The Reaper Market Comments

Metals

If you believe in real money, in the inevitable upcoming depreciation and devaluation of all currencies, if you believe in a debt-saturated world that gold is the only asset that is not simultaneously someone else's debt, then this gold chart should excite you. The double bottom by gold, the breakout upside, the on-going bullish consolidation all are bullish. All it will take is for gold to close strongly above $330 to accelerate the uptrend. Reflecting this bullishness in gold generally is the five-year bar chart of the Amex Gold Bug Index (HUI). A big head and shoulders bottom has been formed over the past five years with a clear breakout upside above the neckline. Once the HUI clears 140, gold stocks should accelerate upside.

A strong close by December gold above $330 should turn all trends sharply higher. A weak close by December gold below $310 will turn the intermediate trend lower, below $300 the major trend lower. Gold has been building for this breakout, up or down, for the past five months. Negative fundamentals affecting the U.S. Dollar and the U.S. economy argue for an upside breakout in gold. The 48-year low in inflation has not been able, so far, to break gold down. As discussed here also many times previously, the fundamentals intrinsic to the gold market regarding supply and demand are bullish. For example, Middle East demand for gold is up 30%. Japanese gold demand has increased 75% this year, with investment demand up 150%. ...When the U.S. Dollar tipped its hand and started lower on October 22, gold turned around and bottomed October 24 and moved higher. Since then, the decline in the dollar has been reflected by the rally in gold. Gold stocks have been tracking higher accordingly, too. ...Ironically silver, which has been weaker than gold, bottomed October 10, before gold. Silver has been trudging higher since then. December silver needs to clear $4.70 resistance to turn decisively bullish. A weak close by December silver below $4.30 should set up a test of $3.80-$4.00. ...The copper market bottomed October 7 and has moved higher with the U.S. stock market. Copper prices have also improved with declines in registered exchange copper stockpiles, lower interest rates, Chinese refined copper cutbacks. Additionally, current copper usage is outstripping mine production. ...January platinum has topped out just below $600 at $591. Is platinum now going to finally decline seasonally due to less demand from the auto industry and less demand from Japanese jewelers? If so, this is a belated seasonal sell-off. A weak close by January platinum below $570 will confirm the intermediate high. Palladium is attempting to bottom just above $300.

Recommendation

Futures investors who are scale down purchasing call options in February gold--hold. Only exit these call options on a weak close by February gold below $310. Futures investors may purchase December gold on a strong close above $325 and $330 with $312 open protective stops, holding for a test of at least $342, maybe $400.

Stock Indices

The stock market is not declining on negative news. This is bullish short-term, or at least suggests further consolidation. There has been bullish divergence on the stochastic indicator on the last three lower lows, too. The sharp three-week rally, followed by the low volume narrow range consolidation, implies at least another thrust up, possibly toward 9000-9400 resistance on the DJIA, into our late November/early December turning point timing frame. It will take a weak close by the DJIA below 7400 to accelerate the downtrend.

Are we seeing a modified ABC Elliott Wave correction up in this overall bear market in stocks? The effective July 24 and October 10 double bottom in the December S&P suggests that the consolidation in the stock market since October 15 has been a "B" corrective leg of an ABC rally. December DJIA could rally to 9000 and even 9400-9500 resistance. The December S&P could rally to test 965-1000 resistance, maybe a tad higher. On November 4, December NASDAQ rallied to 1073, exceeding the August 22 high of 1056.50. Interesting that the previously super weak NASDAQ has exceeded the August 22 high, while the December DJIA and the December S&P 500 have not yet done so.

Overseas, however, the world's second largest economy, Japan, which, together with the U.S., comprises nearly 50% of the global economy, is still struggling. The Nikkei Dow is relatively just off its July 9 bottom of 8360. Bad bank loans still plague Japan. ...So far, we have seen the stock market move higher primarily due to lack of selling pressure, speculation (bottom picking), little insider selling, and short covering.

The Republican sweep on November 5 helped stocks. This is not big investor buying, but investors still are not all that fearful, so this is probably not the major low, just an intermediate low as we have long projected (October 10). The S&P 500's core earnings of 48 are clearly indicative of an overvalued stock market.

The fall-out to Wall Street of the accounting changes, the severe under-funding of pension plans that will have to come from future profits, the deflationary tendencies globally, real profits being shipped overseas through the soaring U.S. current accounts and trade deficits, the inability of the U.S. to compete with manufacturing in China where 40 cents an hour labor is employed, crisis in the corporate debt bond market, the saturation of U.S. consumers with debt, falling factory orders for the third time in the last four months, consumer spending contracting by 0.4% in September after a plunge in consumer confidence, U.S. car sales falling 27% in October, their slowest sales pace in four years despite zero financing and hefty rebates, the probability of a war in Iraq, not to mention the risk of more U.S. terrorism--all are still emerging fundamentals that will dramatically affect stock market profits/earnings/prices over the upcoming months and into next year. Moreover, the fallout of an $8.5 trillion plus loss in the stock market, over 80% of U.S. annual GDP, is taking its inevitable toll. But for now, there is a respite from all the negative news and bear markets. The elections gave investors renewed hope.

So, this is a traders' market where investors can play December S&P, DJIA and NASDAQ futures contracts, or Spyders (SPY) for the S&P 500, Diamonds (DIA) for the DJIA, QQQs for the NASDAQ 100. ...A word of caution: Bear market rallies are unpredictable. They often end when they are least expected to do so. That investors jumped back so soon to institutional bullishness of 44% and individual investor bullishness of 51.7% (only 20.7% bearish) is of concern. Such is not the sign of a major bottom. Investors are already more bullish than they were at the August highs. So, this rally has weak underpinnings all around. Yields of less than 1.8% just don't cut it at a final stock market bottom, either. A better bet is a 30-year cycle bull market in commodities.

Recommendation

Futures investors who are lightly scale-up purchasing put options in March S&P--hold. Futures investors may sell March S&P short on a stop at 879 with 921 open protective stops, holding for a retest of 770. Until then, the bias is up.

Interest Rates

Have long-term interest rates bottomed? How much lower can they go? 3% U.S. T-bonds? As discussed in the last issue of The Reaper, T-bonds are still performing better than any other investment on the monthly continuation bar charts. This is still deflationary. As long as the Fed's excessive growth in the money supply is not matched by surging velocity (turnover of money), a contracting deflation could persist. (Gold holding below $330 and the U.S. Dollar not cracking to the downside to the contrary.) Nevertheless, the sharp fall-off from 115 resistance by T-bonds since October 10 suggests we have seen the low in long-term interest rates for the time being, particularly given overbought conditions and resistance.

Obviously the Fed is so concerned about the economy and the markets that it cut interest rates a shocking one-half point on November 6. The Feds' half-point interest rate cut (ie 50 bp) is the last one in the deck. The interest rate futures markets have now discounted the Federal Reserve's latest interest rate cut. A bearish head and shoulders top is being formed in T-bonds.

T-bills are already at 40-year lows. The Central Banks of the world are in conjunction lowering interest rates, but the U.S. has hit bottom. December T-bonds are yielding 5.06%. December T-notes are yielding 4.04%. December T-bonds should have trouble clearing 111-115 resistance. December T-notes should have trouble clearing 115-116-16 resistance. ...Yes, when stocks go up, bonds tend to go down, and vice versa. But the weakness in the U.S. Dollar against nearly all the major currencies may now be a relatively new factor in play that is pressuring the interest rate futures markets (T-bonds and T-bills) in a global contracting economy.

A strong U.S. Dollar, that enjoyed the fat of the land (literally the world) during good times, could be on the cutting edge of misery during hard times. ...Total mortgage credit is up almost $2.8 trillion since 1998, a 50% increase. Mortgage loans of 100%-120% of appraised value have been common. But mortgage applications have been off for three straight weeks. Mortgage interest rates have percolated back up which have hurt the housing market. The number of applications to refinance home mortgages fell 17.7% in the latest week. Foreclosure rates in the U.S. are at 30-year highs in single family dwellings. The median housing price is now 5.4% lower than a year ago. Fannie Mae is having a rising number of refinancings. ...In the troubled $2.3 trillion corporate debt market, defaults have hit a one-year record of $140 billion. New debt issues have fallen to a five-year low. Junk bonds hit a new low. The spread between junk bonds and U.S. Treasuries are at multi-year highs, in excess of 10%.

Recommendation

Futures investors who profitably purchased put options in March T-bonds--hold, Futures investors may sell March T-bonds short on scale up strength, preferably on strong rallies above 110, with 113-09 open protective stops. Target: 98-102.