Outlook for Stocks Mixed Gold Market Set to Explode

February 23, 2001

The brief two-week rally we forecast for the listed stocks this week failed to materialize as the dominant short-term cycle apparently topped early. A decline began early this week and has intensified as of this writing at mid-week. It is doubtful in the highest that the Dow will manage a rally at this point as the late February/early March sell-off has begun. However, a cycle bottom is anticipated the first week of March so we should once again get another buying opportunity within a couple of weeks. For now, it is a short-sellers market.

The advancing minus declining volume ratio on both exchanges has been nothing less than atrocious over the past several days. The nice upside volume uptrend stalled out late last week and started turning down on Monday. By today (Wednesday) the technical deterioration across the board was made manifest by the fact that all four of our primary technical indicators (advancing minus declining volume momentum) have now turned down and are giving sell signals. The advancing/declining volume differential on the NASDAQ is even worse, as the tech stocks have apparently begun the final precipitous stage of decline of their one-year bear market. Once the decline has ended and the wash-out is complete, there should be a sideways accumulation market over the next few months until the middle of this year, at which time the OTC stocks will become buys again.

Notwithstanding the weak internal condition of the market (short-term), the intermediate-term position of the market is still fairly strong. The primary leading indicator for both the equities market and the physical economy, the Dow Jones Transports, are still well above the benchmark supporting floor of 2800 (currently at 2994). Above this level, the market is in strong hands and is no imminent danger of a major sell-off. A central component of the Transports—General Motors (GM)—is also above a critical support at $50 (currently at $52) and has etched out a bullish bowl-shaped pattern on its daily one-year chart. This chart, more than any other, shows the underlying strength of this market despite the short-term weakness.

Interestingly, most listed stocks are running on a four-month rhythm from price bottom to price bottom, with the most recent cycle bottom occurring last November. That means that early March should witness the next cycle bottom, and an ensuing turnaround. Since we are in the final stage of the cycle decline, we can expect rough going from here until early March. The final 8-12% of any cycle decline is always the "hard down" stage, and that's what we are in now.

A further support for the intermediate-term bullish case is the fact that several leading Internet stocks—which have been pounded for nearly two years—have clearly bottomed and will almost assuredly bounce back strongly once the current cycle bottoms next month. The best example of this is found in the Merrill Lynch HOLDRs Trust (HHH), which is listed on the AMEX. Note the high-volume spike bottom that occurred in January, as well as the clearly visible head and shoulders bottom pattern that has formed and is nearly complete. By March, HHH should lead the way higher among the Internet sector stocks.

Stocks aside, the big talk right now in many financial corners seems to be centered around the gold market; specifically around the possibility for a gold market crash. Indeed, several top analysts have gone out on a limb to predict that the gold market is on the brink of a crash of epic proportions, which would take gold down below $200. In our analysis, this scenario is doubtful in the highest. Much like the equities market, gold's dominant intermediate-term cycle is due to bottom in early March. This means we are only days away from an expected end of the decline that has weakened gold's price for the last several months. While a test of the $250 ultimate supporting floor is a possibility, we doubt even this will transpire since that would run the risk of breaking the market wide open at a critical juncture. The short interest on the COMEX continues to build at a fantastic pace and the market is in the perfect position for a short-covering rally—the kind of rally that would cause a spike in gold futures similar to the one that occurred in September-October 1999. Long-term bull markets do not usually begin with short-covering rallies, but the current gold market will be an exception. Apparently, gold's bull will begin as some sort of "V-bottom" reversal and will launch higher from there after a series of consolidations along the way. Ideally we would want to see a major bull market begin as a rounding bottom-type accumulation pattern, but we'll take them as they come.

Gold's short-term price objective (by June of this year) is the $400-$425 range. After this level is reached, a pullback and lengthy consolidation will ensue that will probably carry to the end of the year. The upward trend will resume in force in early 2002 and will carry higher throughout the year.

How high can gold climb over the long haul? In this instance the sky is truly the limit. Gold will fast become the asset of choice (indeed, the de facto choice) of the '10s. When all other assets classes (including real estate) are sinking rapidly in the runaway deflationary trend through 2004, investors will have no other choice but to pile into the gold market, which will only exacerbate the upside trend. Gold in the years ahead will be what the Dow was in the 1990s. A phenomenal, once-in-a-lifetime buying opportunity is upon us.

Once the present market decline bottoms, a number of stock sectors will become buys, including the gold mining stocks. Our favorite long-term investment choice is Placer Dome (PDG). Barrick Gold (ABX) also reflects the favorable longer-term outlook for the mining stocks. Note the concentric cycloid pattern in the 10-year chart of the ABX. A bearish dome is about to intersect a bullish bowl—in March no less—and our guess is that the bullish energy of the bowl will overpower the bearish pressure of the dome. In fact, this is one of the single most powerful chart patterns that can occur—a bowl meeting a dome. Either way, an explosive move (whether to the upside or downside) always results.

The physical economy continues to deteriorate, so much so that even the always-ebullient financial press has added the word "recession" to its vocabulary. Fortunately for them, this word will only be applicable for a few months. Unfortunately for them, another, more severe, word will soon take its place—depression. By our estimate, we should be in the early stages of depression by the fourth quarter of the present year. The depression will intensify next year and through 2004. This is yet another reason why gold will become the de facto investment choice in 2001 and beyond. Nothing shatters the financial illusions and delusions of the crowd faster than a deteriorating economy. Incipient depression is yet another fundamental factor the gold market has in its favor.

In summary, we are at the crossroads of several major economic and financial events. The crosscurrents now present throughout the market have made it difficult to consistently make money in one direction or the other, and this will likely continue through March. However, two firm signals will be flashed this spring that will afford us tremendous profit opportunities on both sides of the market (long and short). The gold market will also offer rich rewards to far-sighted investors who have bought at today's low prices.

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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