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Markets Reflect Terrorist Threat

May 24, 2002

Two years ago we reported in a GOLD-EAGLE essay that the "War and Peace" cycle was forecasting war sometime in the 2002-2004 timeframe. This article was followed one year later in the summer of 2001with an article informing you of the military preparations being made by nations hostile to the U.S., as well as their preparations to attack the country. Another, more startling (and at the time, extremely controversial) revelation informed that preparations were being made last summer for an attack on U.S. soil by foreigners. Our basis for this forecast was confirmed by the developments that took place last year in the gold and steel industries. We wrote at that time, "The gold sector is being joined by the steel industry as the latest metal-producing financial sector to both discount and benefit from the specter of war."

One year after the fact and we are FINALLY receiving confirmation that trouble is ahead on the horizon from U.S. officials. Never mind that this statement came one year too late, and further was a statement that you should not have had to read last year from GOLD-EAGLE, but rather from the pages of the New York Times and Washington Post, et al. Our so-called "leaders" have sufficiently awakened to the military/terrorist threat that others (including this writer), and especially the metals markets, have been warning about for some time.

On Monday of this week Vice President Dick Cheney warned that new terrorist attacks on U.S. soil are "almost a certainty," adding that "It's not a matter of if, but when." This was followed by an announcement from FBI Director Robert Mueller that suicide bombings in the U.S. are "inevitable." How they all of a sudden are able to release this "knowledgeable" forecast now, yet they weren't able to one year ago, is a question worth pondering. And how exactly they "know" for certain that such an attack will occur opens up a Pandora's Box of possibilities. Nevertheless, credit must be given to them for at least publicly admitting something the markets have been warning of for a long time.

We've learned through the years not to trust the public pronouncements of high-profile leaders. And we know from recent experience that whenever the authorities warn of "potential threats" they rarely come to pass and are basically good only for scaring the public. So are Bush, Cheney and Co. to be believed this time? Surprisingly, for once they may be right. One thing we've noticed in our study of cycles and market history is that major wars, bombings, and terrorist events tend to happen during the "hard down" declining phase of a dominant intermediate-term or long-term trading cycle just before the bottom. To take one recent example, last year's devastating World Trade Center/Pentagon bombings happened just before the dominant intermediate-term 40-week cycle bottomed. This year there will be even more downside pressure to the markets since not only do we have a 40-week cycle bottom coming up, but also a dominant trading cycle of 120-weeks, a 2-year cycle, a 4-year cycle, and a 12-year cycle bottom-all by November of this year! This concentrates the threat of a terrorist event around these important dates, with the most likely timeframes in September-October (anniversary of 9/11 and the infamous "October Massacre" connotations). To perhaps a lesser extent, under this theory there would be perhaps a minor threat of a terrorist episode between now and late June when the dominant interim cycle bottoms.

The gold and silver markets are even more bullish now than they were one year ago when we first warned of the threat of violence to America. This shows how these important (and militarily-sensitive) markets are potentially discounting in advance another devastating event or series of events, not the least of which will be financial in scope. Crude oil is flaring up as well. And even the steel market is perking up again and looking to break out this year to higher highs. Last year, Bethlehem Steel (BS) was the stock we used as a leading indicator for a military threat in this sector. Today, old Bess is about to go under and could easily be subsumed into another steel producer, like say U.S. Steel (X). The chart for U.S. Steel reveals some interesting inside accumulation taking place and it would not be surprising if some sort of take-over were in the works. Rumor has it that U.S. Steel has an important government contract sale (war-related) in the works and something of this magnitude is clearly being reflected in the chart. The steels have a history of discounting war and other military activity in advance.

Another surprisingly strong intermediate-term investment sector is found among healthcare providers. The percentage gain in this industry since last fall has been enormous, as reflected in the AMEX Healthcare Provider Index and especially the Healthcare Payor Index. This is somewhat surprising when you consider that healthcare product, medical technology and pharmaceutical stocks are not doing so well.

A further consideration in the bull market for healthcare providers is that there is a recurring phenomenon in the charts of many healthcare stocks known as a "Magnetic Midpoint," (a.k.a., "Seldom Crossed Lines," developed by our friend P.Q. Wall). This is basically an area in the chart where prices have seldom if ever crossed in their complete trading histories. Magnetic Midpoints (or "Magic Midpoints," as they are sometimes called) rarely occur in charts, but when they do they nearly always portend a big upside move, and always produce a doubling of the price when they are legitimate. We've been able to locate Magnetic Midpoints in many healthcare stocks, which means further upside movement is likely this year, even in the face of broad market weakness. It would seem that the healthcare sector has turned into somewhat of a counter-cyclical.

What then accounts for this anomaly? We can't help but wonder if perhaps the insiders see something negative on the horizon that would possibly be a boon for the hospitals and healthcare services, like domestic terrorism or major natural disasters, for instance. In any event, the healthcare providers are on a solid technical - and from the looks of things, fundamental - footing in the intermediate-term and will benefit (unfortunately) from any bloodshed and violence that may erupt on U.S. soil, God forbid.

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.


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