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[TTHQ Staff]

BEING STREET SMART ____________________ Sy Harding Stocks, Gold, Bonds! March 4, 2005. On the stock market; I’ve been bullish on the market since the beginning of the market’s favorable seasonal period last October. I’m still bullish, at least for the time-being, but advising avoidance of small and speculative stocks. They’ve had their run. Focus on the blue chips, that is, the stocks of the Dow and S&P 500. In fact, our technical indicators triggered a sell signal on the Nasdaq, the home of speculative stocks, in mid-January. My advice is also to avoid the mine field of individual stocks, where one piece of unexpected news can send them into a tailspin, focusing instead on sector and index mutual funds. My preference is exchange-traded-funds (ETFs) that can be bought and sold throughout the trading day, and do not have minimum holding periods. I particularly liked the healthcare sector in October, and still do. Just as importantly, prepare to make gains from the downside once the market’s favorable season ends, which will be sometime in the April to June time-frame, as I expect the market will run into serious trouble this summer, with its low for the year taking place in the October-November time-frame. That downside positioning can be in the form of bear-type mutual funds, such as those available at Rydex Funds (RydexFunds.com), Pro-Funds, (Pro-Funds.com), Potomac Funds (PotomacFunds.com), the Prudent Bear fund (Prudentbearfund.com), all of which are designed to move up when the market moves down. Downside positioning can also be accomplished with short sales of exchange-traded-funds, or of individual stocks. But not just yet, the market remains in its favorable season, and as I’ve been pointing out in recent columns, the economic numbers continue to come in with a strong enough mix to probably support the market for awhile longer. Among this week’s economic reports, the Chicago Purchasing Managers Index for February rose to 62.7% from 61% in January. A number above 50 indicates continued business expansion. The ISM non-manufacturing index rose to 59.8 in February from 59.2 in January. Within the latter index, new orders rose to 61.6 from 60.5, and the employment index rose to 59.6 from 52.2. On Thursday it was reported that corporate productivity in the December quarter was much stronger than had been previously reported. It was revised up to 2.1% from the previous report of 0.8%. And since there has been no loss of momentum so far this quarter, that indicates this quarter may wind up being stronger than the current estimates. And on Friday it was reported that 262,000 new jobs were created in February, at the high end of forecasts. Not that all the economic news this week was positive. We also learned that new home sales fell 9.2% in January, and the inventory of unsold homes rose by 3.5%. Then there was the further spike up in crude oil prices to a new high of $55 a barrel, which along with indications that interest rates will continue to rise for the rest of the year, adding to inflationary concerns. So the economic fundamentals continue to support the signals of our technical analysis and charting, that the market can probably hold up for awhile longer, but that the pressures are building for the serious troubles I expect once the market’s favorable seasonal period ends. On gold: The same underlying conditions, of rising inflation and rising interest rates, plus the concerns in currency markets about the weak U.S. dollar, U.S. budget and current account deficits, support the bullishness for gold that is in our technical indicators and charting. Our technical indicators triggered a timely sell signal for gold on December 1, after gold had become quite overbought. But in my column of January 1, titled Gold Should Shine in 2005, I said “My newsletter issued a sell signal for gold on December 1, and although I expect gold stocks still have further to go on the downside, after some further decline, I believe gold will find an important bottom and resume its bull market.” And sure enough, our technical indicators triggered a buy signal for the gold sector in early February and gold has been to the upside since. On bonds: I was wrong with my sell signal on bonds of last October, and bearish comments about bonds in my columns since. It may sound like an excuse, but it was puzzling that bonds continued to rise in price after the sell signal in spite of rising oil prices and other signs of inflation, and with the Federal Reserve having begun a steady series of interest rate hikes last June (along with pronouncements that it will continue with more rate hikes well into this year). But perhaps I’ll turn out to have been very early rather than completely wrong, since bonds now appear to have finally topped out. My holding in the bear-type bond fund, the Rydex Juno fund, designed to move opposite to bond prices, was underwater by as much 8% a couple of weeks ago. But with bonds down for the last three weeks, the holding is ‘only’ down 4.8% now. Anyway, no guarantees for sure, but those are my expectations; still bullish on the stock market for the time being, but expecting a serious market decline to be underway by summer; bullish on the gold sector (but always keeping a close watch on this volatile sector); and still bearish on bonds. Sy Harding is president of Asset Management Research Corp., DeLand, FL, publisher of The Street Smart Report Online at www.streetsmartreport.com and author of 1999’s Riding The Bear – How To Prosper In the Coming Bear Market.