first majestic silver

Indian Summer in Place, but…

October 20, 2003

… there is an increasing probability that this will culminate in a Market Crash.

The following chart is a 5% X 3 box reversal Point and Figure Chart of the $XAU vs the US$ (source: stockcharts.com). It shows that the Gold Shares have been in a Bull trend - relative to the US Dollar - since 2001.

What it also shows, however, is that the rise is reaching levels where some consolidation may need to set in before the primary uptrend can continue.

So, if there is to be consolidation, will it be the $XAU that falls or will the US$ rise?

The next chart clearly shows that the $US may be reaching for a bottom. Note how the MACD is giving a buy signal, and how the RSI is now in a rising trend.

This buy signal indicates that the "Double Bottom" formation on the Point and Figure Chart below is likely to hold for the time being and this, in turn, implies that the gap on the above bar chart - at around 94 - 94.5 - is likely to be covered before the US$ turns down again - ie we can expect a rising dollar for the foreseeable future.

As we come within sight of the US Presidential Elections it seems reasonable to expect that the politicians will pull out all the stops to ensure that the background economic situation is benign (or appears so); and this will be consistent with the Indian Summer scenario that we began to anticipate some months ago.

In an Indian Summer scenario, it would also be reasonable to expect the equity markets to be sailing on smooth seas, and the following charts of the DJIA and DJ Transports show rising tops (Source:decisionpoint.com) - ie In terms of Dow Theory, the Secondary Uptrend is intact and showing no signs (yet) of a reversal.

Importantly, the MONTHLY charts of both the DJIA and the Transports appear to have broken UP through falling trendlines (although the DJIA chart has a warning message of its own in that there is still some resistance to be overcome in yet another downtrend line).

One reason that the US Dollar may be rising is that yields are also rising again - as can be seen from the following chart (note how the PMO is showing a fairly strong break up):

And herein lies one of the signals which points to the rising probability of an eventual Market Crash.

Those who understand the dynamics of Corporate Profit and Loss Accounts will understand that - at the margin - profits rise strongly into a revenue "turnaround" phase; and this will be the fundamental justification for the equity prices to be rising at this stage. It appears that revenues are starting to rise off a low base. (There was an article recently that IBM is planning to employ a further 1000 staff members)

The fundamental underling problem is that if (and probably when) corporations start to add overheads coming into a rising revenue phase, there is a philosophical assumption that "the worst is behind us" and that the revenue line has now entered a rising trend.

It is my contention that this assumption is fundamentally flawed - ie It is (only) because of artificial monetary and fiscal stimulation by the authorities that the revenue lines have started to rise. However, because this stimulation has not been addressing the underlying problem - which is that the historical "DRIVERS" of the economy are terminally ill - there is a rising danger of severely contracting corporate Profits, following the Indian Summer period.

Fundamentally, there is no reason to believe that the economy can keep growing - given that 67% of GDP is driven by consumer spending; and given that consumers have been increasing their debt levels - AND GIVEN THAT INTEREST RATES APPEAR RISING ONCE AGAIN.

Summary

Rising yields are underpinning the US Dollar's (temporary) consolidation.

Aggressive monetary and fiscal policy has succeeded is injecting further adrenalin into the ailing economy.

Consumers, who are extremely vulnerable to higher interest rates because of high debt levels, cannot be expected to continue buying beyond the current spurt.

This is likely to cause revenue to top out again.

When revenue tops out, Corporate Profits will start to fall (dramatically) in the initial stages following a revenue turnaround.

At that point, the Primary Bear Trend will begin to re-emerge; WITH A VENGEANCE.

Conclusion

Notwithstanding the apparently rising trend, investing in industrial equities at this point is EXTREMELY risky.


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