May 9th, 2004

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. US Dollar, Commodities, Precious Metals:

1. Administrative Comments:

Wow, first off, I found out that my breakpoint trades email was set to a maximum of 20 MB, for some reason. I had not been receiving new emails for the last few weeks and this is the reason why. Therefore, I must apologize to everyone who has emailed me, as you would not have received a response as my inbox has was full and therefore rejecting new email. I have changed my default email setting to unlimited space, therefore this should not happen again. I was also able to retrieve some of the emails that did not make it to my inbox. Anyway, please re send your emails if you have not received a response to a previous email that you sent.

2. General Market Analysis and Commodities

Last week I wrote that the market was hanging on by a thread that is in danger of breaking down. Well, last week the markets tanked once again and are breaking down. The major indicies have turned bearish and are breaking, or close to breaking symmetrical triangles to the downside on good volume. There is so much negativity in the air, especially the IRAQ situation, with the never ending war itself, was well as the new scandal with the Iraqi prisoners.

Crude oil is another worry on peoples minds as oil prices, and subsequently gas prices keep rising, which may lead to inflation very soon. Gasoline prices are now close to averaging $2 a gallon across the entire nation, and not just California and Chicago. Rising gas prices are being felt most Americans, especially truckers who have started to protest across the country. Higher diesel prices are really hurting truck drivers, but their pain will soon be felt by us all as truckers will eventually have to pass their transportation costs to grocery stores and retailers, which will in turn raise their prices and pass the cost on to us, just like a runner passes a javelin in a race.

On top of all this, key economic data shows the economy is improving and growing, new jobs are supposedly being added, and company earnings have been good for the most part. However, with each positive economic report, the market has been selling off, but why? The obvious answer is fear of rising interest rates. Bond traders believe that the Fed. has to raise interest rates to slow down the economic growth, but more likely, to stave off inflation from high commodity prices, especially from oil. Bond traders are selling bonds, which cause yields to go up, which in turn causes long term interest rates to go up. The Fed. has no control over this, bond traders do. The Fed only controls short term interest rates to the banks, but not long term interest rates. If long term interest rates go up, then the Fed. will eventually have no choice but to raise short term interest rates.

The main hurdles to the US economy are the insane personal and corporate debt, the huge trade deficit, and jobs that are transferring overseas. All this has to be dealt with, and there is no easy fix. It will likely take many years before these imbalances can work themselves out, as well as the Dollar loosing much more of its value.

Also, the Housing Market is said to be in a bubble, and higher interest rates will likely be the needle that pops the Housing Bubble. When the Housing Bubble bursts, it could devastate the economy and hurt many Americans who have taken 2nd and 3rd mortgages on their homes. Higher interest rates would cause the housing demand to slow way down, which would in turn, cause housing prices to fall in value. I'm sorry folks, but you cannot expect your house to keep increasing in value 10% or more every year, and don't be surprised if the home values even start to drop eventually. It's simple supply and demand, if demand falls, then prices will fall, nothing magic about it. People who have zero equity in their homes could actually have negative equity one day if housing prices plunge, in other words, they would owe more then their house is worth - scary thought, but many Americans are prone to this if the Housing Bubble bursts.

My old chart which graphically demonstrates Belkins theory of the Nasdaq topping out at the 200 week moving average. So far Belkin is proving to be right.

The DOW Jones:

The DOW Jones has broken a symmetrical triangle to the downside which is bearish and a fall to the next support level of 10000 is now in the cards. The trouble is that a bearish descending triangle has is now forming. If support at 10000 and the 200 MA fail to hold, then the next major supports are 9500 and 9000, as shown in gold below.

Note, this bearish pattern can still be negated if the DOW rallies and breaks the downtrend resistance line, but that doesn't seem to likely at this point.

A closer version of the above chart:

The S&P 500:

The S&P resembles the DOW char and is bearish: Supports lie at 1080 and the 200 MA.

Based on triangle height measurement, I calculate a price target of about 1000.

The NAHL market indicator is finally on the verge of crossing the 20 MA which would give a sell signal for the overall market.

Other Sectors:

The NYA has already broke a symmetrical triangle to the downside and has formed a very bearish descending triangle which will likely be broken to the downside.

Industrial equipment also looks weak as it has formed a bearish descending triangle.

Components include: A, BIOV, CGNX, COHR, DBD, DHR, DNEX, ESIO, FLIR, GGG, HELX, MIL, MVSN, MYK, NATI, NEWP, ORBK, PHTN, PKI, PLL, ROP, SBL, TEK, TLGD, TMO, UNA, VARI, VECO, WAT

Banks look weak and have broken support. Higher interest rates will obviously hurt banks, fewer loans will be made which is where banks make their money.

The Trucking Index is still holding up and has major support in the gold region highlighted below. It will be interesting to see how this sector holds up with higher gas prices.

Internet sector looks very weak, and stocks in this sector are going to take a big fall.

Retail also looks weak:

Telecommunication stocks look like they are about to break support.

In conclusion, There is no real good reason to buy stocks, and rallies are shortable. Probably, the best way to trade right now is to either day trade, or short the rallies. However, daytrading is probably the safest bet at this point.

For those of you who don't want to short individual stocks, the USPIX, or Profund UltraShort mutual fund offers an easy way to short the market.

Notice how the 50 MA is getting close to crossing over the 200 MA? If this happens, this fund will be triggered long. Notice what happened that last time the 50 crossed under the 200 MA? A long term price target of about $42 is possible, which isn't bad percentage wise.

The Rydex fund is another well managed mutual fund that shorts the market. The Rydex looks very similar to the USPIX fund above, my advice is to take your pick.

Crude oil is breaking out big time, which is not good for the economy per inflation.

For example, some grocery store prices are up an average of 50% in the last year. This can be attributed to rising oil and gasoline prices.

3. US Dollar, Commodities, Precious Metals:

Gold is finally approaching strong support, which lies between $369 to $379, as indicated by the gold band below.

Realize that even if gold bounces at support, it needs to consolidate for months before making new highs.

What a month it has been for gold and silver, but especially the respective precious metal stocks. The US Dollar is the 'usual suspect' of course.

The US Dollar is now in a strong uptrend with support at the uptrend line and just above the 200 MA. As long as the Dollar remains strong, gold, silver, and corresponding stocks will remain weak.

The Dollar is also rallying due to rising interest rates and a belief that the US economy is improving.

GRZ looks good and is near long term support.