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February 28th, 2004 - Doom and Gloom?


Table of Contents:

(click on the numbered sections below and you wil be taken to that corresponding section)

1. Administrative - insider section:

2. Relevant news for this newsletter

3. Doom and Gloom

4. General Market Analysis - Indicators, Nasdaq / DOW / S&P:

5. Metals (Gold / Silver):

1. Administrative Comments:

First let me state that this newsletter is a long one.

Anyway, I hope you all enjoy it, it's a nice day out today where I live (I live in the St. Louis Area, any of you live near me??). It's such a nice day and I'm on the dang computer, lol.

I finally added a couple insider picks to the insider sections - one Long and one Short.

I subscribe to a service that provides real time insider buying and selling on a weekly basis and I've notice something very interesting that could spell trouble for the general stock market.

The insider data I receive is in descending order for both insider buying and selling. I typically review the chart patterns of companies within the top 10% for insider buying and selling.

During the Cyclical Bull Market of 2003, the insider selling usually averaged about 20 - 30 million worth of stock sold for the companies within the top 10 weekly insider sells. Also, the insider buying averaged about 20 - 100 million for the companies in the top 10 weekly insider buys.

However, recently the insider selling has picked up dramatically: For example, I now see companies with insider selling of almost a billion dollars, with many now averaging well over 100 million in the weekly top 10. In other words, insider selling as increased by a factor of 10.

Also, insider buying has dramatically decreased:  Last year, the top insider buying would average well over 20 - 30 million for the top 10, now I rarely see anything over 10 million.

This change in insider buying / selling could be a red flag for the general market:

Anyway, I added only one new long and one new short this weekend, UCOMA (Long) and APH (Short).

Ucoma has had strong insider buying during the last 6 months and has an unbeliveably low PE ratio of 1.17!

APH is a stock that saw 5 insiders dump almost $500 million worth of stock between February 23rd and 24th. AHP already broke support, but may be shortable on a bounce.

2. Relevant articles:

Greenspan Urges Social Security Cuts

World oil demand still surging

Costs of Transporting crude oil soar

Hubbert Peak of Oil Production

this next one is a bit too doom and gloom, nevertheless it's worth a read.

Life After The Oil Crash

3. Doom and Gloom

This weekend, I'm in the mood for some 'Doom and Gloom', I feel like scarring you all! Actually, the information being presented is not meant to be taken as doom and gloom, but I imagine some of you will take it as such. Actually, I am a very strong optimist, but I'm also a realist and like to look at all the facts, whether they are negative or positive. Anyway, I feel this information needs to be stressed so that you are aware of it, and are not caught blind sided one day in the future if it all comes to fruition.

The first issue I'd like to address is the comments Greenspan made on Wednesday 25th. about Social Security. On Wednesday, Greenspan shocked the nation, and possibly the Bush Administration, by proposing future cuts in Social Security Benefits rather then raising taxes. Greenspan said that Social Security will have shortfalls after 2018. Greenspan is worried about the huge government deficit and the record personal debt levels of the average American.

What can I say, better late then never I guess. Greenspan does not have to worry about getting re-elected, and this issue is a sore spot for George Bush who just seems to spend, spend spend. George Bush is supposed to be a republican, but his spending is far worse then any Democrat?

Anyway, unless you were under a rock, I'm sure you've all heard this news. My point is that you cannot rely on the government to take care of you in the future. If you are retiring 5, 10, 15, etc years from now, do not even count on having Social Security as part of you monthly cash flow. You must take steps now to insure your future financial footing is strong and self reliant.

The debt in this country, personal, corporate, and institutional government is simply staggering and terrifying. With so many jobs continuing to leave this country, illegal immigration, more and more laws being passed everyday taking away our personal freedoms, rising commodities and oil prices, this country could have big problems in the future. Also, as you will see further below, rising commodities, especially oil, will likely cause inflation to rise significantly in the future. Interest rates are currently low, but even Greenspan warned that if the huge deficits are not addressed, long term interest rates will have to be raised.

In other words, things could get a lot worse economically in the years to come. To the Laymen, currently the economy looks great, rising GDP and strong growth, but there are real economic problems underneath the surface that are rarely discussed by the general media and the politicians. My point is that you need to prepare yourself to deal with the ramifications if our economy is hit hard in the future with recessions and possibly even a depression like the one in the 1930's in the years to come.

If such a scenario happens, the people that will be hit the hardest are the ones with high personal debt levels, credit cards, mortgage, and low savings - which now includes a largest percentage of the US population in history or that of any nation in history. The best way to protect yourself is to pay off your debt as quickly as possible and become as close to debt free as possible. This is, of course, easier said then done I know, however one way to help you achieve this is to grow your capital as quickly as possible. Commodities are in a long term Secular Bull Market, and long term investments in this area will reap vast wealth over the next 5 - 10 years. Precious metals such as gold, silver, and their corresponding stocks, as well as energy stocks such as electric, oil and natural gas will out preform in the long run.

Look, I know it's not fair, we've all been paying into the Social Security system for years and that money is owed to us. However, who knows what will happen in the future, forget about what's fair or not fair and take the steps now to secure your financial future, you owe it to yourself and your family!

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The next important, and scary topic is the commodities boom, especially OIL., which is the King of commodities. The future of oil worries me the most. I will discuss this further below in a concept called, 'peak oil'.

Last week, the CRB made another higher high and closed at its highest level in close to 20 years. The CRB index is in a strong long term Secular Bull Market that will last for many years to come. Long term investments in this area will reap vast wealth for those of us who stay invested in this area for the long term. One cannot forget the mania in internet stocks in the late 1990's; well my friends, commodities like gold and silver stocks will probably one day reach internet mania levels.

Huge breakout for the CRB.

The next target is 280 for the CRB, the high set back in 1983 and 1984. Commodities have entered a long term Secular Bull Market that has only just begun....

Back to oil: Oil broke resistance last week and is now well on its way to $40 a barrel. Oil also looks scary on a long term chart, especially if $40 a barrel, which is multi-year resistance, is broken to the upside.

see the following charts:

Oil has formed a multi-year ascending triangle with long term resistance at $40. If $40 is broken to the upside, the price target would be in the $60's!

As you can see, the oil charts are screaming that more upside is likely.

Have anyone you ever heard of 'peak oil'? Peak oil is a concept first discussed in the 1950's and is a well accepted concept by most geologists and oil executives. Peak oil is when oil production hits its peak production levels.

You see, everyone talks about when we are going to run out of oil, however that is not the problem. We will probably never run out of oil. The problem is, when our maximum oil production is hit.

Oil production is known to follow a bell curve and we have been on the up slope of this curve since oil production first began in the 1850's. In other words, oil production has increased year after year. However, if oil really does follow a bell curve, then one day we will reach 'peak oil' or the top of the bell curve. Thereafter, oil production will decline year after year.

For example, for simplicity sake, let's assume that oil peaked in 2000 (I'm not saying that it did, but let's assume for this example). This would mean by 2020, oil production would be at 1980 levels and would have to supply the much more industrialized world of 2020! Do you see the problem here? If oil follows a bell curve, the world is going to have big problems once peak oil is reached. Also, consider the fact that China and other Asian countries are going to be a huge demand on oil that did not exist years ago.

The scary thing about peak oil is that the price of everything would skyrocket, not just the price of oil and gas for your car. Oil is the 'king commodity' because it effects everything. Transportation, energy costs, manufacturing, food, etc.

What about alternative energy? Most alternative energy is not effective: For example, Hydrogen is currently manufactured from methane gas. It takes more energy to create it than the hydrogen actually provides. Ethanol, which is made from corn and added to our gasoline, takes more energy to process (using oil) then it produces. Solar and wind power are still too expensive for the average consumer and not that effective. Also consider the fact that once the general population realizes the danger and tries to switch to solar power, etc the cost will be even higher for these alternative energy sources then it is now. Remember, Hydrogen Fuel Cells, Solar Cells, Wind Mills, etc are all manufactured from oil - sort of a catch 22.

Also, consider the fact the oil is needed for our food production: Pesticides are oil based and oil is used to transport our food. If oil goes up, the price of food will drastically go up.

Once again, who knows if all this will come to pass, but you need to prepare yourself financially for the future. As stated above, the best ways to prepare yourself are to get out of debt, and to amass personal wealth by making prudent investments to take advantage of the commodities boom that will likely dwarf the internet boom of the late 90's.

Again, commodities are booming, it's not just gold, silver, and oil, it's commodities in general:

For example, have you looked at a chart of copper or aluminum lately?

Just look at that uptrend:

Just look at that uptrend:

4. General Market Analysis - Indicators, Nasdaq / DOW / S&P

So how does the market look: Let's first look at a few market indicators and see what they are telling us:

The NASI has been very reliable in predicting market tops, and especially market bottoms when used in conjunction with Stochastics during this Cyclical Bull Market. Note that in the past, a reliable buy signal was generated when the Stochastics was oversold under 20.

The NASI is now in the low 20's but this is not a buy signal by itself. Any technician worth his weight in gold, knows that Stochastics can remain in an oversold or overbought condition for long periods of time. A buy signal will not be generated until the Stochastics turn up and cross back over 20 - which has yet to occur.

Still waiting on a buy signal:

The BPCOMPQ, or Bullish Percent Index. For many years, this indicator gave reliable buy and sell signals when it was under 20 and over 50 respectively. However, last year 50 was no longer the magic sell number, as the BPCOMPQ rallied to the 70's.

Currently, the BPCOMPQ is forming a horizontal rectangle which is basically a sideways consolidation before a large movement. The direction the BPCOMPQ breaks this pattern (up or down) will set the next big market trend, whether it be rally or correction.

In conclusion, you can see that these indicators are have yet to give a clear signal in the next trend. The NASI could produce a buy signal soon, but hasn't yet. While the BPCOMPQ has yet to give a buy or a sell signal.

This means that the general market, especially the Nasdaq, will be subject to a lot of chop and traders, both long and short, will be whipsawed. Therefore, it is probably wise to wait for these indicators to trigger a clear trend, whether it be more rally or a correction, before placing big money Long or Short - especially for swing trading. For day traders, it shouldn't matter much, however you could find many situations where a chart triggers, but then pulls back quickly that same day. When the market is not in a clearly defined trend, you have to be quick and nimble to make consistent profits.

Once the market finally reveals which way it wants to go - up or down, then swing traders can deploy more capital as profits will come easier.

Also remember, you don't have to trade every day! If your psychology is not right, or you don't feel confident on the trends, then take some time off from trading. Many studies have shown that over trading is one of the common mistakes traders make.

Now, let's take a look at the general market:

Nasdaq

The Nasdaq is by far the weakest of the three major averages. The Nasdaq is well off its highs and it could be argued that the Nasdaq is either forming another bullish flag, or a bearish descending triangle. Strong support exists between about 1970 and 2000, in what I call a support zone.

The Nasdaq has strong resistance at the downtrend line and possibly even the 50 MA. If the downtrend line can be broken, it would be positive for the Nasdaq. However, 2100 is the most significant area as that represents the previous high for the Nasdaq. Failure to break 2100 will cause the Nasdaq to form another lower high.

The Nasdaq could still do anything at this point, if it can muster a rally, then it could break the flag and be off to the races once again. However, if the support zone is breached, then the Nasdaq will enter a much larger correction and will fall to 1900 at least, and possibly 1800 as that represents the 38% Fibonacci number.

If the Nasdaq decides to enter a larger correction, then look to one of the Fibonacci numbers as possible areas to pullback. Note that the first major Fibonacci number is about 1810 and represents a 38% retracement of this Cyclical Bull Market. While a pullback to about 1800 seems like a huge deal, it would be considered a mild and normal correction based on Fibonacci. Only when do we see corrections that fall below the 50% and especially the 68% mark do we consider that the uptrend is over.

Again, let me state that a correction and subsequent fall to about 1800 would be totally normal and the Cyclical Bull that began in March 2003 would be well intact. This scenario will not happen if the Nasdaq rallies and breaks the bullish flag to the upside.

On a long term basis, the Nasdaq is in real danger of breaking the uptrend line that began early last year.

So far, Belkins market theory is holding up well. The Nasdaq appears to have strong resistance at its 200 week moving average. Only time will tell if we get a large correction here as Belkin preticts will happen.

Read my past newsletter for more on Michael Belkin's market theories:

click here:

Following the Nasdaq, the next logical chart would be the Semiconductors, as they strongly affect the Nasdaq. The Semiconductor index is in the process of forming a bearish descending triangle. If this breaks to the downside, then so will the Nasdaq and the general market.

DOW daily chart:

The DOW is stronger then the Nasdaq. The DOW is consolidating in its uptrend and has yet to give another buy or sell signal. Strong support near the 50 MA.

This long term chart clearly shows the strong resistance the DOW has ran into that is not present on the short term daily chart. If 10750 can be cleared, then 11000 is possible, but if the DOW turns down, then a retest of 10000 is likely.

The S&P 500 daily chart:

The S&P 500 is also in a consolidation pattern, but is the most bullish of the three major indicies. The S&P is forming an Ascending Triangle with resistance at 1160 and support at the uptrend line.

This long term chart shows you the next major resistance level on the S&P is 1175 while support is at the green uptrend line.

As discussed last week, if the market decides to enter a correction, rather then shorting individual stocks, the USPIX Profunds Ultra Short fund is a mutual fund that specializes in shorting the market and offers an alternative. ProFunds UltraShort OTC Fund seeks investment results that correspond each day to twice of the inverse of the performance of the NASDAQ 100 index. The fund primarily engages in short selling, stock index futures contracts, options on stock index futures contracts, and options on securities and stock indexes.

The 50 MA seems to act as resistance and a buy signal would be generated once the USPIX breaks the 50 MA which may be occurring right now. However, a lower risk strategy would be to wait for the 50 MA to cross up over the 200 MA.

I am not advocating that you purchase shares in this fund and I personally do not own any shares, however I may do so in the future if the market if/when the market dictates it. Note the long term price target is in the low $40's, which would represent a double from current levels!

As far as sectors go, because of the strong CRB, conentrate on sectors that deal with commodities such as oil, natural gas, gold, silver, copper, coal, electric power, basic materials, etc.

As far as non commodity based sectors, Airlines, Semiconductors, and Autoparts look weak, banks, wireless, and casinos look strong.

5. Metals (Gold / Silver):

When discussing precious metals such as gold and silver, the US Dollar is paramount. Subcribers to BPT were warned of a possible Dollar well in advance based on the positive divergence in the MACD.

Last week, the Dollar rallied to test resistance at 88. I think 88 will soon be broken, and when it does, the low 90's represents the next resistance area. A strong Dollar will likely keep gold and corresponding stocks at bay and may still cause further corrections. I would like to see gold metal and stocks fall and get a little closer to their respective 200 moving averages.

On a long term basis, the Dollar has could possibly rally to the 200 day moving average. Personally I would like to see such a scenario, as this would likely cause gold metal to pullback to the mid $380s.

Gold metal is consolidating into a bullish flag pattern. Gold could remain weak for a little longer if the Dollar rally continues.

On a longer term chart, you can see that gold has strong support at the uptrend line near the 200 MA.

Silver recently broke through a bullish flag and is retesting the upper portion of the flag.

If the Dollar rally continues, silver will probably not pullback as far as gold as it is technically stronger.

Silver looks like it's heading to the low $7's at least. I think in the very long term, Silver may see $10 and beyond.

GOLD STOCKS

Gold stocks are consolidating nicely. During the rally in early February, many gold newsletter writers were saying that gold stocks had seen their bottom and were on their ways to new highs. Even if gold stocks would have made new highs, it would not have been healthy - V bottoms are never sustainable. Technically, you want to see stocks form a nice base before breaking out to new highs. If gold stocks would have continued to rally, the base (or foundation) would not have been in place to sustain the rally.

Personally, I want to see more consolidation and a little more pullback in gold stocks. I would like to see gold stocks near their 200 MA, as reflected by the HUI and XAU.

Currently, the HUI is consolidating just over the 150 MA with resistance at the downtrend line. I would like to see the HUI fall below the 150 MA and get a little closer to its 200 MA. It think there is a good chance for this, especially if the Dollar rally continues, and it looks like it will.

However, I also think that 80 - 90% of the correction in gold stocks is over and if you are a long term investor, then I see no problem in buying a few gold stocks here, as timing is not an easy game.

Remember my discussion above about the long term commodities bull? The big money will be made in commodities in the coming years, you ain't seen nothing yet.

The chart shows the long term uptrend support line of the HUI. Notice how the 200 day moving average ( the blue line) corresponds exactly with the long term uptrend line. This shows that a pullback to the 200 MA is not at all out of the question and further strengthens the 200 MA's importance. However,

Note, this chart is a weekly chart, therefore the 50 week MA is approximately equal to the 200 day MA.

The XAU, or un-hedge gold stock index, is retesting on its 150 day MA. Resistance lies at the downtrend line and the 50 MA. I would love to see the XAU fall and get closer to the 200 MA.

The long term chart of the XAU below shows you how strong the XAU is on a long term basis. Is that a Bullish Flag I see???

One more thing, if the Dollar rally continues, then Palladium metal may also suffer some kind of pullback Therefore, the two stocks, PAL and SWC may pullback as well. If you can hold on, I think these stocks will eventually rally much higher. I think Palladium will see the $300s this later this year.


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