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Samex Capital's Stock Market CROSSCURRENTS
Alan M. Newman, Editor
The range bound scenario gained more credence in thelast two weeks with the failure of volatility to expand dramatically and no realacceleration on the downside. We have said all along that the range bound scenariowas the most likely case and thus far, the range has held.
But at this juncture, stocks are sufficiently oversold to positthat April’s typical performance will again ring true. Since 1984, mutual fundinflows have increased more than 49% month-over-month into April and there is no reason tosuspect the trend to end now. Support should begin to surface imminently andinfluence prices. The recent print highs of Dow 10,984 and SPX 1229.11 andNasdaq’s December high of 2191 are 5.2%, 4.9% and 10% away, respectively. Ifnearly achieved, these levels would be very decent gains and we would expect these highsto continue to act as substantial overhead resistance.
Nasdaq broke below the important 2008 level highlighted in ourlast issue. This factor reinforces the significance of Dow 10,386 and SPX1163.75. If those levels are taken out, the rationales for bulls pretty muchevaporate in a puff of smoke.
We’re short term bullish but still rate the intermediate termneutral, since the dreaded “Dead Zone” arrives in a little more than amonth. Since 1950, virtually all of the stock market’s gains have come in themonths from November through April. We will cover the “Dead Zone” in depthin the upcoming April 28th issue.
The disappointing technical conditions achieved inthe last 13 sessions of only modest deterioration in sentiment as breadth crumbled (andprices did not) leads us to believe the odds for our Dow 8500 low target for the year haveincreased. Enjoy the month ahead while it lasts.
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It is still quite difficult for most observers to accept thenotion that a secular bear market commenced for stocks in 2000. They would ratherbelieve that the bottoms achieved in October 20002 and in March 2003 were worst possiblescenarios from which only more good times could spring. Amazingly, even withrecoveries measuring as much as 58.5% for the S&P 500 and 52.2% for the DowIndustrials, there is very little if any belief that prices must even suffer acorrection. In fact, as viewed by professional market letter writers, optimism hasbeen abundant all along. The two-year moving average of the bull/bear ratio standsat over 2.5 to 1. Historically, a one-week measure of similar magnitude would byitself, be bearish. Two years? Not a record, but if anything, it should revealhow extended the cyclical bull market has become.
But secular bear cycles do exist, as evidenced by the enduringdevastation that began in 1929 and more recently, from the first jaunt by the DowIndustrials above 1000 in 1966. In both cycles, record highs in the averages werefollowed by many years of underperformance. Of course, bear cycles end as well, asevidenced by the huge stock market gains from 1982 to 2000. And precisely for thisreason, we believe that huge asset shifts are now underway towards the two longest runningsecular bear markets in recent history; Gold and Japan [Editors note: Japan will becovered in Crosscurrents soon]. As our featured chart illustrates, the relation ofGold and the Dow Industrials has been very volatile, ranging from 1.29 in January 1980 to42.19 in August 1999. Eventually, we suspect that the ratio will move back to thepre-mania average of roughly six-to-one. Our "initial" secular bull markettarget for Gold is a ratio of approximately 11, which represents the level at which webelieve the mania for stocks commenced. In the meantime, the two horizontal linesthat abut our question mark delineate the current range; from 22 to 26.5.
This "trading range" has already persistedfor 27 months, and most likely the long lived phenomenon has to do with the continuedbelief that stocks will continue to recover and eventually go on to new highs. Sincewe have already gone on record with a low side target of Dow 8500 for 2005, extrapolatinga range for Gold becomes a simple mathematical exercise of division, by 22 and by26.5. Given the computation, a low in Gold this year could be anywhere from $321 to$386 per ounce. We also believe that there is a decent likelihood that the Dow hasalready seen its high for the year but there is a slim chance that a run for a new recordcould surface late in the year. For the purpose of this exercise, we'll assume a toptarget for the Dow of 11,000, where we would expect ample resistance. The samecomputation places the high for Gold at anywhere from $415 to $500 per ounce. Thusfar, Gold has consolidated well over the last few months and we feel a lot more confidentabout the higher range estimates, from $386 to $500. Technically speaking, the XAUand HUI gold indexes do seem somewhat "tired" and we could conceivably close outany of our Trading Stance positions (see page five) at anytime, but we intend to beholding onto the Investment Stance positions for quite awhile. If we are correct,this bull market is still very much in its infancy.
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ABOUT ALAN M. NEWMAN
Alan M. Newman has been the Editor of CROSSCURRENTS since the firstissue was published in May of 1990. Mr. Newman is also a member of the Market Technician'sAssociation and has been widely quoted for years by the financialpress, media, and other newsletters and has written articles for BARRON'S.
The newsletter is published 20 times per year and focuses oneconomic and stock market commentary, often covering controversial subjects. Severalproprietary technical indicators are usually featured in every issue accompanied bycurrent interpretation. Broad samples of our work can be viewed at
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