In the financial press there has been much concern expressed by a host of financial analysts and newsletter writers about the supposed bearish history of May in the past. Yale Hirsch, editor of the "Stock Trader's Almanac" calls the May-October time span the "worst six months" for the market, historically. While this may be true in some market years, it has not proven so in others. In truth, the numerous cycles which govern the market frequently converge or otherwise cross-current around different months that produce misleading patterns to those who are inclined to interpret the stock market in a seasonal fashion. But the stock market is unlike the commodities market in this respect and cannot be viewed seasonally. Instead, the broad equities market must be viewed cyclically, therefore any attempt at classifying certain months as either bullish or bearish must be rejected.

So what might we expect in the 3-4 weeks ahead? Within this time frame there are still many positive signs on the immediate horizon for the broad market between now and early June (the next cycle peak). My all-time favorite bottoming pattern, when the weighted 10-week moving average curves under and over the 30-week MA in bowl-shaped fashion as prices are coming off of dominant lows, can be seen everywhere in the chart books. This will allow us to at least do some short-term stock picking over the next few weeks as we have been doing recently.

In last month's article entitled "Forecast and overview for Q2 2003" here on Gold-Eagle, I noted that the S&P 500 index was close to giving a signal that hasn't occurred in over four years, namely, the crossing over of the 100-day moving average above the 200-day MA as the S&P was coming off a major low. I pointed out at that time that these two averages are key for following the interim trends since they reflect the dominant interim cycle and its half-component (i.e., the 20-week and 40-week cycles), which govern the dominant forces behind the stock market in the intermediate-term. It was further uncovered that every time since the bear market began the S&P has tested the 100-day/200-day MAs it has failed to penetrated above them and has been turned back to make lower lows. "But this time the S&P has a legitimate shot at finally making the upside penetration," I noted. Sure enough, the S&P has finally made it above the 100-day/200-day moving averages and has risen approximately 40 basis points since that time. Moreover, the S&P is on the verge of sending a double confirmation signal by way of its sub-dominant 50-day moving average about to cross over and above the 100-day moving average.

But to keep things in their proper perspective, I'll repeat the question I posed in last month's forecast: "Would a bullish crossover signal mean that the 3-year-old equities bear market has ended? In view of the longer-term cycles, no. In fact, the bear market should actually intensify in 2004 and beyond. But a bullish crossover signal from the 100-day/200-day MAs would at least signal a quarterly upturn that could last until summer. In any case we must be prepared to act on such a signal if it occurs." I reiterate my previous conclusion that based on the available evidence, it would seem that the second quarter will witness a respite from the harsh economic and trading conditions of recent months. The real estate bubble should continue and doesn't look like it's ready to pop quite yet. Stock prices may well see a tradable relief rally this spring, and at least should stay above the Q1 lows. In fact, the anticipated continuation of the spring rally could actually be quite impressive to the point of frustrating many bears and giving too much confidence to the bulls.

Part of the reason the Dow has been held back somewhat relative to the S&P and especially the NASDAQ can be attributed to what I consider to be the Dow'sleading indicator stock, Altria (MO), which has led the Dow up or down by a period of days-to-weeks over the past year. Even though there is still immediate weakness in MO, I can now honestly say I like the pattern that is shaping up in this stock with the 30-day MA slowly curving around while the 60-day MA is experiencing a reversal of downside momentum. Another week or so and MO should be ready to pop to the upside, which would be a great confirmation for a May rally in the Dow.

Speaking of confirmation, we cannot ignore the confirmation provided recently by the Dow Jones Transportation Average (DJTA) which has performed beautifully in breaking out from an inverse head-and-shoulders pattern. I'm not a big believer in the Dow Theory, per se, especially as it hasn't proven its mettle as much as it used to 20-30 or more years ago (for various reasons). But it's always good to consult the DJTA whenever the Dow Industrials are trying to break out decisively either to the upside or the downside since confirmation from the Transports never hurts. For the first time in quite a while we finally have that confirmation.

On the real estate front, the leading indicator - the Morgan Stanley REIT Index (RMS) - is performing well per the prediction made in last month's Q2 forecast article. At that time I noted that in the 8 or so years this index has been in existence the 100-day/200-day moving averages have been in a bullish configuration (i.e., 100-day MA above 200-day MA, both averages rising) for close to 5 of those 8 years. The averages got out of their bullish alignment in mid-2002 and have been unaligned ever since, but the 100-day MA was threatening to penetrate back above the 200-day MA, which, as I noted, would send a bullish signal. "This would put RMS in line to challenge its previous peak of approximately 470 (RMS currently near 450). And what would such a bullish signal spell out for the broad U.S. real estate market? Obviously that the bull market in housing isn't over just yet. This alone could keep the economy propped up for a while longer." Currently, RMS is hovering near 460 and the 100-day MA has crossed above the 200-day MA, confirming the bullish signal. Thus, real estate equities are in a good position this spring and forecast continued short-term growth for the housing and real estate sector into at least the third or fourth quarter.

May 6, 2003

Clif Droke is the editor of the Gold Strategies Review newsletter, a monthly forecast and analysis of gold and silver futures and precious metals stocks. He is also the author of numerous books on finance and investing, including most recently "Junior Mining Stock Yearbook 2003-2004." Visit his web site for free samples of his analysis at www.clifdroke.com