Troll-Free Report
Macro Scenario:
This rally has been fed by the Fed's pumping and interest rate cuts, but eventually bad news seems likely to stop the momentum. My macro-economic scenario calls for the US dollar to remain strong for the next few months as the Fed is so far holding off increasing interest rates despite the ongoing huge current account deficit. In the recent past lower interest rates encourage inward investment in bonds and stocks so that the traditional relation between the currency and interest rates has reversed. Foreign investors are selling US stocks and buying bonds – they don’t seem to believe that the interest rate cycle is over but that stocks have risen too much. They are likely wrong on both counts. Non-tech stocks seem fairly valued given low interest rates, but tech stocks are still very overvalued.
I still feel the trigger for the slump will be when the dollar begins to reverse triggering foreign capital withdrawal from the US. Overall I see a W shape recovery. As the first stage of the recovery proceeds interest rates will begin to rise. Layoffs also tend to lag economic output. Both these will mean that house-prices will begin to fall and loan repayments rise. This will put pressure on consumer spending and on bank viability. This is the second dip of the recession a la 1982 or even the 1987-1990 running correction cycle which seems to be wave 2 of the advance from the 1970s and now we are in wave 4.
The beginning of the turn around in the US Dollar is being sensed with the clear completion of a multi-year zig-zag correction in the AUD and bottoming and upmove in AUD, Canuckdollar and the Euro, and the uptrend in gold in the last year. We are hearing discussion of the falling USD in the mainstream media. Consolidation in the gold sector, reduction in gold hedges, buying by Japanese and other gloomy investors etc. will help raise the USD price of gold. However the Yen is falling and could fall some way and this is where the currency markets are focusing for the moment. In the long-run Sterling needs to decline relative to the Euro in order for the UK to enter the Euro system and BOE cannot sell further gold for the same reason.
Technical Analysis Scenario:
NDX/NASDAQ
The Elliott Wave Scenario is that we are now in wave C of B on the main crash in the NDX. There are two possible scenarios. One is that we are now in 3 of C since 22 February with waves 1 and 2 complete. Wave 2 slightly overshoots the beginning of 1… Alternatively wave 2 of C is a large triangle/pennant shape with us now in wave D up. I still don’t buy the view that wave B started in Sep 2001 as I can’t see 5 waves down from the May 2001 top. Monthly stochastics support the latter view as we don’t yet seem in a strong uptrend again. McClellan Sumamtion too remains borderline, close to zero.
My own TA method shows recent short-term bottoming in the SPX and NDX.
The major B wave is likely now an expanded flat. If wave 2 is complete, I see the NDX rising 1000 points in wave 3 going sideways in wave 4 and to maybe 3000 + six months from now (a 50% retrace). The crash would then just be getting underway in October 2002. Wave C could then take the NDX to levels of around 700 by mid 2003. The final NDX bottom would give a very below normal return of less than 6% off of the 1994 bottom. This would allow a very substantial rebound (to c. 1200 for a normal return).
Dow/SPX
The Dow hit new highs since the September low at the top of the recovery out of the January-February bottom. This looks clearly like waves 1 and 2 of the C wave. This C is C of E in the Dow’s B wave. The remaining three waves have to match 3,4, and 5 of the NASDAQ C of B wave up. This suggests that the remaining three waves there will be a lot smaller than the first two, or the Dow wave 4 will be very long….
Gold
The gold price seems to have completed a 20 year ABC correction and now has completed a 5 waves up in the last year and has begun to correct, perhaps completing the first two waves of the correction. The phase is such that the gold price tends to move opposite to stocks. The ABC expected correction in gold should match the 3, 4, 5 up-move in the NASDAQ followed by C down in stocks and 3 up in gold!
Currency
Complete EDs exist in the AUD, Canuck, Euro, and Swiss Franc and they are now recovering against the USD. Yen shows no sign of bottoming yet. The USD index also appears to be in an ED, but 5 of 5 is still to come over the next few months. This can be accomplished by a decline in the Yen and perhaps sideways movement in the AUD, Canuck and European currencies. This move up (a triple wave) matches nicely the remaining 3 waves up required in stocks.
Individual Stocks
KKD has completed 5 waves up and now is in 3 of A down. LOOK/LOK has just completed B of the decline after putting in 5 waves up. Mayne went through an ABC zigzag correction and is now recovering. NDS seems to have finally completed a huge multiyear ABC correction and a final 5 wave 5 of C down to below $10. |
