BONDS AND STOCKS AT CRITICAL JUNCTURES -- GOLDS STILL FALLING -- TIME TO WATCH INSTEAD OF ACTING
DOW PROBING BOTTOM OF BIG TRADING RANGE -- AND LOOKING OVERSOLD... The Dow Industrials have reached the bottom of the eight-month trading range defined by the July/October lows. At the same time, daily oscillators show an "oversold" reading. The 9-day RSI line has just dipped under 30 (which is oversold territory), which it also did at the end of last September and late July. Both were the prelude to a rally. The RSI pattern actually bears a closer resemblance to the bottom formed during the September/October period. The early October low broke the low hit in late September -- prompting a short-term "positive" divergence in the RSI. The same is happening now. The Dow has undercut its February low. But, once again, the RSI is showing some positive divergence. All that means to us is that the market has reached a potential support zone and is looking oversold. It doesn't make us bullish. But it does argue against being too bearish as these levels and at this point in time.
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BOND YIELDS ALSO TESTING LOWS... The 30-year T Bond yield is also at a crucial chart point -- and is also very close to its October low. The 9-day RSI line is now under 30 for the first time since last September, when the lost trough was formed. This isn't a good time to be making big bets on bonds either. Although the trend of yields is down, this would be logical spot for some profit-taking to emerge in bond prices.
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GOLD STOCKS ARE STILL DROPPING... Back on February 5, in a paragarph entitled "Dressed Rehearsal for the Real Thing?" we issued a cautionary warning on gold stocks. Here's what we said: "We're still bullish...over the long-term. However, as we listen to the media talk about the rally in gold day after day (and with some resolution of the Iraq situation drawing close), we think this is a time to be more cautious on gold." Since then, gold stocks have taken a decided turn for the worst. Once again, we have to point out the value of using moving average lines as a trading discipline. The XAU and the Gold Bugs Index (HUI) broke their (blue) 50-day lines on February 10 -- issuing an initial sell signal. As of today, they're both below their 200-day moving averages. Moving average lines keep us from letting profits turn into losses -- and also keep us from re-entering a falling market prematurely. Although we remain bullish on the longer-term trend in gold and gold stocks, we won't be re-entering the group until we see some convincing evidence that the downside fall is over. We recently suggested that bullion might even fall to the $325-$330 support area before stabilizing. Gold fell $6.00 today and is trading around $350. The extended downturn in gold stocks is another factor keeping us from being too bearish on the stock market over the short-run -- since they had been moving in opposite directions.
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NOT A GOOD TIME TO BE AGGRESSIVE... That same February paragraph described a knee-jerk reaction to a UN speech by Secretary of State Powell -- after which stocks and the dollar bounced (albeit temporarily) -- while bonds and gold pulled back. We suggested that could a "dressed rehearsal" for the time when Iraq situation is resolved. There's a growing sentiment that time could be drawing very near. As we said back then, however, "we think those (counter-trend) reactions will be interruptions of existing trends -- not major reversals". We still believe that. To conclude with what we said a month ago: "We don't think this is a time to be aggressive in any of the financial markets. If you're not already participating in existing trends, it might be a good idea to wait until the Iraq crisis is resolved before committing new funds." As we enter the weekend, our charts are telling us essentially the same thing. We don't see any compelling reasons to be taking on new positions right now. We would, however, recommend taking defensive steps to protect existing positions against any short-term trend reversals. There's a time to act -- and a time to watch. Right now, we're in favor of watching.
