Stock, Real Estate and Currency Outlook

The Chicago Mercantile Exchange (CME), the exchange on which major world currency futures are traded, announced recently that December 2001 volume of trade reached a record of 411.7 million contracts, surpassing the previous record year by 78 percent. Last year, the underlying value of transactions on the CME represented $294 trillion in asset allocation and risk management activity, an increase of 88 percent above the record $155 trillion set in 2000. CME's 2001 trading volume made it the largest futures exchange in the United States for the first time. Why is this important? Because most of this volume was centered around trading in the Eurodollar futures contract. This is significant due to the enormous importance of this global currency. In fact, a number of major currencies are due important moves in their respective cycles in coming weeks. We will analyze the list of currencies in the paragraphs that follow.

The CME March 2002 Euro futures contract has brief rally potential to the $0.88 overhead resistance level. After this, expect a steep and prolonged decline to follow, probably to as low as $0.84 or even $0.82. The Euro was the CME's most actively traded futures product in 2001.

Canadian Dollar futures on the CME (basis March 2002) has immediate upside potential to $0.635 (presently $0.6250 based on the measuring implications of the recent trend line penetration. Ultimately, however, the C-dollar will continue its downward trend in coming months since it has too much overhead supply and the climatic phase of the downward trend has not yet begun. The C-dollar should trade in mostly inverse relation to the U.S. dollar in coming months. Since the C-dollar tends to follow commodities, it only follows that it has more downside potential since the K-wave cycle (which governs commodity prices) doesn't bottom until at least 2004. The C-dollar might find a price bottom before 2004 but the time bottom won't be for another two years at least.

The March 2002 Swiss Franc contract on the CME should reach $0.57 before the end of March based on the price projection implication of its broken June-October 2001 line of demand. Price points can be predicted with great accuracy by measuring natural reaction points along trend lines in relation to areas of heavy selling on the tape. The SF topped last September near $0.64 and broken below its four-month trend line in October at around $0.61. This yields a minimal downside target of $0.57, which just happens to be an important level of chart support extending back by more than a year. Also, parallel channel and cycle channel configurations show heavy overhead supply near $0.60. Any rally in the SF contract in coming days should meet resistance around this level. The SF has been making a series of lower lows and lower highs for the past five months, which is bearish. Volume accumulation has not yet showed up on the tape. Therefore, the SF remains bearish heading into March.

The Australian Dollar (basis March 2002) is coiling in an 8-week triangle pattern. The breakout should be to the downside since the price projection target from the November 2001 trend line break is at $0.495. This also is where the triangle measuring formula projects to. A bearish 20-week parabolic dome (a function of the 20-week cycle) is also still intact, which means prices will be under selling pressure until at least March.

The March 2002 British Pound has immediate upside potential to $1.43 with a move to $1.45 likely in coming weeks. The Pound, along with the U.S. Dollar, is among the very few major world currencies that have bullish short-term outlooks.

The South African Rand (basis March 2002) is finally in line for a corrective rally from its steep six-month decline last year. The price projector off its six-month trend line forecasts to around $0.11 (prices are currently around $0.085) The cycle channels are also in the process of turning up and converge around this level.

The Brazilian Real (basis March 2002) has considerable downside potential in coming weeks once the $0.40 neckline support is broken. The Real is tracing out a bearish head and shoulder topping pattern between $0.40 and $0.42. The Real is currently trading within the confines of a 6-month parabolic dome, a function of the 24-week cycle.

Meanwhile in equities, the March 2002 S&P 500 contract on the CME has entered the declining phase of its cycle channels and while it will likely join the Dow in a brief rally this week, has considerable downside potential in the weeks following.

The cash Dow has upside to the 9800-9900 resistance band during the coming week before the cycle channels converge to push prices lower. Looking further out, the Dow will have significant downside pressure up until late May/early June under the combined force of the 40-week cycle and the 120-week cycle. There should be a bear market rally in June possibly extending into a summer rally. But this will be followed by a decline into the autumn and finally, will be punctuated by an outright crash sometime in October. After yet another rally off the October lows, we could see one final low for 2002 as we close out the year since the 120-week and the 40-week cycles will both be down at that time.

Just how far down can the Dow decline this year in terms of amplitude? At this point it's really anyone's guess. But based on the configuration of time cycles, cycle channels and trend lines, the 3500 would be the absolute lowest point the Dow could reach this year. That is not to say the Dow will actually fall this far in 2002, but it is a possibility. We should definitely see a test of the super critical 7400 level sometime this year and probably a decline to around 6500. But below that is anyone's guess at this point.

The chart books are literally studded with short sale candidates right now and almost every stock sector has them. One sector that really stands out is the homebuilding and building supply sector. It is interesting to note that this is one of the only industries that is still trading at or near all-time highs. Many of these stocks have experienced parabolic blow-offs, which warn of a crash in coming weeks. This sector will undoubtedly help bring the broad market down hard in the months ahead. Home building has experienced quite a resurgence since the temporary lull last autumn. No one seems to believe that home and real estate values can plummet just as hard as stock values. Everyone seems to think real estate is somehow immune to the pressures of cyclical deflation. Such is not the case as all-too-many will discover this year.

REITs will be big losers this year and in the next 2-4 years to come. Unfortunately, all too many analysts make the mistake of assuming that real estate is a hard asset or physical commodity much like gold or silver. It isn't, at least not in the market sense. In a runaway deflationary environment real estate will lose value just like most everything else. This is especially true since most people in the U.S. have the greatest portion of their wealth tied up in real estate. In the coming hard times they will be forced to sell at any price in order to pay off existing debts, etc. Also, there is always heavy debts associated with land and real estate, which means that most people don't actually own it, and this in itself guarantees a real estate collapse since there is too much debt and not enough money to pay it.

The gold mining stocks have begun the first of their significant corrections after an impressive 6-week run to the upside. Expect lower prices across the gold mining sector in days ahead. This is shaping up to be a classic 38%-50% corrective move and as long as mining shares bottom above the 50% retracement level it shows the market for gold shares is still strong and the bull market is still technically underway.

Even though a follow-through rally from today's market action is to be expected up until late in the coming week, there isn't much upside potential to merit being long the market and the downside potential is huge once the market finally breaks.We've said it numerous times and we'll say it again-Year 2002 will be the worst year in stocks at probably any time since the GREAT DEPRESSION.