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A Year of Uncertainty

"A Year of Uncertainty - For some at least"

In this weeks wrap-up -

In this weekends wrap-up we will cover

1. Fundamentals - General Market Thoughts
2. The Current Technical Outlook -
     2.a. Short term Perspective - Channels, Indicators,Counts
     2.b. Long term Perspective - Elliott Counts, and sometargets
     2.c. Gold and Silver
     2.d. Leaders and Shakers
3. Sentiment Indicators
     3.a. Volatility Studies - VIX
     3.b. Put / Call Ratio
     3.c. Commitment of Traders
4. Conclusion

Fundamentals

After taking a couple weeks to get situated back at school, it's back to writing the weekly wrap-up.

It was a volatile week as the market had it's first minor correction in a long time. This caused quite a ruckus on CNBC as Kudlow and Cramer wondered why in the world anyone would want to sell into such a "powerful" market The 5 wave declined ended Thursday, however, and we had the expected recovery on Friday. Friday was also the day of the unemployment report which continues to disappoint. Far from the 250,000 a month needed to signal a real recovery in the job market, the majority of jobs created originated in the education and government sectors, and are on average 20% lower paying then the jobs we are losing. This goes a long way to explain why income levels have barely budged since 2000.

With jobs still lagging, and income levels stagnating below inflation, people have relied on their favorite appreciating asset, their house, in order to make up for it. With rates as low as they have been, everyone is confidently racking up credit with the expectation things will get better in the future. We certainly hope they are correct, since if the economy doesn't recover (in a real job-filled manner), and rates are pushed up, there will be a lot of people wondering why in the world they got themselves a 30-year adjustable rate mortgage - just like people wondered why in the world they didn't sell their stocks in 2000. Yes, according to figures released from the mortgage brokers, adjustable rate mortgages are still popular despite the fact we have spiked up sharply from our lows - putting a smile on the mortgage brokers face no doubt.

But what if they are correct? Just this year, China and Japan have already committed enough money to buying U.S. treasuries to cover the majority of our credit needs. Kind of a two way "I buy your goods and you buy our bonds" promise. Some economists have speculated that this could very well keep rates low for the foreseeable future. So basically, the reason interest rates have remained so low is in a large part due to those friendly Asians who have taken it upon themselves to finance our indebtedness in order to keep us buying. In return, their currencies remain pegged far below market, and jobs, manufacturing, and investment will continue to flood their way. Now, the question is, is this sustainable. Stephen Roach has been writing exactly on this topic, and talked about how the majority of economists are back up on the "New Economy" soap-box touting this exact symbiotic relationship as the foundation for another historic boom period. The historic high in household debt, GDP/Credit ratio's, and the wavering job market, are all just a natural and ignorable part of this New America - the land of productivity and credit.

Yes, I'm sure Best Buy would indefinitely finance my buying spree's. Although I grant you that the United States differs from a consumer in the way that the U.S. can print all the money it wants, the value of what it prints will undoubtedly fall. This brings us to the G7 conference that took place this weekend. Our 'boy' Mr. Snow didn't say anything surprising - basically condemning China and Japan for their 'inflexibility' (even though they are the ones supporting our deficit) and refusing any support in the Euro / U.S. ratio. What is worrying, is the growing "currency war" rhetoric that all nations are beginning to convey. Everyone wants to have the "cheap" currency in order to support the export and manufacturing industries of their respective countries. Yes, we are back to instant gratification, since it seems that no one cares any longer for the longer term repercussions of currency devaluation. First of all, rates can sky rocket, and would have already done so if it wasn't for the hundreds of billions of dollars worth of buying by the Asian countries. Second, a weakening currency discourages investment since the currency risk, combined with the risk of investment would discourage a lot of foreign investors. Therefore, to sum it up, since it looks like no one wants to have the stronger currency, paper money will be "dropped out of helicopters," as Bernake put it. This makes commodities quite the investment idea, since the laws of supply and demand always take effect eventually.

This brings us to the last section of this report. My predictions for 2004 are as follows. The market has been ridiculously strong dumbfounding the majority of analysts (including myself.) Although I will get into more detail below on what exactly I think will take place, I think 2004 will contain the first major correction of this rally. Although I doubt that it will be too extensive since there is just too much momentum behind this market, any external shock, or a dollar crash, will have a significant effect. I'm sure that many of you have noticed how strong earnings reports just aren't strong enough, and how bullish reports aren't causing bullish reactions, and in fact, have prompted selling. This is the opposite of what occurred at the October bottom, and begs the question of what exactly is going to excel this market higher. Things are looking remarkably skittish at the moment, since weak numbers signal un-sustainability, while strong numbers indicate that the Fed might raise rates soon. In the words of CNBC, the numbers have to be "Just right" in order for the market to like them. The tech sector has also lagged in strength while the healthcare and energy stocks have pick up the pace (something that I predicted back in December). In general, I expect this to continue. The fundamental valuation on some of these energy stocks are ridiculously low compared to the awesome earnings they have been having. What's humorous however, is the fact that a number of brokerage firms have been busy downgrading these sectors, while giving two thumbs up to the 300 P/E internet stocks. Some of them claim that current prices in the oil and natural gas markets are too high. These same analysts claimed that we would be at 20$ a barrel after the quick conclusion of the Iraqi conflict, making this all sound like another case of year-2000 distribution. Overall, I think that the commodities markets are going to remain attractive for the years to come due not only to the exponential increases in demand from India and Asia, but also due to the currency conflicts that are going to arise sooner or later. On the political front, rhetoric and accusations are already being slung back and forth in preparation for this years election. Although election years tend to be positive years, they are also known to cause a good deal of uncertainty. For instance, a democratic win wouldn't be good for Halliburton stock. At the forefront of the mud slinging will be the "War on Terror," which somehow turned into the "War on Iraq" despite the fact 10 out of the 11 hijackers actually came from Saudi Arabia. Although Bush has an apparent economic recovery and an easy but troublesome Iraqi victory under his belt, the Democrats are going to be more than happy to point out that three things are missing - jobs, stockpiles of dangerous Iraqi weapons, and a couple hundred U.S. soldiers. Another thing that is going to become important in this election is protectionist rhetoric (coming mainly from the Democratic camp.) The only thing worse than an exodus of jobs to Asia, is a protectionist attempt to stop it, historically resulting in a lose/lose situation. Therefore, although I usually keep this weekly scribbling free of political points of view, I will include a good deal of it this year due to the profound impact this years election could have on the markets.

Enough writing however, lets get on with the technicals.

2. The Current Technical Outlook -

2.a. Short term Perspective

Nothing surprising on the NDX. It stretched itself all the way up to the upper trendline and then dropped to the support line. What I am looking for now is an ending pattern where we have a good deal of divergence. Although this is just speculation, I expect that we will see a new divergent high that doesn't quite make it to resistance, and then a drop breaking the support line.


We just finished up a classic 5 wave correction (some see it as A-B-C, although I usually don't see the degree of divergence with them as I do in this case.) I expect that this current rally will continue through the week and will probably come close to, if not reach the previous high. I do expect this ascent to be a good deal slower than the previous giving us a good divergence play at the next top. I would keep stops close at this point in time, however, since I am quite bearish on the market despite the short-term optimism. With no earnings coming out in the near term, it seems to me this thing could fall by it's own weight alone.

Charts of Interest

The Transport index, an essential amongst Dow Theorists, has shown immense weakness over the past two weeks. As you can see from the "price relative" ratio, the transports have lagged the Dow in speed of ascent since December, and have now dipped below their October lows even though the Dow is far above them. Intra-market weakness like this is often used to pick tops in the market. Similarly, the semiconductors have been lagging in the Nasdaq.


The bonds have done a whole lot of nothing over the past months. What has been well defined are support and resistance lines. Complaining that rates should be much higher, and would be if it wasn't for "intervention" by the Asians, is a pointless debate. For me, it just means that once this index breaks out, the move will be even more drastic then it otherwise would have been.

2.b. Long term Perspective

Although I have become a bit more disillusioned by Elliott wave than I was at first, here is a count I have been partial too lately although I certainly don't trade by it anymore (in cases other than counting fast moving impulses on daily charts). The boundaries defined by the pitchfork have contained this market perfectly. Once we do have a correction, I would expect support at the midpoint. I would also like to point out the curious symmetry in the market. The three vertical lines being equally spaced over time. Whether you believe in cycles or not, it is no doubt interesting to look at.

2.c. Gold and Silver


I expanded the gold charts out just to show people how small the recent correction really has been. People have been freaking out on the message boards and chat rooms as if the bottom just fell out of this thing. Gold is still well within it's rising channel (becoming exponential) and a number of the gold stocks are already forming breakout formations. This bull market is far from over, just like it's far from over in the rest of the commodities. Why do we know this? Because almost everyone public thinks so. If it were really true, the bottom would have dropped out a long time ago - since it sure ain't a bunch of old' timing gold bugs holding up this market.

Yea, the dollar has shown some strength recently just like I expected it would (on a nice divergence play none the less. Yet she still shows just how weak she is by making the recent rally a pathetic one compared to the decline. The G7 meeting may give it some strength for the time being, and it may even make it to 91-92 (top of the channel), however, I expect the downtrend to quickly resume after that. For those of you who have been reading this for a while, you might remember that I called a temporary bottom in the dollar at 85 - just bragging.

3. Sentiment Indicators

3.a. Volatility Studies

Volitility is still the whipping child of the whole market with no obvious turn around in sight. History tells us that this chart won't remain an ugly duckling forever- maybe it's just taking it's good time.

3.b. Put / Call Ratio

Well this recently rally sure didn't freak anybody out. Call volume practically increased as we fell, and now that we've rallied, it's back to the call side we go. So far, calling the market based on extreme readings in this index has been quite profitable - something to check out.

3.c. Commitment of Traders

To say it simply, all three parties of the COT index have been very wrong at one time or another in the past couple months. No one displaying any sort of edge at all over the other. Therefore, I'm going to keep an eye on it for a while, but not report anything about it while it remains useless. The link to access the charts is posted below.

Charts available from www.vtoreport.com.**

4. Conclusion

All I can think of is how this is going to be one great year of trading. With all the issues plaguing the markets these days, and a year and a half long rally behind us, things are bound to get interesting. Although I may be a bit off on the timing, this years first edition raises a toast to all, and wishes everyone the best in their investment endeavors.

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