Market Alert 02-06-01 – DOW Near-Term Top
Currently, the DOW is putting in another key top at 11,035 today and is offering a desirable level to further reduce stock holdings. The NASDAQ and the S&P 500 appear to be more vulnerable with lower lows expected before the DOW
Indications from the bond market and the US dollar that we could see a 100 to 200 DOW point selloff tomorrow due to some fundamental event either occurring after the close today or during the trading session tomorrow.
There will be further details provided in the February newsletter due for release in the next few days.
John T. Moir
Worldwide Investment Manager
Wavetech Enterprises, LLC
Phone: (775) 841-9400
WAVETECH ENTERPRISES, LLC
By: John T. Moir
Chief Editor: John Allen
Associate Editor: Barbara Crenshaw
Position overview . . .
In addition to the long-term view of the stock market provided in the January 7th newsletter, we also stated that we expected the DOW to be range-bound between 11,200 and 10,000 and that the T-Bill market was overbought and offered a desirable level to hedge or a shorting opportunity in the near-term. During the course of the month, the DOW rallied as high as 11,028 which will now offer stiff resistance in the future instead of the projected top-end range of 11,200. The suggested short position in the T-Bill market offered a perfect entry on January 8th and a two week trade profit before arriving at supportive levels. With the primary trend for higher prices and lower yield, we repositioned in the treasury instruments on the long side and further added to the profits for the month.
With the DOW not reaching the upper end of the suggested trading range, no DOW trade was executed; however, the various treasury instruments provided profits with the initial short, and timely reversal at the end of the month. Depending on the five different trading models used, the net returns on investment (including fees) for the month of January 2001 was between 6.4% to 4.5% with the more conservative models outperforming the more aggressive ones. This inversion was due to the lack of available trades in the stock indices and below normal performance in the foreign currencies, however with diversification, all models still earned a rate of return well in excess of industry averages.
Looking forward . . .
In recent days, the DOW has rallied as high as 11,035 before declining to within its primary range of between 11,000 and 10,350. We would suggest using these temporary rallies to further reduce undesirable stock or mutual funds with the objective of increasing your overall cash position. Obviously, there could be tax consequences involved, but by taking action early in the year, other more effective forms of investments like in the futures/derivatives markets can be considered where profits can be generated by either going long or short. Our wave pattern analysis indicates that we could remain within this range for the month with better opportunities for constructive profits available in the various treasury instruments and different currency spreads. Also, there are indications that the entire treasury yield curve should remain bullish with lower projected yields and higher treasury prices until August 2001 with normal corrections along the way. In addition, should the DOW break below 10,350 then our next levels to monitor would be 10,000 and 9,750.
With the Fed reducing interest rates by 100 basis points in January 2001, they are artificially supporting the DOW stocks while the primary stocks within the NASDAQ and the S&P 500 are continuing their primary bear market trend. Eventually the DOW will resume this trend lower as its “safe haven” characteristics diminish.
CONTINUED COMPLACENCY AT THE HIGHEST LEVEL:
Recently, we tuned into the PBS Wall Street Week show and were surprised at what we saw. The “10 Elves,” representing mainstream Wall Street technical/strategic pundits and forecasters, had not a single bear among them! For both the DOW and the NASDAQ over the next three months, nine were bullish and only one was neutral, and they had apparently been that way for some time. This was after the worst decline in history, and the NASDAQ index 55% off its highs, and an S&P 500 at its lowest weekly close in a year after its worst annual decline in 23 years. Something is wrong with this picture.
The whole psychological cycle of major market advances and declines is that, almost by definition, markets advance until almost everyone is bullish, and then they decline until almost everyone is bearish. And yet after these huge declines, the “Elves” are still bullish. We find this truly disturbing, because it implies that a sustained rally cannot or should not occur until at least a majority of these pundits has thrown in the towel and turned bearish, and that probably can happen only with further market declines.
THE EURO — AN ALTERNATIVE CURRENCY TO THE US DOLLAR:
After many attempts by the European Central Bank (ECB) to support their ailing new currency by raising interest rates, decided to leave rates unchanged at their most recent ECB meeting. In the past, the ECB has been raising interest rates with the attempt to bolster the euro instead of focusing on Europe’s growth prospects.
Europe’s monetary policymakers have failed for so long because they relied too heavily on conventional thinking where they expected higher interest rates would lead to higher returns on deposits, and lure money into Europe as well as raising demand for the euro. They set out to bring European money rates up in order to compete with higher rates in the US since the US Federal Reserve was raising rates at the time and ECB found itself chasing American policy.
While the Fed pushed interest rates in the US up by 175 basis points (1.75%) between June 1999 and May 2000, Europe’s central bank raised its interest rates for a total of 225 basis points (2.25%) in the same period. Yet the euro declined. From its inauguration January 1999, it fell nearly 30% against the dollar and even more against the Japanese yen and the British pound. This policy completely missed the cause of the euro’s weakness. Money did not flee Europe because returns on overnight deposits were inadequate, but because Europe’s economic underpinnings were weak and the economies offered little promise for the future.
Investors have long noted the sorry consequences of Europe’s legacy of heavy-handed regulation, high taxes, and centralized control. They have seen intrusive rules and excessive government guidance create rigidities in labor markets that discourage hiring, firing, and any effective business restructuring. They have become increasingly aware of how European firms, struggling in this environment, have neither created new jobs nor experimented with technology and other labor-saving innovations. With these characteristics in mind, the euro’s decline either accelerated after an ECB rate increase or continued as if the rate hike had not occurred. In only one instance, the rate increase of April 2000, did the euro rise in response, and then only for a short while by only 1%.
This vicious cycle prevailed for more than a year, but now it is beginning to change. The recent softening in the US economy and the decision by the US Federal Reserve to cut short-term rates by a full percentage point in January have taken immediate pressure off European policymakers. But more important fundamentally, and for the longer-term outlook, Europe seems to have awakened to its basic problems.
Recently, the ECB President, Wim Duisenberg, expressed concern for Europe’s growth prospects and suggested that rate increases would stop. Declining rates would not solve the euro’s problem, much less Europe’s economic difficulties, but at least such a switch in policy would avoid compounding them. These comments have started to support the currency with a recent price of 92.5 cents as compared to it’s low of 82.5 cents last October.
The ECB, or course, can only take things so far. The rest is up to the national governments. Recently, Germany has at least made a start with business-tax cuts. And that France and Italy have indicated that they will follow German’s lead. It is a modest beginning, given the size of the task, but for currencies and financial markets, even modest starts matter.
Changes, however small, that effect perceptions of the future will also later investment decisions at the margin. Those adjustments, in turn, will alter values and modify trends. The process will gain momentum if and when Germany’s tax cuts begin to bear fruit in economic growth and stronger profits for German business, and will intensify if French and Italian cuts also succeed.
With the change in ECB policy and further business-tax cuts in several countries, we expect the euro to rally to parity, and could move to as high as 1.20 if the US goes into recession which appears very possible. This translates in to a US dollar decline of between 8% to 25% with the dollar completing a bear market rally today as this newsletter is being released. The larger percentage decline would be more likely if the US goes into a prolonged recession.
With the stronger possibility of a US recession looming and the depreciation of the US dollar against European currencies, we would suggest that investors with US holdings (i.e. real estate and/or equipment), consider hedging their equivalent value in the futures/derivatives market. This will defer various tax consequences due to liquidation, and maintain (preserve) the overall monetary value as the US dollar declines. Should there be any questions regarding this hedge process, the information discuss within this newsletter, or our management services, please e-mail or call the number provided below and we will be glad to assist with further clarification.
John T. Moir
Worldwide Investment Manager
Wavetech Enterprises, LLC
Phone: (775) 841-9400