first majestic silver

A Taste of What's to Come

January 17, 2002

The broad market has already given us a taste of what the overall market environmental will be like for 2002 with the Dow's steady six-day decline, accompanied by the sell-off of a number of leading indicator stocks and blue-chip bellwethers. Much as we have warned in recent editorials, the first quarter of 2002 is when several major cycles peak and turn down, which will have the effect of bringing down equity and real estate prices throughout the year. Make no mistake, it will be an ugly one and will make 2000-2001 look prosperous by comparison.

It is intriguing to note the large number of stocks with similar chart patterns, as equity prices across many sectors and industries line up with the Dow. This is a reflection of the peaking long-term and dominant trading cycles and it always produces crashes because of the tendency for many sectors to fall together. Year 2002 would have been a down year anyway due to the declining 120-week cycle, which always produces a pronounced sell-off, but the confluence of multiple time-frame cycles (from the very small to the very large) practically guarantees a crash of mammoth proportions. The Dow's trading pattern is that of a parabolic half-dome, with the mid-point of the parabola having already been defined. This means we can expect pronounced selling after the broad market tops in February.

The overall pattern in IBM, a Dow leading indicator, is also that of a bearish 3-month parabolic half-dome. The supporting trendline has been broken, thus establishing the mid-point of the parabola. This means that IBM will encounter selling pressure all the way into April, although there will be consolidations and counter-trend rallies along the way. We agree with the sentiments expressed by Bud Kress of SineScope (15 Phoenix Ave., Morristown, NJ 07960), who wrote in a recent letter, "Investors who have failed to sell at the previous two opportunities now have their last chance to realize the decades of accrued gains. Traders who made purchases subsequent to last September's bottom should also realize their gains…"

The Dow Jones Transportation index has met ultimate resistance at 2800 and will likely be unable to overcome this formidable obstacle. The 2800 level, called the "Berlin Wall" by many market technicians, has been a benchmark psychological level for the past year and it is from this level that the huge 800 point drop was seen last autumn. The fact that the Transports have formally topped is an important indication that our scenario for a first quarter broad market top is in place and unfolding on schedule, since the Transports typically lead the Industrials by a few weeks.

The Sept. 11 WTC disaster was much more than a cause of personal and economic loss; it was also a product of K-wave deflation. History shows that most "hot wars" and international acts of aggression are perpetrated during the "hard down" phase of the 55-year K-wave, that is, during the final few years before the bottom. Not only will WTC and its aftermath severely hurt the U.S. economy, but a major retrenchment in the airline industry is already apparent. A large number of airlines are aggressively promoting drastically reduced rates with seemingly no takers. Business and personal travel is way down and likely to remain down for some time. This is reflected in the Dow Jones Transportation index and is failure to rise among the critical 2800 level.

One asset class that will perform exceptionally well in 2002 is precious metals. It is extraordinary to watch the cycle channels unfold across numerous gold and silver mining stock cahrts, as well as in gold and silver futures. For instance, the XAU mining index has a well-defined upward-sloping channel extending well into 2002 and its interim benchmark resistance near $60 is sure to be broken in the next couple of weeks. Once this final layer of supply is absorbed, the way is paved for a smooth upward flow to consistently higher levels. The XAU will undoubtedly be one of the top-performing indexes for the year.

Even the junior mining sector has firmed up appreciably in the past few weeks. As we have mentioned in recent weeks, Durban Deep (DROOY) is a confirmed intermediate-term buy with an overall bullish outlook in 2002. Durban is presently undergoing a correction from its recent run-up but should find support around $1.45 before reversing and moving up above $1.60 in the next few weeks. The cycle channels for Durban are all pointed up after the $1.45 area has been successfully tested.

Our favored mining stock Placer Dome (PDG) has finally turned bullish again heading into 2002 and will move higher, overall, in coming weeks. Its first important test of resistance will come at or near $12.50. PDG currently trades around $11.75. Similar to DROOY, the cycle channels for PDG are all pointed up in the first quarter. The head and shoulders reversal pattern in PDG's daily chart projects a minimum upside objective of approximately $14 in coming months.

Even the "hedged" gold producers like Barrick Gold (ABX), which have been greatly maligned in recent years for their leveraging methods, look extraordinary going into 2002. Barrick's chart proves what we have said for years, namely, that hedging really makes no difference where equity prices are concerned. As long as a gold company is legitimate, established, actively traded, and actually brings yellow metal out of the ground, that's all that matters, hedged or unhedged.

Investment analyst Thomas Henning presciently observed, "[Fed Chairman Alan Greenspan] opened up the floodgates, pumping billions into the system. This is what the Japanese have been doing for years. It has done no good. Does anyone ever ask where the money came from? Answer: Out of an ink bottle. The Cash Dollar Index has asked this question and has broken down as the Gold Complex has firmed up. The central bankers are in trouble, not because of the [Sept. 11] attack, but because things were going down before that tragedy."

The top-performing mutual funds for the first three quarters of 2001 will likely be repeat performers this year. They are, in order of performance, as follows:

Rydex Venture 100 (RYVNX), Rockville, MD; $66 million in assets; "no load" (no sales charge); $25,000 minimum; up 94.40 percent.

ProFunds UltraShort OTC Investor (USPIX), Bethesda, MD; $54 million; no load and 1 percent load versions; $15,000 minimum; up 92.44 percent.

Rydex Arktos Investor (RYAIX), Rockville, MD; $64 million; no load; $15,000 minimum; up 62.05 percent.

ProFunds UltraBear Investor (URPIX), Bethesda, MD; $55 million; no load and 1 percent load versions; $15,000 minimum; up 51.76 percent.

Potomac OTC/Short (POTSX), Alexandria, VA; $3.3 million; no load; $10,000 minimum; up 50.87 percent.

Leuthold Grizzly Short (GRZZX), Minneapolis; $6 million; no load; $10,000; up 50.04 percent.

Rydex Tempest 500 (RYTPX), Rockville, MD; $83 million; no load; $25,000 million; up 49.89 percent.

Other top-performing funds for Year 2002 will also include the Prudent Bear Fund (BEARX) and the Rydex Precious Metals Fund (RYPMX).

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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