June 20th, 2004

Table of Contents:

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

1. Administrative:

2. Long Term Picture:

3. Market Indices:

4. Gold:

1. Administrative Comments:

none

2. Long Term Picture:

Before we take a look at the current market situation, let's take a look at the big picture:

Fundamentally, the market is way overbought, especially when compared to historical PE valuations. Fundamentals will eventually catch up with the market, but we all know that anything can happen in the short term, and by short term I mean a few months, to even a year or two (cyclical). In the long term, fundamentals always catch up with the market, but this takes years and is seen on the secular (or long term scale).

The market moves in repeatable cycles of long term (also called secular) which last approximately 10 - 20 years, and short term (also called cyclical) which last from 1 - 3 years. Secular markets represent the long term trend to the market, but short term counter trend cyclical markets always exist inside a secular long term market - usually 3 - 4 cyclical markets exist inside a long term secular market.

For example, the DOW was in a secular bear market that began in 1966 and lasted until 1982. To give you some perspective, the DOW topped out at about 1000 in 1966 and hit a low of around 800 in 1982, WOW!. Even though the long term trend was slightly down over all this time, there were also 4 short term cyclical bull markets interlaced inside this secular bear market.

A picture is worth a 1000 words and the graph below shows you exactly what a secular bear market looks like: Isn't it amazing how the DOW basically went no where for 16 years! In the chart below, you can also see the short term counter trend cyclical bull markets that occurred. Long term investors (which is the average American) do very poorly during secular bear markets - 16 years is a long time for your money to do nothing, might as well have it in the bank or CDs.

After the secular bear market ended in 1982, the DOW began a secular bull market that lasted from 1982 to 2000, or 18 years. There were also several short term counter trend cyclical bear markets during this time, but the overall trend was up.

Next, in March 2000, the general market most likely began a new secular bear market. History shows us that the current secular bear market will probably last at least until 2010 to 2015. My point is, a cyclical bull market began in early 2003 but will eventually end, possibly this year, and the long term secular bear market we are in will re-manifest itself.

As stated above, I think the general market is in a long term secular bear market that will likely result in the market going sideways to slightly down over the next 10 years. For example, let's say this current secular bear market ends in 2015, the DOW will probably be near the same levels as it is today and will probably resemble the DOW chart above 5 - 10 years from now.

Here's another interesting chart for you, the 78 year chart of the S&P 500:

Just as I stated above, fundamentals will eventually catch up with the market. Major bottoms where new secular bull markets begin, the PE ratio is under 10! The S&P 500 has a long way to fall before the PE ratio falls to 10.

Notice how the S&P 500 pulled back to test the long term historical uptrend line during the 70's secular bear market? I'm confident that the S&P 500 will once again pullback to test this uptrend line during this current secular bear market and that's a long long way down....

However, the S&P is in a cyclical bull market currently, so this retesting of the uptrend line will probably not happen for a couple years from now.

Also worth noting is the gold and precious metals market: A secular bear market began in the precious metals sector in the early 1980's when gold topped out in the $800's and silver topped out near $50. This secular bear market finally ended in 2000 - 2001 and a new long term secular bull market began. Expect gold and silver and other precious metals to outperform over the next 5 to 10 years. Obviously, the gold sector is where long term investors should be placing their money.

3. General Market Analysis:

The market still continues to churn sideways as it was unable to make a definate move to the upside or the downside once again last week. We have been waiting for three weeks now for the market indices to give confirmation on the next major trend this year, whether it be up or down and a strong case can be made for bullish and bearish scenarios.

Bullish Case:

First off, insider buying has been picking up over the last few months and is now at the highest it's been in about a year and is at levels seen in May-June of 2003 when the Market was really taking off like a rocket.

Insider buying improved for the fourth consecutive month, rising 10% from $145 million to $159 million in May according to the most recent Client Advisory from Thomson Financial. In May, corporate insiders sold $4.3 billion worth of their company's shares for a sell/buy ratio value of $20.73.

While Thomson considers any reading over $20 to be bearish, it is a drastic improvement from February's extreme reading of $54.60 that preceded the March-April sell-off. The trend over the last few months has brought the metric into more neutral territory and April's reading was the least bearish signal in a year.

The chart below is plotted in terms of a ratio of insider selling / buying, in other words, the lower the number, the more insiders are buying.

Also interesting to note is that the high that occurred in February preceded the March-April correction, so maybe the pickup in insider buying is telling us that the market will rally and breakout to the upside. Which would graphically be seen as the Nasdaq, DOW, and S&P breaking their respective bullish flags to the upside

Here's another graph for you, (from www.thechartstore.com):

The graph is annualized average 1 month change for the S&P 500 during an election year from 1928 - 2000.

First off, notice how election years are statistically up years. Also notice how April and May are statistically down months for the market - April and May of this year were also down months.

Also note how June, July, and especially August are the historically the best performing months during an election year. If this trend continues, then the current market will likely break it's recent consolidation bullish flag patterns to the upside.

Also, the major averages currently seem to be following an Elliot 5 wave pattern and are close to embarking on the 5th wave.

If you take the S&P 500 for example, the S&P could be following a 5 wave Elliot Wave pattern. If this is the case, then the S&P may soon embark on Wave 5 that would take it to 1250. This also corresponds nicely with the 62% Fibonacci retracement as well as the presidential cycle as this 5th wave would likely top out late in the fall of this year.

The DOW Jones:

The DOW is beginning to look very bullish as it has broken out of a bullish flag pattern and the volume increased dramatically on Friday.

Major resistance is now the high at 10750 from February.

DOW Theory states that the DOW and the Transports are closely linked, just like the Nasdaq and the Semiconductors.

The Dow Transports are rallying, thus suggesting that the DOW will soon follow.

The long term chart of the DOW shows that the DOW is in a multi year downtrend which began in 2000.

You can clearly see the bullish flag pattern. If the DOW can take out the high of the flag (10750), then it's off to the races for this summer and early fall.

The S&P 500:

The S&P resembles the DOW chart as it has formed a bullish flag. Volume also picked up nicely on Friday, but the flag has not yet broken out to the upside.

DOW Industrials have broken a triangle on major volume.

And speaking of insurance, AIG is a chart in the Insurance Sector which also has a bearish head and shoulders pattern. Long term target in the mid $60's based on pattern measurement.

4. US Dollar, Commodities, Precious Metals:

Gold metal bounced nicely off the support area marked in gold in May. Subsequently gold rallied, then pulled back to form a higher low and a possible bullish flag with resistance at about $400.

I would like to see gold break $400 and then hold this level on a pullback, to me that would be extremely bullish.

Obviously, the long term chart of this gold bull market is well intact.

Gold is indirectly correlated with the US Dollar, i.e. when the Dollar falls, gold rallies and vice versa.

In order for gold to begin another strong uptrend, the US Dollar will probably have to breakdown and re-enter the long term downtrend. For this to occur, the support area in gold must first be broken.

AGT is another gold stock with positive divergence.

I currently own shares of AGT.

AU is another gold stock with positive divergence and is one of the majors.

I currently own shares in AU.

HMY is another gold stock with positive divergence in the MACD.

I also own shares of HMY.

The long term chart of HMY shows you why I own shares of this stock. Notice that it has bounced off a long term support area in gold and also formed a hammer candlestick last week.

Yes, I even own the slow moving CEF, it's a safe investment that closely follows the price of gold as 90% is invested in the metal itself.

I also own shares in NEM, BGO, GSS, and SIL, charts not shown