Summary of Index Daily Closings for Week Ending February 13, 2004

This week the Dow Jones Industrial Average rose nearly 150 points, as indicated last week by our Short-term Technical Indicator Index reading of positive 11.75, hitting a new high for this March 2003 rally of 10,746.88 on Wednesday before backing off and finishing the week up 34.82 points, closing at 10,627.85. This is the fifth week in a row that our Short-term TII has been accurate.

The new high the DJIA reached on February 11th was largely the work of an unfriendly bid for Disney by Comcast, accounting for 25 percent of the gain. The rise was not on particularly impressive volume nor breadth, and lacked follow through the next two days. While the S&P 500 also hit a new high (Disney sits on both the DJIA and the S&P), the NASDAQ and Transportation Averages did not, setting up a bearish divergence.

Under Dow Theory, the Dow Industrials and the Dow Transports should move in sync, in the same direction and in similar pattern. When one average hits a new high, the other should follow. When one average hits a new low, the other should follow. The reasoning is simple. For commerce to succeed, goods not only need to be produced (the Industrials), but they need to be shipped (Transports). Any interruption in one portends an eventual interruption in the other. Harmony between these averages must eventually return. If at any given time, they diverge, it means something is terribly wrong with the markets, and a trend reversal is likely being signaled. Divergences between these averages are like the canary in the tunnel. An early warning system. The Transports gave the Industrials a seven month heads up before the Bear market hit the DJIA in January 2000. Since 1999, there have been no divergences between these two averages . . . until now.

Either one of two price events must next happen. Either the Dow Transports are going to rise 165 points (rally more than 5 percent) over the near term, or the Dow Industrials (and the rest of the equity market) is about to take a nasty fall. This is what happens with Dow Theory divergences. They confirm, or they don't due to a major trend reversal. For the non-confirmation to be official, both indexes must decline below their recent lows - 10,417.80 in the Industrials and 2815.70 in the Transports - before the Transports rise above 3080.

Richard Russell, the foremost expert in Dow Theory on the planet at age 79, points out in his February 10th newsletter (www.dowtheoryletters.com) that many market tops have been characterized in this way - a final run-up in the Industrials unconfirmed by the Transports. The two charts on page three depict this divergence.

In addition to the Bearish Dow Theory divergence, we also have a very interesting convergence of two simultaneous 50 percent retracements in the S&P 500. The above chart shows the decline from March 24, 2000 to October 10, 2002. Call that move the 1.00 base move. Since then, the S&P has essentially retraced 50 percent of the decline in terms of price and time. Exact 50% retracements will be fulfilled if the Market reverses to the downside on February 20, 2004 after hitting 1160. It essentially hit 1160 on February 11, 2004 by reaching1158.89. Quite often trend reversals occur on such patterned Fibonacci retracements. The fact that we are about to witness a two dimensional fractal (a miniature exact replica of a larger pattern) lends weight to the retracements' significance.

Notice also that the S&P 500 has had a trend reversal up or down around February 20th +/- a month every year for the past five years.

This week the Short-term Technical Indicator Index comes in at negative (68.25), meaning we can expect the equity market to move down this week. This indicator has been accurate the past five weeks. The Intermediate-term Technical Indicator Index comes in at negative (22.19), warning that a significant reversal remains at risk over the next twelve weeks. Massive increases in M-3 could mitigate the damage or the timing.

The Economy:

The news wasn't so hot this past week. Lot's of disappointments. Here goes. Inventories rose 0.6 percent in December, pushed up largely by automobiles. They rose 3.0 percent. The financial press boasted this was good news, that companies must be building inventories because they have increased confidence in the economic recovery. Poppycock. Does anyone in his right mind believe rising car inventories means the economy is in strong recovery? It simply means zero percent giveaways will be around awhile. Retail Sales actually fell in January, down 0.3 percent, according to the Commerce Department. If you look at December and January together, Retails Sales fell 0.1 percent. Some recovery, eh?

Jobless Claims jumped to 363,000 for the week ended February 7th. Here's some sobering figures from the February 2004 issue of The McAlvany Intelligence Advisor (P.O. Box 84904, Phoenix, AZ 85071): Over 95 percent of last May's university graduates cannot find a job in their area of study. In Oregon, over one in eight people receive food stamps. An estimated 1.66 million Americans went bankrupt in 2003 - the highest number since the Great Depression. Over the past five years, 8.0 million Americans have gone bankrupt. He points out that weekly jobless claims figures are vastly understated due to seasonal adjustments. For example, the reported Jobless Claims figure for the week ended January 3rd was 353,000. Yet, without the seasonal adjustments, actual initial claims for unemployment benefits were 546,823 that week.

Well, what about that great 5.7 percent unemployment rate? The answer pain and simple is that it is bogus. Millions of unemployed workers are not included in this figure. How's that? Discouraged workers, those answering the survey that they have given up looking for a job, are excluded from the ranks of the unemployed. If a person has taken a flyer and started up a new business, even if that person's earned no income from it, these folks are excluded from the unemployed, yet eighty percent of new businesses will fold up within five years. Further, if you lost a six figure job and now work two jobs for a combined half the pay, The Bureau of Labor Statistics reports that two new jobs were created.

If you take out arbitrary seasonal adjustments by the Labor Department, jobs actually declined 800,000 during December 2003 and January 2004, according to John Mauldin in his February 7th piece, The Unemployment Quandary (www.safehaven.com). He further points out that the establishment survey of the Bureau of Labor Statistics shows we have lost 3.0 million jobs since the recession started in 2000. This figure is based upon an active look at the unemployment insurance accounts of nearly 160,000 businesses.

This week we heard that the Chairman of the White House Council of Economic Advisors, Gregory Mankiw, has been promulgating the outsourcing (exportation) of jobs overseas all in the name of free trade. Of course, Dr. Mankiw still has his job - oh, and by the way, it is on U.S. soil.

So is it any wonder that the University of Michigan index of Consumer Confidence plunged in February 2004 to 93.1 from 103.8 in January?

We also learned this week that the U.S. Trade Deficit grew in December by nearly 11.0 percent in one month! Brutal. And how about its twin, the Federal Deficit? We learned this week from Bush's own economic advisors that an overhaul of the Social Security system favored by the administration would increase the national debt by 4.7 trillion. Oh boy.

Money Supply, The Dollar, & Gold:

M-3's recent stratospheric growth took a breather, M-3 actually falling $8.7 billion last week. Even with the phenomenal increase in the money supply over the past month, it remains below its level of late summer. The Dollar fell to nearly a new low, in reaction to recent increases in M-3. It will act inversely to the money supply. Gold has been in a trading range since early December, a sideways correction. Given the prospects for the deficits, look for Gold to rise over the long run, perhaps dramatically.

Bonds and Interest rates:

It would seem that the extraordinary growth in M-3 we've seen the past month has leaked into bonds more so than into stocks, as was the case during the early portion of this equities rally. The Fed has made it clear, again this week, that it is not ready for interest rates to rise. We should infer this also includes long-term rates - for the glory of housing and mortgages.

The Bottom Line:

February 20th is a potential Fibonacci turn date in equities as it marks when the rally in the S&P 500 since October 2002 is 50 percent of the time period it took the January 2000 to October 2002 decline to occur. We also find that, contrary to what the media wants us to believe, the mutual fund cash-to-assets ratio is the lowest it has been over the past 25 years - except for once when it was about the same - in early 2000, the top of the Bull. With low cash levels, mutual funds will be hardpressed to bid up equity prices. The chart on page 3 notes that the Dow Industrials are very close to a Fibonacci 78.6 percent retracement of the decline from January 2000 through October 2002, which would occur at DJIA 10,775. This is a common retracement percent for countertrend rallies in Bear markets, and in fact has been seen twice before during the past four years. As far as Dow Theory divergences go, the current Transports/Industrials' is a big one given the huge amount by which the Trannies have failed to confirm. Absent master planner intervention, the demise of this impressive Bear market rally draws nigh. Be very cautious.

"Every man shall give as he is able, according to the blessing of the Lord your God which He has given you."
Deuteronomy 16:17

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