Market Insights™

We pointed out last month that both the NASDAQ Composite index and the AMEX Internet Index were not performing particularly well. As market leaders, that was bothersome. That problem is no longer with us. We also pointed out that the long bond was a concern -- it still is. It is the one indicator that gives us pause in this rally. Bonds are always key to the direction of the stock market. They made a gallant run to the 6.00% level but immediately rebounded a quarter of a point.

As Barron's pointed out this past week, the advance-decline line has diverged from the NYSE Composite index for 19 months now. That exceeds the second longest divergence on record (1928-1929) and is just two months shy of the longest (1971-1973). Both periods ended badly. No guarantee that history repeats any time soon, but it certainly bears watching.

We'll keep our eyes open.

Market Statistics
DJIA 10988.91	S&P500 1416.62
DJTA 2909.16	NASDAQ 3447.81
DJUA 281.37	30 YR BOND 6.23%

28-October-99

Long Term Model asset allocation:
stocks	bonds	cash	gold stocks
100%

Intermediate Model asset allocation:
stocks	bonds	cash	gold stocks
75%		25%

Short Term Model asset allocation:
200% stocks	100% stocks	100% cash	100% short

The S&P 500 made a short term bottom on Friday October 15 (precisely on the inflexion point we discussed last month). The following Monday our short term model flashed a BUY signal and we recommended moving to a leveraged long position. If you followed our advice, you are currently 200% invested in stocks (100% on borrowed margin) and benefited from today's explosive break above the 1300 level. That move was accompanied by very heavy volume and strong complementary moves in the bond market, the NASDAQ Composite, and all three Dow averages.

In addition, several stock averages broke up through important downtrend lines, suggesting that the correction in stocks may be over. The indices showing positive life were the S&P 500, the Dow Industrials, the NYSE, and the US dollar. Two other averages are right up against their corrective downtrend lines: the Dow Transports and the Russell 2000. A strong follow through day tomorrow will break these two indices into a bullish pattern.

The only important laggards are the NASDAQ and the bond market -- and these are VERY important. The NASDAQ has been providing leadership in recent months but has been underperforming of late. Bonds are always key to the direction of the stock market. This is why we have kept the Intermediate term signal in a mildly bearish stance at 75% stocks, 25% bonds. If the internet stocks and the NASDAQ Composite can regain solid leadership and the long term government bond yield can drop back down to 6.00%, we will be prepared to switch our intermediate term recommendation back to 100% stocks.

After the European central banks indicated publicly that they were going to drastically cut back on gold bullion sales, the yellow metal skyrocketed over 25 percent in price in less than a week. Normally this kind of price action would be a negative for the bond market and by extension the stock market, but we feel that gold is merely trying to find its "natural" price level. By removing the artificial tampering of governments, this should have the secondary affect of improving the predictive quality of our bond model several months hence.

Market Statistics
DJIA 10622.53	S&P500 1342.44
DJTA 3013.11	NASDAQ 2875.22
DJUA 306.26	30 YR BOND 6.24%

28-September-99

Long Term Model asset allocation:
stocks	bonds	cash	gold stocks
100%

Intermediate Model asset allocation:
stocks	bonds	cash	gold stocks
75%		25%

Short Term Model asset allocation:
200% stocks	100% stocks	100% cash	100% short

In last months letter we indicated that the short term market indicators were pointing positive while in the background the intermediate market indicators loomed negative. We also pointed out that whenever our proprietary real long bond rate indicator flashed a sell signal in the past, a market top appeared within four months. We got such a signal this past June.

While we fully expected the S&P 500 index to break into new highs before making a top, it appears in retrospect that the July 19 record intraday high has assumed that role. We were speculating that the stock peak might coincide with the the 13 week inflexion point due around October 15. We now anticipate that the inflexion will coincide with a market BOTTOM rather than a market top. Since inflexion bottoms typically occur a week earlier than inflexion tops, our guess for a target bottom in stocks is October 8, eight trading days from today.

[Note: Inflexion points are simply cyclical periods where stocks make a change in direction. If they are rising, an inflexion would coincide with a correction. The duration and depth could be either great or small, depending upon the indicators at the time. If the market is sliding, it will reverse to the up side. Again the duration and depth varies with market conditions. These inflexion points occur every 13 weeks +/- one week.]

A July rather than an October stock market peak fits better with the timing of the slide in long bond prices (rise in long bond yields). As we pointed out last month, the sell-off we have seen in bonds since the beginning of the year historically would have resulted in a sell-off in stocks proceeding by the end of July.

The reason we are in the midst of a market correction is simply that the intermediate negatives have swamped the short term positives. We believe they will continue to do so. However, since these same short term positives are still with us, they should provide support as the correction continues to unfold, limiting downside potential.

The positives we are referring to are long term interest rates and market leadership. While bond yields haven't been able to penetrate below the 6.00% level, they also haven't exceeded the cycle high of 6.27% set back in early August. And while the S&P 500 index and Dow Industrials are about 10 percent off their all time highs, the market leading NASDAQ Composite is down just 5 percent while the all important AMEX Internet Index is showing good relative strength.

Targets in the S&P 500 to watch: 1200 on the downside, and 1300 on the upside. A close significantly below 1200 would signal serious trouble while a close above 1300 on strong volume should be interpreted as a reversal to the upside. As always, keep your eye on our market models for further developments.

Market Statistics
DJIA 10275.53	S&P500 1282.20
DJTA 2856.98	NASDAQ 2756.25
DJUA 291.77	30 YR BOND 6.06%

28-August-99

Long Term Model asset allocation:
stocks	bonds	cash	gold stocks
100%

Intermediate Model asset allocation:
stocks	bonds	cash	gold stocks
100%

Short Term Model asset allocation:
200% stocks	100% stocks	100% cash	100% short

Stocks moved generally sideways this past month, with both the Dow Industrials and the NASDAQ Composite up slightly, and the S&P 500 Index down slightly since our last letter. The Dow pushed into new highs while the other two indices are a few percentage points below their all time highs set on July 19. For the record, the Russell 2000 is within 12 percent of the record it set in March 1998.

The S&P 500 index closed below 1336 on July 30, moving us to switch our short term model to SELL from NEUTRAL. Since then, we have moved back to the NEUTRAL position leaving all models with a recommendation of 100% stocks.

The internet stocks, as represented by the AMEX Internet Index, completed their retest of the June 15 low, setting a new low on August 5. Four trading days later the yield on the 30 year Treasury bond put in a cycle top at 6.27%. These were very positive events for the stock market as a whole. Also positive is the index of bullish minus bearish newsletter writers, which has fallen from 35 in January to 13.4, a ten month low.

These positive signals make us optimistic that any close in the S&P 500 below 1345 would represent a buying oppportunity. Therefore, we are looking to move our short term model from NEUTRAL to BUY, probably this week.

So much for the good news. The bad news is on the intermediate front. The bond market, although it seems to have made a short term bottom, has been in a decline since the beginning of the year. It's very unusual when a market top doesn't appear within the first seven months of this kind of action. And the chart of the Dow Transportation Average looks very weak, having topped out in May this year. Tops in the Transports normally precede tops in the Dow Industrials.

A little known indicator that we invented is flashing a major CAUTION light. We track the real long bond rate (long bond yield minus inflation) against its 12 month moving average. Since 1980, whenever the average has moved below four percent followed by the current value crossing up through the average, the market has topped out within four months.

The last three times this occurred was March 1990, January 1994, March 1996. Stocks peaked in June 1990, February 1994, June 1996. The indicator once again went negative in June 1999. We anticipate a top in the S&P 500 in either September or October which could very well coincide with a double top in the Russell 2000 and Internet Index.

A thirteen week inflexion point that we track is due the week ending October 15. That is our current target for a critical turning point in stocks. Stay tuned.

Market Statistics
DJIA 11090.17	S&P500 1348.27
DJTA 3171.35	NASDAQ 2758.90
DJUA 320.93	30 YR BOND 5.96%

28-July-99

Long Term Model asset allocation:
stocks	bonds	cash	gold stocks
100%

Intermediate Model asset allocation:
stocks	bonds	cash	gold stocks
100%

Short Term Model asset allocation:
200% stocks	100% stocks	100% cash	100% short

The major stock market indices, including the S&P 500, Dow Industrials, and the NASDAQ Composite, established all time highs on July 19. Both the Dow Transports and Utilities have yet to exceed their April highs, while the lagging Russel 2000 is making a run at its all time high of April 1998.

The CBOE Internet index, currently at 465, is in a process of retesting its low of 385.1 set on June 15. This is occurring in concert with a retest of the recent highs in long bond yields. We feel that once this retest is complete (more than likely within the next month) the stock market will push into new highs.

For that reason, our recommendation for your trading portfolio has moved more positive to 100 percent stocks from 100 percent cash, based on our short term model. Our intermediate model has moved more positive as well, shifting from a maximum of 75 percent stocks to a maximum of 100 percent stocks in your long term portfolio.

What would change our mind here and put us in a more negative stance would be if the S&P 500 index closes below 1336.

The 30 year bond yield traded below the 6.00% level and then moved above it again. We believe the cycle highs were posted in June and that yields will move back beneath 6.00% once this retest is completed.

Market Statistics
DJIA 10972.07	S&P500 1365.40
DJTA 3418.39	NASDAQ 2705.84
DJUA 317.18	30 YR BOND 6.00%

27-June-99

Long Term Model (Clairvoyant) asset allocation:
stocks	bonds	cash	gold stocks
100%

Intermediate Model (Clairvoyant) asset allocation:
stocks	bonds	cash	gold stocks
75%		25%

Short Term Model (Spider Wizard) asset allocation:
200% stocks	100% stocks	100% cash	100% short

The markets have been mixed since our last letter. The Dow components (Industrials, Transports, and Utilities) are all down slightly while the S&P 500 index and NASDAQ Composite are both up slightly. The markets have been in a correction since our May 14 SELL signal. The DJIA and S&P 500 both set all-time intraday highs on May 13, the NASDAQ on April 27. The Russell 2000 index, a proxy for small cap stocks, peaked last July. Our recommendations based on our short term model remains 100 percent cash for your trading portfolio and based on our intermediate model no more than 75 percent stocks in your long term portfolio.

Those of you who got swept up in the internet stock mania made a great deal of money if you sold in mid April. However, if you've held onto your .com stocks, you more than likely saw prices cut nearly in half. The CBOE Internet Index (ticker symbol INX2) peaked at 727.9 on April 13 and hit a low of 385.1 on June 15. It currently stands at 473.0, down 35 percent from the April peak.

Since the NASDAQ Composite has been the market leader, and the internet stocks have led the NASDAQ, we expect the current correction in the averages to continue until the internet sector launches into another bull run. That is not likely to happen before a retest of the June 15 low is completed. That more than likely would coincide with a peak in long term interest rates.

The 30 year bond yield has moved solidly above the 6.00% level. It could be close to putting in a top here. That all depends on how investors interpret the actions of Greenspan & Co. this coming Tuesday. We believe that the market has already factored in a single 25 basis point increase in the Fed Funds Rate. If investors come away from this Tuesday's meeting believeing the Fed will raise rates further than that, expect a negative reaction in the stock market.

Market Statistics
DJIA 10552.56	S&P500 1315.31
DJTA 3316.11	NASDAQ 2552.65
DJUA 322.04	30 YR BOND 6.15%

28-May-99

What a difference a month makes. It appears that the latest internet stock mania has finally come to an end. In the process, our short term model flashed a SELL signal on May 14, just one day after the S&P 500 index set its record closing high of 1367.6, switching our recommended position in your trading portfolio to 100% cash. More interestingly, and perhaps more ominously, our intermediate model switched to a mild SELL mode, indicating that the GROWTH portion of your long term portfolio, which has been 100% in stocks, should now be 75% invested in stocks, 25% in cash.

Since the SELL signal, the S&P 500 has sold off 6.6 percent on an intraday basis. While we don't see this as the beginning of the BIG ONE, there is no indication that we have reached the end of this correction. This correction should provide a buying opportunity, but it will come at lower prices than current. Our best guess is that the market will sell off into the 15 percent range before it is all over. But we will let the market tell us when it is the right time to get back in.

With CPI inflation now running solidly over 2%, this correction has been triggered by rising interest rates. The 30 year bond yield has moved over 5.80% after bottoming out below 4.90% in October of last year. That 100 basis point move is significant and negative for stocks.

Gold has just set a 20 year low while the Dow Jones Utility index is making record highs. These two actions are both positive for bonds, meaning long term interest rates should reverse soon. That would mark the end of the current correction in stocks.

DJIA 10559.74	S&P500 1301.84
DJTA 3415.70	NASDAQ 2470.52
DJUA 329.20	30 YR BOND 5.82%

Stock Market Outlook: NEGATIVE

28-April-99

Our short term model is currently in NEUTRAL mode, meaning our short term portfolio is 100% invested in stocks. Our intermediate model is in BUY mode while our long term cycle is still in the EXPANSION phase, indicating that the GROWTH portion of your long term portfolio should also be100% invested in stocks. We feel comfortable with these allocations at present.

Over the next month, we will be looking for an opportunity to increase our short term position to 200% stocks (buying on margin) on any significant dip.

Thus far the March 3 peak in long term bond yields of 5.68% has held, although the equity gain to bond holders has been minimal.

DJIA 10845.45	S&P500 1350.91
DJTA 3631.72	NASDAQ 2550.37
DJUA 307.95	30 YR BOND 5.57%

Stock Market Outlook: POSITIVE

28-March-99

The S&P 500 index dropped to an intraday low of 1216 on March 3. As expected, that level provided a springboard from which stocks climbed to new highs. That event took a mere four trading days, eventually culminating in historic intraday highs on March 19 for both the DJIA and the S&P 500 indices. The NASDAQ has yet to exceed its all-time high of 2533 set in early February, while the moribund Russell 2000 is well below its highs of a year ago.

We believe the scenario we laid out last month is still intact. That would mean a retest of highs is immenent, probably within a week, with new records a possibility. That should give the index of bullish minus bearish newsletter writers just the boost it needs to push it back into the danger zone. And that int turn could lead to a significant market correction. Just how significant is difficult to say at this time; as always you'll want to monitor both our short term model and our intermediate model .

Historically speaking, April has usually presented excellent buying opportunities. So be on the alert for at least a short term market bottom this month.

Our bond model has just flashed a BUY signal. If the market responds accordingly, long term interest rates should begin to fall from this level. Exactly what impact this would have over stocks is unclear because these two assets appear to be disconnected from each other at this time.

DJIA 9822.24	S&P500 1282.80
DJTA 3260.11	NASDAQ 2419.17
DJUA 299.77	30 YR BOND 5.60%

Stock Market Outlook: NEUTRAL

28-February-99

Last week saw the S&P 500 and the DJIA indices move into all time historic highs during the intraday session on Wednesday without making new closing highs. Investors immediately reacted with stong selling late Wednesday and on Thursday. We responded Wednesday with a SELL signal on our short term model and are currently 100% in cash.

The negatives are many right now. The Russell 2000 index has been in a BEAR market since last April. It appears to be tracing out a major 5-3-5 Elliot Wave correction. At this particular juncture, that index appears to have completed the 5 wave leg down, the 3 wave leg up, and is now declining into the final 5 wave down leg. Throughout this decline in the Russell, the large cap indices have held up well, posting all-time highs this year after a 20 percent correction last summer. It is doubtful that they would continue to show the same strength in the final more violent stage of the downturn.

Because of low inflation rates, the relationship between stocks and bonds inverted from August 1998 through January 1999. Whatever was good for bond prices was bad for stock prices and vice versa. In February the more familiar relationship asserted itself. Now a falling bond market is also a negative for stocks. And bond yields have been on the rise recently (bond prices have been falling), which is unnerving equity investors. The European economies have been weakening lately, adding to an already desparate world economic situation. The U.S. economy, on the other hand, is perceived to be "overheating", raising fears of a Fed tightening of interest rates. Finally, the market internals (advance-decline line, new highs vs. new lows) are badly deteriorating.

On the positive side, the index of bullish minus bearish newsletter writers has dropped significantly over the past two weeks. As long as the S&P 500 index can hold above the 1215 level, it along with the DJIA and possibly even the Nasdaq composite should be able to push into new highs. We expect the market to test that level later next week or early the week after. Our expectation is that it will hold and trace out a pattern similar to April-July last year. Recall that the market moved sideways in April, May and into June, made new highs in late July, and then slid into a minor bear market correction. Thus far this time around, we have had a sideways market in January, February, and probably into March. New highs should follow in April before another, more severe, bear market follows.

Should the S&P 500 index penetrate the 1215 level over the next week, we would have the makings of a classic head-and-shoulders topping formation with the 1215 level representing the neckline. That would be a very negative event for stocks and would erase our short term optimism.

Gold appears to be weakening, which would be a positive for bonds. That would play into the short term positive scenario we outlined above.

DJIA 9306.58	S&P500 1238.33
DJTA 3207.43	NASDAQ 2288.03
DJUA 293.87	30 YR BOND 5.55%

Stock Market Outlook: POSITIVE

29-January-99

Since bottoming in October 8, 1998, stocks have made astonishing gains. The S&P 500 is up 33 percent, the DJIA a less spectacular but still impressive 21 percent, and the NASDAQ a maniacal 79 percent! Although we have been somewhat skeptical about this latest leg of the bull market, our intermediate model kept us 100% invested in stocks for 99% of the entire advance (we pulled in our horns briefly during the late November correction).

As seems to be the rule over the past year, our short term model is once again on the verge of a sell signal here the end of the month. Considering that we have underestimated the power of this market the past two months, we are erring on the side of optimism and assuming that the market will power through this overbought condition by month's end.

We use the term mania to describe the price action of the internet stock led NASDAQ index only because that is precisely what it has become. The level of optimism in this market, as measured by both the CBOE put/call ratio and the index of bullish minus bearish newsletter writers, is in the danger zone. The latter index is now above +30. Last year this occured twice, in April and July. The April reading was followed by a consolidation correction that lasted two months. A 19 percent almost-bear market in both the S&P 500 and DJIA, and a 30 percent bear market in the NASDAQ index followed the July peak. We expect the markets to plow through the latest reading, ultimately pushing the index over +40 and triggering a full-fledged bear market for all the major indices. For now, we wouldn't recommend standing in the way of this runaway locomotive.

Both gold and bonds are currently trading in a narrow range. A break below 5.75% in the 30 year treasury bond would be a big negative for stocks.

DJIA 9358.83	S&P500 1279.39
DJTA 3201.98	NASDAQ 2504.68
DJUA 302.80	30 YR BOND 5.09%

Stock Market Outlook: POSITIVE