However, because a new low was formed on this momentum chart, the odds are 75% that the S&P 500 makes a lower low in price on the next down move.
The last two bounces off oversold weekly RSI conditions were triggered not by the PPT, but by asset allocators, primarily pension funds, which follow a discipline of resetting their asset mix by selling bonds and buying stocks whenever the bonds get overbought on the weekly chart and the stocks get oversold. It is an elegantly simple strategy that keeps them selling the asset class at a oversold highs and buying the other asset class at oversold lows.
The question of the week is whether these asset allocators will continue the reallocation and perhaps persuade the individual mutual fund holder to stop switching from stock funds into fixed income (doing the opposite from the asset allocators). In the absence of corporate buy backs and foreign buying, it is a two pony show.
In the past, the mutual fund redeemers have stopped selling once the market turns. But we have never seen heavy redemptions mid year, and I wonder if the redemptions will continue in the face of a rally. Perhaps the mutual fund holder is demoralized enough to continue redemptions.
Further to the bearish side, the up-move has not been confirmed by the long bond, which continues in the rally mode. And the junk bonds are falling and did not respond at all to the Wednesday rally. The credit markets are saying deflation lies ahead.
If so, then we proceed on down into the 1994 lows by October. And as you can see from the two charts below, there are excellent percentage gains yet to be had on the downside.
First, a log scale daily chart of the SPX back to 1994.
Finally, a log scale weekly chart of the NDX back to 1994.
I will be looking for an entry long in the NDX and SPX on Monday, provided trin behaves.
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