McHugh On The Markets - Print Version

The Conference Board reported that U.S. Leading Economic Indicators fell 0.3 percent in October to 115.1, the fifth consecutive monthly decline. Does that sound Bullish? This is not a government produced number.

Now that the election is over and next year's fixed social security increase has been set, the Labor Department announced that - gee wiz - energy costs are up, so the PPI that was up "only" 0.1 percent in September was up 1.7 percent in October. That is the single largest admitted jump in wholesale prices in a decade and a half. Hmmm. Oil was 48 bucks a barrel in September, and $43 in August, but the increase didn't really show up until October. Yeoman's job. Consumer Prices were reported by the Labor Department to be up 0.6 percent in October - a 7.2 percent annualized rate. How's this for a consumer tax?

The Mortgage Bankers Association informed us that Refinancings are up and New Mortgage Demand is down - down a hefty 0.6 percent for the week ended November 12th. Greenspan warned that a weak dollar and high trade and budget deficits could produce economic problems for the U.S., according to a story at www.cnnmoney.com This came on the heels of the U.S.

Dollar hitting a record low versus the Euro this week. The Fed Chair's remarks also came as the U.S. Debt Ceiling was raised by $800 billion to $8.2 trillion.

Jobless Claims came in at 334,000 for the week ended November 13th, an increase over the initially reported figure for the prior week, which was of course revised higher by Labor Department.

The Secretary of State pre-softened Americans to the idea that Iran could be the next Iraq. Get ready. Let's review. Pre-war, the market declines. Once the bombs fly, equities rally.

M-3 sits almost exactly where it was on August 23rd, 2004. That's no growth over three months. Our research indicates that whenever M-3 plateaus or declines over two or more months, equities subsequently decline.

The trade-weighted U.S. Dollar remains on its track for a primary degree Elliott Wave (1) bottom. It is in the latter stages of this quest, finishing off an intermediate degree wave 5 down of (1) down. Inside that wave, the Dollar has completed minuette degrees i through iv, and is wrapping up v of minor degree 3. There should be a bit more decline followed by a small minor degree wave 4 rise and then one final descent to a bottom - minor degree 5 of intermediate degree 5 of Primary degree (1).

The entire decline to the primary degree (1) should hit at least 82 - perhaps lower - and we are close to that target now. We know this from the Head & Shoulders Top pattern formed by intermediate degree Elliott Waves 4 and the first half of 5. This pattern is confirmed by the decisive break below the neckline - below 87 - which increases the probability of the minimum downside target of 82 being reached. Prices remain inside the long-term downtrend.

After a bottom is reached, look for a pretty strong A-B-C rally inside primary degree wave (2) that retraces a Fibonacci percent of primary (1) down's carnage - either .382, .500, .618, or .786. It is a rally that could consume a huge chunk of 2005. Then an awful primary degree wave (3) down.

Here's the problem with a falling dollar. As the value of our currency declines - due to too high budget and trade deficits, and too much printing press action - the appeal of holding U.S. dollar denominated assets by foreigners diminishes. The longer foreigners hold assets of a deteriorating currency, the lower the value of those assets. So, foreigners become disinterested in buying new U.S. assets and develop a growing disdain for depreciating U.S. stocks and bonds. The risk here is that foreigners start dumping our financial assets. The problem from their perspective is, once they dump our stocks and bonds, what do they do with the money? And that is a real issue which is why so far they haven't dumped. But if they can find an acceptable alternative investment, selling pressure could annihilate our stock and bond markets. This, in effect, is what Greenspan was saying this week - only in Maestro-talk. Just speculating, but world instability could strengthen the U.S. Dollar - for example a Middle East event - perhaps the catalyst to primary degree wave (2) up. In that case Gold may not act inversely. Just a thought.

Gold continues to hit new rally highs with renewed upward momentum this week. Prices remain solidly inside their long-term upward trend-channel. Near term, the RSI is overbought and there is a Bearish Rising Wedge pattern with a common "throw-over," indicative that Gold's advance may need to correct a bit soon. However, the dominant pattern is a Bullish Ascending Triangle which portends continued upward advance for Gold intermediate-term. This pattern is suggesting Gold should approach a target of 500. That is arrived at by taking the distance of the widest part of the triangle and adding it to the spot of the breakout. Last week we noted Gold had hit its highest level since 1988. This week add another 10 points to that statement. Helping demand for Gold - through liquidity and convenience - is the commencement on Thursday of the first and long awaited exchange traded fund for Gold, traded on the NYSE.

"He gives strength to the weary,
And to him who lacks might He increases power,
Though youths grow weary and tired,
And vigorous young men stumble badly,
Yet those who wait for the Lord
Will gain new strength
They will mount up with wings like eagles,
They will run and not get tired,
They will walk and not become weary."

Isaiah 40:29-31

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Robert D. McHugh, Jr. Ph.D.
MAINRDMCH@aol.com
Main Line Investors, Inc.
www.technicalindicatorindex.com

Robert McHugh Ph.D. is President and CEO of Main Line Investors, Inc., a registered investment advisor in the Commonwealth of Pennsylvania, and can be reached at www.technicalindicatorindex.com. The statements, opinions and analyses presented in this newsletter are provided as a general information and education service only. Opinions, estimates and probabilities expressed herein constitute the judgment of the author as of the date indicated and are subject to change without notice. Nothing contained in this newsletter is intended to be, nor shall it be construed as, investment advice, nor is it to be relied upon in making any investment or other decision. Prior to making any investment decision, you are advised to consult with your broker, investment advisor or other appropriate tax or financial professional to determine the suitability of any investment. Neither Main Line Investors, Inc. nor Robert D. McHugh, Jr., Ph.D. Editor shall be responsible or have any liability for investment decisions based upon, or the results obtained from, the information provided.