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D.B.
Hi Ike, how are you doing?
I.I.
I am doing well, thank you.
D.B.
In our last interview on 2-21-04, you were
expecting the decline that was taking
place at the time to last for another 30
days, and your downside targets were 1095
for the SP, 10,000 for the Dow, and
1925 for NASDAQ (-/+1.0%) The indices
bottomed as you had expected, thirty days
later on 3-24-04, at 1087, 10007, and
1896, respectively. Subsequently, the
indices rallied sharply and over the past
ten trading days they have pulled back. In
your view, is the action of the past ten
days similar to what we observe during
periods of consolidation, or, is it
similar to what we observe during periods
of a top formation?
I.I.
In order to make a determination, with any
degree of reasonable certainty, one would
take into consideration the behavior
of both the price, and the internals.
Notice that price wise, both the SP and
NASDAQ are below resistance, but above
support! Consequently, as of the close, on
Friday, 4-16-04, the price behavior
ought to be considered as
"neutral" The indices -
judged only by their current price
behavior -
are acting neither bearish, nor bullish
-they have not violated support, on a
closing basis, and they have not overcome
resistance, on a closing basis. Obviously,
we want to make a determination with
regards to the most likely outcome. To do
so, we got to take a look at the
internals, and at the price action of the stocks that make up
each index.
Obviously
we can't list here every single component
of the SP, and of NASDAQ, but I'll
use just three, and a sub-sector to make
my point (I encourage our readers to take
a look on their own of all the stocks that
make up the Dow, the SP, and the NDX)
When we look at the price behavior
of many leading stocks such as
CSCO, AMAT, NVLS, AMGN, MSFT, KLAC, INTC,
in the case of NASDAQ for example, we can
see that they have experienced a more
severe deterioration. KLAC, INTC, and CSCO,
are already at their March lows, while
NASDAQ itself is roughly 5.2% higher. In
addition, the all too important
Semiconductor Index, didn't even manage to
reach the 38.2% Fibonacci
retracement level. It turned down as soon
as it reached long term resistance
(orange trend-line) and it has remained
below it. If the price action of the
Semiconductor stocks is a leading
indicator, or, if it continues to
deteriorate, then, one has to
consider the possibility that NASDAQ will
revisit its March lows.
Next,
I would like to examine the
McClellan Volume Summation Indexes for the
Dow, the NDX, and the SP500
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Chart
courtesy of Carl Swenlin and
decisionpoint.com |
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The
current pattern of the
McClellan Volume Summation Indexes at
point #3, looks very similar to the
pattern at point#2, and at point#1.
Point#1 marked the beginning of a
horrendous decline, while point#2, marked
the beginning of a spectacular rally.
Even, if we didn't bother to do any further
analysis, the very fact that the current
pattern is almost identical to a pattern
that in the past preceded both a
substantial decline and a substantial
advance, should be enough of a
reason for rational investors to consider
both outcomes, and devise their
investment/trading strategy accordingly.
We
can also take a look at the cumulative
breadth, and volume for the Dow, the OEX,
and the NDX.
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Chart
courtesy of Carl Swenlin and
decisionpoint.com |
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Chart
courtesy of Carl Swenlin and
decisionpoint.com |
Notice
how the cumulative volume has fared for
all three indices over the past two
months. In terms of units, we have had a
bigger loss over the last two months, than
we did between August '02, and October of
'02, a period which included the waterfall
decline following 9-11. Also, notice that
cumulative volume is already at its March
lows, although price isn't, which
indicates a much bigger exodus of money
from the market, than what we are lead to
believe, looking only at price. It doesn't
take a genius to realize, that if
money continues to leave the markets at
the current rate, it would be nearly
impossible to see higher prices. Moreover,
during periods of consolidation that
precede further market advances,
what is really taking place, is
accumulation. The steep decline in the
cumulative volume over the past two
months, more than likely, indicates
distribution, not accumulation. What
follows periods of distribution is lower
prices, not higher prices.
D.B.
So, if I understand you clearly, you are
saying that based upon the price
action as of Friday's close, the markets
can go either way. However, when the
internals, and the price behavior of
individual stocks and
sub-sectors are taken into
consideration, if the markets were to turn
down, the ensuing decline can be a lot
more severe than investors are
anticipating.
I.I.
You are absolutely correct, that is
exactly what I am saying. To put it
differently, if the markets turn down from
here, and take out their March lows, I
believe they can easily
decline another 7%-8%.
D.B.
If last week's lows continued to hold and
the markets move higher, what
sectors -in your view- offer the
best opportunities?
I.I.
I believe that the severe declines
in many previously popular tech stocks,
such as ORCL, INTC, ELX, KLAC, CSCO, XLNX,
PMCS, GLW, just to name a few, are due to
institutional investors' rebalancing
of their portfolios towards lower beta.
Consequently, without institutional
sponsorship/buying, I don't believe
tech stocks will out-perform the way
they have up to now. The sectors
that will enjoy institutional
interest/buying going forward
are: junior oils, food, select health care,
natural gas, and alternative fuel.
D.B.
How about gold and gold stocks? You
have been cautious to negative on
gold stocks since the beginning of the
year. Last
time you concluded by saying:
"On
another note, we would like to caution against gold
stocks. The HUI and the XAU appear to have formed triple
tops with each top lower than the previous one,
signifying a down trend. We highly suggest that holders
of gold stocks place some protective stops below
Friday's lows."
I.I.
I
like to buy gold stocks when the gold/XAU ratio is
above 5.00-5.25, and sell when the ratio dips below 4.00-3.75. We are
a long way from an entry point now. We'll probably have some
trading opportunities, but until that
ratio gets back above 5.00, we won't have
an opportunity to buy gold stocks with the
intention of holding them for several
months.
D.B.
Should we get into the rest of the charts?
I.I.
Sure, we got some interesting stuff to
talk about.
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