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REALITY CHECK UPDATE
Published Every Tuesday and Friday

ARCHIVE:    APRIL 2000-SEPTEMBER 2001  

Contributed by Mitch Harris
President: Market Trend Realities,
Editor: The Reality Check Newsletter

September 21, 2001

STOCKS
REALITY RATIO: -0.419
Last Signal: 09/07/01, TRADING BUY
Dow: 9,605.85 OTC: 1687.66 

Last week s continued selling cascade quickly brought the sum of our trading indicators to its deepest oversold reading since reaching -.484 on March 23, at the last significant intermediate turning point. We THINK we are at a similar point now, but still must caution that while the line has reached its extreme, the slower moving average lines are still well above and falling. This indicates that their could be more trouble down the road, after the markets unwind their current oversold condition. While the extreme volatility of the past three weeks has whipsawed the Reality Ratio, we hope it is getting back in harmony with the markets. Yesterday s crash will serve to drive the Ratio to an even greater oversold extreme. This will help to pull down the moving averages with it and while this has been perhaps the most difficult market in a generation, we think the next big move will be to the upside. While we have been too early on expecting this and would hold off on committing new funds until we see more convincing signs of an upturn, we think it is close and will be significant. 
FRIDAY, September 21, 2001: US markets continued to melt like ice on a sunshiny day, as the sabers of war are rattling louder by the hour. Last night, before a joint session of Congress and the entire world, President George W. Bush declared war on Terrorism, giving the renegade Taliban dictators of Afghanistan and all others who run countries that harbor terrorists the ultimatum, "givem up or we re coming to get em." As it was stated that there are some 60 countries that harbor the vermin we plan to "smoke out of their holes", this may truly be considered the declaration of World War III. While I don t want to be among the loudest of alarmists, this is most disturbing because we cannot even determine exactly who we have just declared war on. Perhaps this was done in the hope that they will show themselves, like in an old western where the hero yells out from the middle of the street, "come on out and show yourself". These snakes are not likely to accommodate, leaving us with no other choice but to pursue them. 

Equity markets have not managed to find its footing, continuing to fall during almost every minute the markets have traded. The tremendous uncertainty over the pre-and now post attack economy and military future has portfolio managers dumping stocks at wholesale prices. This is normally considered the capitulation that leads to solid market lows, but for the first time in a generation (I can t believe I m saying this), this time it is different. While this may still be capitulation that should soon lead to a powerful market rally, the fact is that we can only look to what has happened in past history during similar situations to get a hint of how human behavior may act and react. The only other time in modern history that we can refer to was the attack on Pearl Harbor, of course, on 12/7/41. The markets were already in decline at the time of the attack, similar to the markets of today. According to a 9/12, special report by Tom McClellan, "the market didn t find its footing until the US Navy s victory at the battle of the Coral Sea." This was on 5/7/42. OF course, we hope for a much quicker victory of some sort now, and are likely to be days away from some sort of US military action. 

We continue to see many reasons for the markets to have the potential to bottom at any time. Instead of regurgitating the same reasons that we ve already given, Let me just say that the markets are now deeply, deeply oversold. Many indicators that we follow are at levels that have actually marked bear market bottoms over the past 30 years. Still others have reached or approached record oversold readings. While the term "oversold" is not as reliable in a grueling bear market, when such dramatic extremes are reached as they are now, they must be viewed as meaningful. 

Extremes have been reached by the daily CBOE, OEX & Equity Put/Call Ratios; the short term McClellan Oscillator, which ended yesterday at a reading of -363, exceeding -300 for the first time and the lowest reading I have found in my records going back to 1990; 14 Day RSI is at its lowest reading going back to 1970. The NYSE percentage above their 10 week moving average was down to just 13.89% after Wednesday s close, and must be lower now. We can list more, but prefer to save it for our September issue of the Reality Check Newsletter which will be published in the next few days. Finally, Each morning s very sharply lower opening is a sure sign that a great deal of the selling is coming from foreign orders that have built up overnight for execution when our markets open. This is "usually" a sign that the selling is near an end, as they are often the last to sell.

In terms of our Elliott Wave Analysis, the new lows can now only be counted as something other than intermediate wave "B" declines. For the Dow, this must either be within primary degree wave "C" of larger cycle degree wave (1) down, or within the even more immediately bearish cycle degree wave (3) down. We hope we are still only completing the first wave of decline, which is supported by technically oversold extremes as illustrated above. 

The current decline began from the 5/22, 11,350 market high and has snowballed beyond what we consider a normal period for most selloffs (in terms of "time"). This too supports the case for some sort of tradable low being close at hand. At least, conditions are right for it. Initial resistance is near 9500, and then at 9870. Again, we don t hold out much for support levels, but the market closed just below support near 8400 yesterday, and this morning s futures are down about 450 points and VERY volatile. It looks like a very messy opening on this morning s triple expiration of options and futures. This may also provide the panic opening that can attract short covering and bottom fishers. This hope/guessing where the sellers may be through is what has kept the markets dangerous, and this will simply continue until it has run its course. 

TREASURIES

Treasury yields spiked sharply higher on the fear that a war, bailout of the Airline Industry, aide to victims of the WTC catastrophe, an already lousy economy and committed funds for tax rebates, and perhaps most significant, the lost PEACE DIVIDEND, all combine to assure the markets that the Treasury will be heading back to the markets with loads of new supplies of bond issues. The cost for all of these accumulated obligations will be measured by how high the yield rises, and of course, how afraid the markets become of how much higher yields might continue to rise in the future. 

Failing to make progress below our targeted Fibonnacci resistance at 5.363% (.786 retracement), the yield has reversed to a closing high of 5.626% yesterday, breaking what we had been targeting for some time as key short term support at 5.617%. This confirmed a bearish trend reversal on our short term P&F Chart, and also triggered a High Pole at the Bearish Resistance (HPBr) sell alert on our longer term P&F Chart. The yield will confirm a longer term sell signal with a rise to 5.80%, but will need to rise above the 5/15, 5.901% high. This would confirm that larger degree wave (3) of the longer term bear market was underway. Resistance is now near 5.51%, 5.40 - 5.34% and then at the 5/22, 5.217% low. We remain long term bearish against this lower level. 

GOLD

Gold & the XAU remains perhaps the greatest beneficiary to the world s tremendous new woes, as capital flight is re-discovering the virtues of owning hard assets. It has remained very firm against weak equity, bond and currency markets throughout the world. We are therefore changing our short term view from bearish to neutral. Our long term outlook had always remained very bullish. We would turn more optimistic now, except that it is already up quite a bit into today s quarterly triple expiration of options and futures. Also, next week the OTC options will expire. These expirations typically exacerbate price movements, so we still want to see what happens after these events pass. This morning s spot gold price is up $4.50 to $393.80 per ounce. 

Goldman Sachs upgraded Newmont and Echo Bay Mines yesterday. This is significant because Goldman has been considered an instrumental player in the Bank of England s major gold sales in recent years. It appears they are no longer recommending the reduction of such inventories, now that the "diversification" that had been targeted for the proceeds from those gold sales has lost the world s support, making further selling a BAD IDEA. 

Stated a week ago last Friday, some of our trading indicators had become oversold and did offer the potential for a rally to begin from those levels. Although there were extenuating reasons for the upturn, it came at the right time because virtually NO damage was done to the market during the recent consolidation as prices held up well above the support at 52. We are raising our initial support to the 9/6, 54.48 low, with more critical short term support still near 52. Beneath this, longer term support remains at the 2/14, 45.64 low and then at the 7/14/00, 41.61 all time low. Prices pushed above Monday s 58.96 high yesterday to close at 59.31, their highest close since the 59.68 close on 6/28. To confirm the upturn, a breakout above the key, 6/14, 60.39 high is needed, but we must also point out that our biggest concern is that our longer term P&F Chart remains on a "High Pole at the Bearish Resistance (HPBr) after a Buying Climax (BC), from its 5/18, 66.54 high. While we ve pointed out that a clear breakout above 60 would be very bullish because it would also break above the long term downtrend line drawn from the 2/7/96, 155.60 high, the XAU still needs to contend with this more substantial technical barrier and bearish chart formation before the long term trend can be considered bullish. 
 

PORTFOLIO CHANGES

Friday, September 21 , 2001: So many things have kept our head spinning in the past week that we have failed to keep up with some stop loss levels and adjustments that have been hit, so we are revising and updating updating them now. 9/5: AngloGold (AU) hit the 17 stop (+27.45%), after they announced the buyout of Australia s Normandy Mines to create the world s largest producer. This is one of our favorites and we will add it back on this morning s opening. 9/17: US Steel (X) hit the 17 stop (+8.8%); Outback Steakhouses (OSI) hit its 26 stop (+6.55%); 9/18: Bank One (ONE) hit the 31 stop (+1.6%). Motorola (MOT) and Tricon Global Restaurants (YUM) also hit their stops, but we haven t yet done anything about them. [Part of our offensive is to have a good defense! That means limiting losses and protecting gains]! 
Article contributed by Mitch Harris: President, Market Trend Realities & Editor, The Reality Check Newsletter, and reprinted here with permission. 

Market Trend Realities (MTR) is a Registered Investment Advisory which manages personal, corporate, Trust, and retirement accounts on a fee only basis. Several low cost, flexible management fee arrangements are available. Investment Advisor, Mitch Harris has studied the Point & Figure Charting Method under the direct supervision of Michael Burke, Editor of the prestigious Investors Intelligence research organization. Management is based on a unique combination of technical analysis methods and tools which include, The Point & Figure charting method, Elliott Wave Analysis & techniques, industry group analysis, cycle analysis, Relative Strength Analysis, Stochastics, and investor sentiment studies. MTR offers a very uniquely structured managed mutual fund program using the RYDEX family of mutual funds, which offer outperformance potential whether equity markets are rising OR falling! Inquiries are welcome by calling us at
(513) 421-8737,  Fax: (513) 421-8733 ,  or by email at: mtr@fuse.net

MTR also publishes a monthly investment newsletter called "Reality Check", which offers technical commentary on the stock & bond markets, the Dollar Index, gold & gold stocks (XAU), Treasury yields, utilities, investor sentiment, and Federal Reserve policy. It also offers stock trading recommendations each month with price targets, stop loss points and insider activity. There are 4 trading portfolios, including a short selling account (we are very proud that our short sale recommendations have averaged 12.5% "compounded" during the roaring bull market of the last 5 years). Short term market commentaries are updated on Tuesday and Friday mornings, along with portfolio changes on this web page. They are also emailed for free to anyone who provides us with their email address. The regular subscription rate is $200 (US) per year. Samples are available upon request. MTR will be happy to send information on any of the above mentioned services. Please email us your home or business address along with your daytime phone number and specify your interest(s). 

 
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Last modified: September 24, 2001

Published By Tulips and Bears LLC