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Global Market Outlook

Equities Outlook Still Bearish; Commodities Looking Stronger

November 2, 1998

The outlook for U.S. stocks, while somewhat mixed, is still firmly bearish based on our indicators. A serious decline in the major indices is still a distinct possibility as we head into November. Stock markets abroad, meanwhile, also continued mixed with Asian countries enjoying a bit of a rally from recent lows and European countries also enjoying strong gains of late.

The commodities outlook is very promising as we approach the end of 1998. Most commodities are technically oversold and appear to have bottomed (at least in the intermediate term) and are poised to benefit from seasonal and cyclic upturns associated with this time of year.


Our benchmark Dow Jones Industrial Average has been the source of great frustration for the bears recently. For weeks we have been forecasting a decline in this index yet it has shown remarkable near-term strength in the face of extremely bearish technical and fundamental factors. Our somewhat esoteric socio-cultural indicators (which in the past have proven very reliable) have also let us down as far as forecasting the expected decline.

Even cyclic and hisotrical considerations—especially the historically bearish nature of October—have been highly misleading this time around for stock market bears. So what gives?

While the Dow may not be behaving as bearishly as we would expect, it isn't exactly performing gung-ho bullishly, either. In fact, there remains an eerie silence from both buyers and sellers—as if both sides are waiting for some important signal before jumping in to either buy or sell heavily.

Another way of looking at this, however, is that perhaps the sellers really do outnumber the buyers but are simply unable to sell due to a paucity of eager buyers. It is precisely this type of condition that could serve as a prelude to a market crash if investors eventually panic over diminished stock buying opportunities.

To be fair, however, we must also consider a bullish alternative to this assessment. The past one week has seen a relative sideways movement in the Dow accompanied by contracting volume. This phenomenon does often follow a large runup in the stock market (as happened earlier in October when the Fed lowered interest rates by an additional 0.25%). Perhaps this is nothing more than a consolidation period before a subsequent runup in the Dow. Indeed, some respected market forecasters are calling for a higher Dow based on this argument.

So which way is the Dow heading over the near-term? Ultimately, we do not know. The Dow has been in the midst of a major corrective pattern since the lows of early September. All we can do is consider the weight of evidence which should point to the Dow's direction. Among the technical factors worthy of consideration: The candlestick chart for the Dow Jones Industrial futures (basis December) showed a bearish "shooting star" on Oct. 20. Shooting stars almost always imply a reversal downward (as has been the case over the past few days). But the amplitude and distance downward cannot be predicted based on this pattern. Thus, while the Dow has declined in recent days, its decline has been extremely shallow and perhaps this is all we can expect this time around from this pattern.

Finally, we would be remiss if we did not consider the overwhelmingly weak-looking fundamentals that surround this market. While we tend to avoid the fundamentals in our analysis and stick only to the technicals, we simply cannot ignore the massive leverage and margin debt undergirding this market—a castle made of sand if ever there was one. While the Federal Reserve may have a short-term weapon for fighting off the forces of global deflation—the interest rate—it simply cannot match the immense force of these deflationary forces which eventually steamroll all who try to stop it. Japan has attempted to stop deflation with interest rate cuts and it hasn't worked—Japanese interest rates are nearing 0% and they are still in the mist of a long-term recession bordering on depression. U.S. investors who place their faith in Alan Greenspan and his fabled interest rate ax are surely doomed to disappointment.

If nothing else, the considerable declines in other U.S. indices, such as Value Line, Russell 2000 and Wilshire 5000, almost guarantee that the U.S. will experience a recession in 1999. These indices reflect the health of American companies much more accurately than the capitalization-weighted Dow Jones Industrial Average or the Nasdaq composite average. Eventually, the effects of the significant declines in these averages will be felt in the broader domestic economy.

In Japan, the Nikkei, like the Dow, has proven resilient to bearish pressures over the past several weeks. Some analysts have even pronounced a bottom in the Nikkei and predict the beginning of another bull market for Japan. While the Nikkei may be close to bottoming, we do not believe it has bottomed yet. Over the past few weeks, we have stressed the necessity of a Nikkei above the critical 13000 benchmark for Japan's economic solvency. For the most part, the Nikkei has remained above this support level in a back-and-fill pattern.

We saw what appeared to be a bullish falling wedge on the Nikkei's chart earlier this month but did not point it out to readers because we were uncertain of our analysis. Now it appears that it was indeed a wedge and much of the upside expectations have been fulfilled, though technically there is still room for more of an upside move (to perhaps the 15000-16000 level) before the Nikkei commences its long-term falling trend. According to Edwards & Magee, a falling wedge almost never signals the end of a bear or bull market, so this alone gives us a clue Japan has at least one more new low to make before the worst is over. Some analysts expect to see a Nikkei of between 7000 and 12000 before it's all over, and that before the end of the year. Maybe so…time will tell.

For now, the Nikkei remains stuck in a range between 13000 and 14000. The near-term trend remains unclear to us at this time. However, a firm break below 13000 probably means the next (and possibly last) big decline to our cited potential bottom areas is underway.


Since falling from its bearish falling wedge pattern earlier this month, bonds yields have risen while prices have fallen in exactly the manner we anticipated. The bear market in bonds, so far as we can tell, is far from over.

It is evident now that a declining T-bond market and lower interest rates plays right into the hands of the Federal Reserve as far as giving them greater ability to reflate the money supply and continue to fuel the credit bubble. This also sets up investors for a potential carnage as the safe haven status of the 30-year T-bond has now been removed to a large extent.

Money market accounts and bank CDs do not yield as much money right now as the stock market does so this forces many investors out of the relative safety of cash and back into the vicisssitudes of the market. They are now firmly at the bear's mercy.

As for our near-term bond outlook, we still see bond yields rising, but maybe not as precipitously over the immediate-term. Bonds have been consolidating a bit over the past few days and this sideways trend may continue for a few days more before further declines resume.

Near-term support for T-bonds is at 128-03 to 128-22, while resistance is at 131-06 to 131-28. Any violation of the support levels just mentioned probably means the next wave of decline is underway.


The U.S. dollar bear market continues with no sign of a letup in immediate site. Actually, this bear market has been ongoing for some time—recent "bullishness" in the dollar was more a reflection of its strength compared to the Japanese Yen and other major global currencies than anything else. Now the trends have changed and the Yen is looking to be in the driver's seat while other major world currencies are also looking strong once again.

And beginning in January, the dollar will be under intense pressure from the coming euro currency. Jim Blanchard, in the October Gold Newsletter, sums it up as follows:

"The dollar…faces a major challenge from the euro. Central bankers across the world will be obligated to allocate substantial portions of their foreign reserves to the euro. To do so, they will have to sell the dollar. "China's central bank, for example, has announced that it will shift its reserves from well over 50% in the dollar to only 20% in the U.S. currency.

The shift out of the dollar has only just begun; when the euro becomes available, the dollar flight will rapidly accelerate. "Jurg Lattmann, publisher of Swiss Perspectives newsletter, noted that, 'Many experts believe up to one trillion dollars may escape from the dollar reserve currency to the new euro. A recent poll by Gallup for Merrill Lynch found that 54% of money managers preferred the euro to the dollar.

Why will central banks and investors dump the dollar? First of all, because of the euro, they now have a real choice of reserve currency. Remember, America is the world's largest debtor nation while the European Union is a major creditor.'"

Meanwhile, Eurodollar futures on the CME have performed remarkably well. We might also add that an options play known as the "Y2K Strangle," which seeks to profit from a simultaneous position of a call and a put in the Sept. 1999 Eurodollar, has paid off handsomely in recent weeks. This strategy, recommended by, among others, Franklin Sanders of The Moneychanger newsletter, recently hit big when interest rates recently dropped, making the call option part of the Y2K Strangle immensely profitable. Readers interested in this options play may want to contact Fox Investments in Chicago for more information [Note: Leading Indicators has no financial interest in this strategy or in recommending this strategy.

As we mentioned above, the Japanese Yen is beginning to look bullish and may be looking to post an impressive run going into 1999. The short, intermediate, and long-term trends of this currency all seem to be pointing up. Major resistance for the Yen is at .95-1.00, while major support lies at .70-.75.

Both the Swiss Franc and the German D-Mark are also beginning to look bullish. While both currencies may come under bearish pressure in the immediate-term, look for potential rises in both currencies relative to the dollar over the next few weeks-to-months.

The Australian dollar is showing a bullish divergence between its stochastic oscillator and its price chart and its moving averages have crossed over and appear to be turning up. However, it needs to overcome immediate overhead resistance at approximately the .65-.68 level before its trend can be considered unequivocally bullish.


The story of the week is in the precious metals market as far as we're concerned, especially in the white hot gold and silver coin market. If anything could sum up the recent action in this market it would be simply "Y2K."

Coin dealers around the country are reporting unprecedent sales of U.S. Eagle gold and silver coins. Some of the dealers we have spoken to have even reported severe shortages of coins and are either no longer selling or have been forced to buy coins at a loss at retail prices, rather than wholesale, in order to fill bulk pre-pay orders. This intense demand, much of it predicated on the coming Y2K computing crisis as well as the global financial crisis, is all the more impressive in light of depressed prices in the precious metals sector. What makes it even more amazing is the fact that the mainstream news media have effectively ignored this significant development, even to the point of covering it up. In fact, the only time gold is mentioned in the news these days is when our supposedly unbiased reporters and commentators take liberties at bad-mouthing it, constantly referring to its monetary value as "antiquated" or "anachronistic."

Clearly, the mainstream press has an agenda against gold and silver. (For this we can all be thankful, however. If the mainstream media weren't derelict in reporting on gold trends we probably wouldn't have sites like Gold-Eagle).

The gold market of late has been instilling hope in the hearts of goldbugsand investors who are keeping close watch for a possible turnaround. Yet it still has not yet provided us with the decisive penetration above $304/oz. that is needed in order to confirm the start of a new bullish move.

Gold obviously has been testing the critical $300/oz. resistance for some time, and, much to the chagrin of many gold investors, it has failed in several recent tries to hold firmly above this level, choosing instead to hover slightly below it. Nevertheless, the very fact that gold is "hanging tough" at or near this important mark should be viewed as an indication that gold is looking for a move to higher levels. If nothing else, it definitely signals that gold has gained significant strength in recent weeks and may have found an intermediate-term support level. In the recent past, whenever gold has failed to penetrate a higher resistance level it has usually fallen immediately to lower levels with no further effort at retesting overhead resistance. Now gold is showing uncharacteristic tenacity and determination to press higher regardless of the ubiquitous bearish sentiment that surrounds it—a positive sign.

Technically, gold's futures chart has traced out a bullish "flag" formation, a pattern that usually implies higher prices ahead. Certainly, gold has given us no reason to expect a reversal to lower levels anytime soon. Gold's relative strength is still bullish and its MACD has given what would appear to be a bullish signal. The MACD for gold recently made a higher low while gold recently made a lower low, thus creating a positive divergence. Gold's MACD is on the verge of registering a clear buy signal and should be watched closely in the coming days. Gold's price trend has been consolidating within a narrow range and we feel this portends a breakout to at least the $310-$320/oz. level over the next few weeks.

On the candlesticks chart, gold futures are showing several small candlestick patterns known as "spinning tops," which represent trader indecision but also usually mean an eventual continuation of the previous trend (up). So we expect to see a gradual move to higher levels in the coming days/weeks.

Momentum indicators and volume trends have been very bullish of late. Gold has also crossed above its 10- and 30-day moving averages, another bullish sign. In short, all systems seem to be saying "go," but we'll still need to await further confirmation from the market itself before jumping in head over heels. Our official stance is neutral but our inclinations are becoming more bullish by the day.

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

With gold stolen by Conquistador Francisco Pizarro from the Inca Empire in 1532, Spain financed its conquest of Europe.
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