For Every Crisis There is Opportunity

January 23, 2001

Our extremely useful forecasting tools will enable us to make money this year when others are losing it. Remember, with every crisis there is opportunity.

Speaking of opportunity, no greater one exists right now, in our opinion, than in the gold market. The gold market, by all indications, bottomed late in 1999 and confirmed that bottom with a higher low in 2000. We are now at a critical turning point in gold. Short interest is rising on the COMEX and trader sentiment is becoming extremely bearish, a further indication that a historic rise is about to begin. Quite simply, we are on the cusp of a historic opportunity in gold, one that cannot afford to be missed. The parabolic bowl formations that we are tracking in the gold futures chart are undeniably bullish in their import. We recommend buying gold futures, options on futures and select "blue chip" gold stocks such as Placer Dome (PDG). At these historic low levels we may never see another such opportunity for tremendous profits in a relatively short period in our lifetimes.

The NASDAQ Composite has nearly reached the point of downside exhaustion and should begin to bounce impressively higher into the first few weeks of the New Year. In fact, 2001 could be a year of overall upside "correction" for the tech stocks after suffering a horrendous year in 2000. The Internet stock outlook also looks to improve in 2001, and several major Internet stocks should be considered as buy candidates as we head into the New Year. In fact, we predict that the beaten-down Internet sector will be one of the surprise performers in the first half of 2001.

It should not be plainly evident that the Federal Reserve cannot alter equity values through interest rate manipulation, notwithstanding mainstream media pontification to the contrary. For the past several weeks investors have been subject to a non-stop barrage of commentary from the financial press to the effect that a "soft landing" in the economy could be effected and a recession avoided by engineering interest rates, as opposed to tax cuts. Now that the Fed has unveiled its "surprise" interest rate cut—the second such instance in two years—and the market has reacted as expected, millions of investors will now naively believe that the Fed alone can "save" the stock market from certain doom.

What this proves to us, however, is that someone at the Fed is an expert cycle analyst who knows exactly when to time interest rate cuts to coincide with turns in the dominant interim equity cycles in order to achieve maximum impact. The deceit is masterful. This clever machination bestows upon Alan Greenspan the mantle of market savior and he is hailed accordingly by the mainstream press.

The proof that the interest rate cut was not the underlying cause of the market rebound is found in the fact that one of the most important measures of underlying market strength—NYSE advancing minus declining volume, which is the essence of stock market supply and demand—had been giving all-out buy signals for a couple of weeks in advance and reflected the strong presence of insider accumulation ever since the beginning of December. This, coupled with the dominant short-term and intermediate-term cycle bottoms, and not the interest rate cut, accounts for the rebound.

We do not deny that the interest rate cut has at least some measurable impact in boosting stock prices—both psychologically and fundamentally. But this impact is minimal in proportion to the far more important variable of the dominant time cycles.

The gaping disparity that emerged between the trajectory of the NYSE stocks and the NASDAQ stocks was a source of amazement and confusion for many traders in the past year. Never before have these two major stock sectors—the one representing the "Old Economy" with the other representing the so-called "New Economy"—gotten so far out of kilter. What was the cause of this disparity? In our view it can be attributed to nothing less than the dynamics that surround each major sector. For instance, the NYSE stocks—represented by the Dow—are principally comprised of companies that manufacture and sell products from raw materials, hence, their performance depends in no small part on the strength of commodity prices.

When commodity prices in general are weak, the financial performance of the Dow 30 stocks also tends to be weak. When commodities prices are strong, this helps to bolster their stock performances. In 1998, commodity prices were plummeting to depths unseen in over a decade, and stock prices and major world currencies (including the U.S. dollar) were also falling in unison with commodities. It was only when commodity prices registered a major cyclical bottom in October 1998 that the global financial decline was arrested. Since that time the major commodities have rebounded strongly and have seen consistently rising prices through the past two years. This helped support the stock performance of those companies in the Dow. The tech-laden NASDAQ stocks, which are largely impervious to changes in commodity prices, plunged throughout the year due to the massive over-supply of tech issues, not to mention the severe over-valuations pervasive throughout the NASDAQ. Strong commodity prices, perhaps more than any other factor, kept the Dow from sinking in unison with the NASDAQ in 2000. But how much longer will this trend persist? Based on a thoroughgoing cycle analysis in the commodities sector, 2001 will see continued commodity price strength—especially in the energy and precious metals sectors—and an overall buoyant broad market.

Speaking of the energy markets, oil and gas prices are back in the spotlight again and have once again become a source of political turmoil and economic dislocation. This trend will continue in 2001. The energy markets were mixed last week, with the boiling natural gas market witnessing a steep pullback from recent high levels, while oil futures closed on an up-note for the week.

Light sweet crude oil futures closed this week at $32.19, up $2.14 from the previous week. Trading volume was moderate, but not quite up to the one-year average. Crude oil futures closed at the extreme upside of its weekly trading range, which is technically bullish. However, oil failed to penetrate the critical overhead resistance at $33. This level also serves as a floor for a rather large area of supply that exists between $33 and $36, as evidenced by the extreme trading volume that has taken place in this range during the past few months. In simple terms, this is a case of too much supply that needs to be absorbed before the uptrend can fully resume. The good news for the bulls is that oil's 3-month and 7-month cycles have both bottomed, and a fresh new dominant short-term and intermediate-term cycle have begun, which will exert an upside force on prices for the next several weeks. This will undoubtedly keep the oil market buoyant and near its all-time highs, but for reasons outlined here will likely be insufficient to propel prices to new highs.

Viewed from a long-term perspective, oil shows a bullish chart, but one whose maximum upside potential (for this year, at least) has been reached. Longer-term, there exists the possibility for a penetration above last year's terminal intraday high of $38/barrel, but since the market remains under the influence of a bearish parabolic dome (see chart example), oil will be hard pressed to mount a serious and sustained rally over the next few months. It isn't until much later on this year that the oil market will again encounter the bullish influence of a long-term bowl pattern that will once again provide a major lift to the market, one that will likely result in a challenge of last year's high. For now expect the oil market to remain in consolidation mode, fluctuating between the $23-$34 range for the first half of the year. Do not be surprised, however, if oil immediately makes a run to the $34 area within the next 2-4 weeks due to the bullish immediate-term influence of the 3-month and 7-month cycles—which are both in the ascending phase—as well as an 8-year bowl pattern. The bowl expires sometime in this first quarter of 2001, but until then has enough force to and momentum to push prices higher one last time. Note also how, on the monthly chart, the most recent monthly bar (for December 2000) is resting precisely on the side of this upward curving bowl, a sign that the bowl is still intact and is the governing force for oil's price movements.

Again, we reiterate our expectation for a near-term upside target of $33-$34 in front-month crude oil futures. Oil's short-term daily chart shows a well-defined trading channel that points to this level. The weekly chart for oil shows a nice run-up of nearly $3 for the latest trading week in oil futures on nice volume. Unfortunately, a downward trending line of supply (i.e., trendline) is directly overhead at the $33-$34 area. Due to the position of oil's dominant short-term and intermediate-term cycles, its wave structure, and the various trendlines and trading channels, it is highly doubtful oil will overcome the overhead supply at the $33-$34 level this month. It likely will not get another chance at taking out this level until later on in the year.

The natural gas futures market is nearing a short-term and intermediate-term cycle bottom. Natural gas hit its long-term upside objective of $10 based on trading channel projections, and the market has had an exhausting upside run for several months so it only follows that a pullback and overall consolidation market is due that will last at least into the spring. This is consistent with the short-term outlook for oil. The overhead supply that exists between $8-$10 is heavy and this will act against any attempt this winter at overcoming this level. A short-term parabolic dome pattern can be seen in the daily chart for NYMEX natural gas futures (basis February), and this will prevent the run-up above $8 this over the next couple of months. However, as the dominant shorter-term cycles are approaching a bottom, prices will remain buoyant enough to at least hover between the $7-$8 range for the next few weeks.

Clif Droke is the editor of the three times weekly Momentum Strategies Report newsletter, published since 1997, which covers U.S. equity markets and various stock sectors, natural resources, money supply and bank credit trends, the dollar and the U.S. economy.  The forecasts are made using a unique proprietary blend of analytical methods involving cycles, internal momentum and moving average systems, as well as investor sentiment.  He is also the author of numerous books, including “2014: America’s Date With Destiny.” You can view all of Clif's books here. For more information visit www.clifdroke.com.

The Federal Reserve Bank of New York holds the world's largest accumulation of monetary gold.

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