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April 18th, 2004
Homeland Security Stocks, Interest Rates
Table of Contents:
(click on the numbered sections below and you wil be taken to that corresponding section)
1. Administrative:
2. General Market Analysis, and Commodities:
3. Metals (Gold / Silver):
1. Administrative Comments:
I am subscribing to a new service to provide stocks with strong insider data. Hopefully the new service will be better, as I have been unimpressed lately with the current service I use. I will update the insider section later this week once I have a chance to look at it.
2. General Market Analysis and Commodities
Let's look at the charts:
The market is down, but not out. The market could still recover and rally, but it needs to do so soon.
After breaking the bullish flag via a gap up on good volume, the Nasdaq has fallen to not only fill that gap, but has fallen all the way to the support on top of the downtrend line. If the Nasdaq is going to recover and rally, then it needs to do it it quickly to maintain this support. I read several newsletters and from what I've been reading, the 'Bears' are out in full force again and many newsletters have turned bearish. However, the Bulls are not totally out yet, the Nasdaq could still recover for one last rally this year, however it had better do it quickly.
If the Nasdaq does recover, the next major resistance levels are the three previous highs (noted by red dotted lines) at 2070, 2095, and the January high at 2155.
Notice below how the Nasdaq has both fallen on high volume and risen on good volume, interesting phenomenon. Also, remember that news can 'trump' the charts, therefore any significant earnings news, or Iraq news (positive or negative) could strongly affect the market - therefore be nimble and take profits quickly until a strong trend emerges - we are in the middle of earnings season.
The Semiconductor Index strongly affects the Nasday, i.e. where it goes, the Nasdaq will eventually follow. The Semiconductor Index needs to strengthen soon, otherwise it will head down and so shall the market. Currently, the Semis are resting on the 200 MA and resistance is at the downtrend line. Also notice that the 50 and 200 MA's are converging suggesting a big move in the future.
Belkins Nasdaq chart is panning out so far, but it could still turn up, though history is on Belkins side. I personlly still think the market could recover and rally once more into summer, but we shalle see:
The DOW Jones:
The DOW Jones is resting right on support at 10325 and needs to rally and break the downtrend line near 10500 to ignite a sustainable rally. Support levels are 10325 and finally 10000 if 10325 fails to hold.
Longer term picture of the DOW. Notice how the broken uptrend line became resistance on a rally retest.
The S&P resembles the DOW Jones as it is currently resting on support and needs to rally. Support is at 1125 and the S&P 500 needs to rally soon to maintain support.
Last week I stated that long term interest rates looked like they were on the verge of breaking a bullish flag pattern to the upside: Well, it looks as though 10 year rates have broken the flag to the upside!
The long term chart of 10 year rates shows that a long term downtrend line has been broken, this is signaling higher interest rates with the first target at 5.5% (noted by the dotted line.
One more thing, those of you who have an account with Interactive Brokers, can play Bond Futures. Remember, as interest rates go up, Bonds fall, therefore you would want to short Bond Futures. I am personally going to try this myself, though small at first, once the downtrend line is broken.
Remember, futures are extremely volatile and risky, therefore consult a professional before doing so.
HOWEVER.......have long term interest rates really broken out?????
The chart below is the 10 year Yield chart above, but it is plotted on a logarithmic scale, while the chart above is plotted on a linear scale. Notice that when plotted on a logarithmic scale, 10 year interest rates have not in fact broken out, but are close to doing so. Some traders only use linear charts, however the chart below shows that you should at least use both to confirm a breakout.
If the logarithmic chart below also breaks out, then higher interest rates are definitely 'In the Bag". The chart below is one to watch very closely because it will effect us all.
What do higher interest rates mean? Rising interest rates would signal that inflation is creeping into the economy, of course how could interest rates not increase with an ever increasing money supply via M3 and the rising cost of raw materials or commodities that makes the cost of everything go up. Also, the 'supposed' economic recovery we're in, will stop dead in its tracks. Of course, the booming housing market we all have enjoyed will come to an end, i.e. the 'Housing Bubble' will burst! If you haven't already refinanced your house in the last few years, then I suggest you do it now before rates go back up, this may be your last chance to borrow cheap money.
When the Housing Bubble bursts, your house, which has been going up in value year after year, will stop going up. Right now, it's a 'sellers market' in the housing sector, but it will turn in to a 'buyers market' when rates go up.
Remember, the Federal Reserve can only manipulate short term rates, they have nothing to do with long term rates. Bond trades are the ones who really determine the fate of long term interest rates.
Rising interest rates will hurt the housing market, HGX pulled back to retest support which held last week. However, if long term rates go up, support will fail and the component stocks listed below will become great long term shorts.
Not surprisingly, the Real Estate market has really taken it on the chin with the strong possibility of higher interest rates.
Interestingly, the Medical stocks are breaking out to new highs again. Biotech and other medical related stocks are also strengthening. You might want to consider playing breakout stocks in this sector.
Commodities:
Commodities are once again on the verge of breaking to new highs, as evident by the chart below:
On a long term basis, the CRB index (which is a composite of 17 various commodities groups) is also on the verge of breaking out to new highs.
The 'King' commodity is crude oil because it affects the price of everything. Crude oil is nearing resistance at $38.35. Likewise, oil stocks are doing well
However, the important resistance level for crude oil is $40, if this breaks to the upside, the economy is in trouble.
Coal is another commodity on the verge of breaking resistance - indicative of a strong CRB.
Natural Gas is breaking out to new highs - indicative of a strong CRB.
Aluminum is another strong commodity breaking out to new highs:
XLU, or Utilities ETF, has fallen to major support and bounced off it. This ETF could now run higher as it has found support
Conclusion: Commodities look strong, however the wild card will be the strength or weakness of the US Dollar. I will discuss this further down in the gold/precious metals section.
Palladium:
Most of you know that I have been extremely bullish on Palladium since late December 2003 when I pointed out that its chart had formed a nice base and was close to breaking out of a symmetrical triangle. Palladium was around $210 at the time. Palladium subsequently high a high of almost $340, however it is finally beginning to pullback. A healthy pullback/consolidation is needed to make Palladium a compelling short term investment again. Nothing goes straight up, and palladium is no exception.
3. Metals (Gold / Silver):
What a week for gold and gold stocks, last week saw a vicious pullback in both the metal and gold stocks. What caused this weakness? The US Dollar is the 'usual suspect':
Last week, the Dollar broke resistance at 90, the next resistance is near the 200 MA, could be slightly above or slightly below. When the Dollar starts to fall, support is at the uptrend blue uptrend line.
The strong Dollar is causing golds weakness. Gold will remain weak as long as the US Dollar remains in an uptrend.
The long term chart of Dollar shows the big picture: The Dollars major resistance point is the red downtrend resistance line.
Once again, let me re-iterate how important this chart is: If the Dollar finds resistance at the downtrend line and begins to head back down, then gold will recover and break out to new highs. However, if the Dollar manages to break the downtrend line, then gold and corresponding precious metal stocks will likely experience a VERY large pullback that would scare even the most devout 'gold bugs'.
As I stated above, gold strongly pulled back last week and found support near $400 or on the broken downtrend line. Gold may rally in the short term, and this is the place to do so.
On a longer term chart, you can see that gold metal has fallen all the way to support at a long term uptrend line. If this line fails to hold, the next support would be near the 200 MA below.
Comparison of Gold to other currencies:
Relative to the Canadian Dollar, gold appears to have bounced off a support uptrend line.
Gold relative to the Japanese Yen, gold is still in a strong uptrend and is nearing support at an uptrend line.
Gold relative to the Australian Dollar shows us that gold has fallen to support on a broken downtrend line.
Well....it finally happened, silver pulled back hard. This was not surprising as silver was going parabolic after hitting a high of about $8.50.
Anyway, silver has fallen to a strong support level at $6.80 which thus far is holding.
Gold Stocks:
Gold stocks have obviously pulled back strongly along with gold metal. The HUI is trying to bounce off the 200 MA, but has strong long term support near 200, noted in yellow. Notice the 3 moving averages are now converging once again which hasn't happened since last summer:
The longer term chart clearly shows the long term uptrend support line for the HUI:
HUI components: NEM, GFI, FCX, CDE, BGO, HL, GSS, GOLD, IAG, AEM, KGC, GLG, MDG, GG, HMY
The XAU chart looks similar to the HUI, and long term support exists at the yellow shaded region near 89.
As far as gold stocks, many are at short term support levels or have broken them. Also, some gold stocks appear to have no real pattern, such as GFI:
However, the longer term chart tells us more about GFI, nice support at an uptrend line. When referring to gold stocks, be sure to also look at the long term charts.
The last chart I'll leave you with tonight is another long term chart of the HUI: Notice that in the past, great buying opportunities come along when the HUI is near the 200 MA. Gold stocks are in a bull market and during bull markets, buying opportunities happen when stocks pullback to their 200 MA - which doesn't happen very often. When such an event occurs, long term investors need to buy if they believe in the bull market, as it is one of the lowest risk times to buy.
Currently, the HUI has once again fallen to the 200 MA and has even formed a bullish flag.
Here's a few thoughts:
Short term traders should probably look elsewhere for buying opportunities in sectors or stocks that are breaking out or are strong. Gold could be dead money for awhile while until it consolidates.
However, long term traders should take heed and think about beginning to buy long term gold positions once again. This will be very difficult to do, I've noticed that many gold newsletter writers have turned bearish. Remember contrarian investing: The best time to buy is when everyone is negative, and the gold market has become negative recently. This is a very hard thing to do, go againts the grain. I don't think there is much more downside left in gold stocks, so I am going to start accumulating gold stocks for the long term once again.
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