May 2005

The U.S. real estate bubble continues to swell like a lava dome, supporting full-blown manias on both coasts and in quite a few cities, suburbs and towns in between. You'd have to live in a place like Muncie, Indiana, or Vernon, Texas, to be unaffected by it all. In Vernon, a town of about 12,000 in the lower panhandle, a mere $50,000 still buys all the house a growing family could need. To put that in perspective, a beach dweller in the Hamptons could trade his or her property for 200 homes in Vernon, with enough left over to buy a few Wichita Falls mansions. Not that anyone from the Hamptons is yearning to relocate to the Texas scrublands. Vernon is a quiet place, one where even big deals are still done on a handshake. But you'd be wrong to infer that it is a relative dearth of wheeler-dealers that has kept prices there from taking off. In fact, the town is where Charles Keating seeded his schemes. Yes, that Vernon Savings & Loan -- where my wife's grandmother kept her savings. SoCal Mania But I digress. For it is not Vernon's affordable housing that we wish to discuss, but rather the vast number of barely affordable homes on inventory just about everywhere else. In Southern California, to take a particularly notorious example, the concept of 'barely affordable' has been stretched to the threshold of the metaphysical. Los Angeles County's frothy market offers dwellings that only 17 percent of buyers can afford at the median price. And it's even worse in Orange County, where the figure is 11 percent. But how, you ask, can real-estate mania be going full-bore in a region where home prices are so very high? Some would answer that it's simply a matter of all-but-insatiable demand meeting temporarily insufficient supply.

Wednesday's on-line Q&A session was quite a bit longer than usual, but it allowed me to field queries in real time from more than a dozen subscribers. Tradable issues that received coverage intraday included the mini-S&P and mini-Nasdaq contracts, as well orange juice futures, General Motors, the Housing Sector Index, Imperial Oil, Clifton Mining, July Wheat, the Health Sector Index, Silver Standard Resources, Panera Bread, July Coffee, Novagold Resources, and Golden Star Resources. A pretty exotic mix, as you can see. One issue that I overlooked was Coeur d'Alene, where we took some profits during the day. You may recall that we bought the stock a few days ago at 2.70, a hidden-pivot support that I'd advertised as a possible swing low. So far, the pivot has held up pretty well, since CDE made a bottom at exactly 2.70 and has since rallied to 3.00. For aficionados of promotional hype, that works out to an annualized gain of�let's see now�3,600% (!!!!!) . I advised some profit-taking at 2.88, then at 2.99, which has left us with a long position half the size of our initial stake, and a cost basis of 2.47. (Click on image to enlarge) I mention all of this because the trade has conformed almost perfectly to our strategic ideal of staking out long positions in a shaky mining sector with little or no risk. My initial stop-loss below the 2.70 bid was 2.59 ' somewhat wider than usual --- but the goal was to initiate a position at a low that had the potential to mark a bottom of at least short-term importance. Of course, despite the earlier profit-taking, there is still risk in the position because we continue to hold CDE shares. But by now we've lowered the position's cost basis sufficiently to cushion ourselves

If red were to come up on a roulette wheel ten times in a row, would you start betting only on black? Many less-seasoned gamblers would, perhaps even increasing their bet size if the streak continued. That might sound like a way to make a huge score eventually, but in fact those who bet like this habitually are almost guaranteed to die broke. For, sooner or later, they will have everything riding on a single spin of the wheel, and then red will come up one more time in a row than anyone in the casino can recall. So what does that tell us about the immediate prospects for the QQQs, which have risen on eighteen of the last 20 trading days? It's tempting to argue that the tech-heavy Nasdaq 100 index can't keep going up like this forever. While correct, we shouldn't be too eager right now to fade a winning streak that may yet prove to be longer than anyone on Wall Street can recall. Actually, seasoned speculators might be inclined to bet the streak will continue, knowing as they do that the stock market is not roulette. Russian roulette is probably more like it, since each new bullish day for the QQQs brings bears that much closer to pulling the trigger to end their pain in a suicidal explosion of short-covering. We can only speculate as to when this will occur. Perhaps it won't be for weeks, when the streak has reached 32 days out of 35. Or maybe it will be as early as Friday, after the QQQs have rallied for two more days and are threatening to do so for yet another as the week ends. Although we cannot personally recall the Nasdaq having risen for as long as it has already, we'd prefer to

Is it possible the chart below can provide us with a simple answer to the question of what lies in store for the stock market this summer? My eye is drawn to the overbought peaks corresponding to the DJIA's two most recent highs on the daily chart. There is no divergence here, only a regular pattern of higher price highs matched by correspondingly higher stochastic highs. This suggests to me that the moderate buoyancy in evidence for the last month or so will persist, even if there is not necessarily sufficient buying power to push the blue chip average to new record highs. Although mild weakness could conceivably surface at times as stocks work their way higher, the chart does not in any way suggest to me that a downdraft is imminent or even likely over the next 4-5 weeks or perhaps longer. Bottom line: Be ready for a tedious summer as stocks huff and puff their way to modest gains. Continuation Pattern I've seen quite a few profusely annotated charts lately that purport to explain why the stock market is about to either explode or collapse. However, I'd prefer to keep my analysis as simple as possible. I'm no expert on stochastic indicators, but I have nonetheless observed patterns similar to the one in the chart above many thousands of times over the years, and to me it 'feels' like it's pointing to a continuation of the current uptrend. If you care to see what stochastic indicators look like when they are signaling otherwise ' signaling trouble, that is -- then I suggest that you take a look at the divergence recorded in conjunction with the March 7 top.

June Gold has broken down once again with Friday's breach of a hidden-pivot support at 417.70. Earlier in the week the futures took a weak bounce off that number that lasted for a few days, but now that it has been violated a test of round-number support at $400 seems likely. Bullion's weakness was corroborated by corresponding strength in the Dollar Index, which punched through a hidden-pivot resistance at 86.33 that had contained the greenback for a few days. The mini-euro, meanwhile, finally succumbed to gravity after holding for several days significantly above the 1.2462 downside target I'd projected a little more than a week ago. As gold and the dollar went their separate ways, the euro synchronized, giving up 0.84 points to end the day at 1.2564. Its weakness was attributed to the apparently growing likelihood that the French will reject the EU constitution when they vote at month's end. Whether the dollar, euro and gold will continue to move synchronously is anybody's guess, but if they do, their respective trends should be expected to end at hidden pivots of comparable degree. This implies an impending swing-low in June gold at exactly 401.90 that occurs more or less simultaneous with one in the June mini-euro at 1.2462. I can discern no corresponding rally target for the dollar, but suffice it to say, the Dollar Index has broken out of the channel that was shown in the chart accompanying last Wednesday's commentary, titled 'The Dollar Doesn't Know It Should Be Falling'. As a final note, I'll mention that we took a speculative position in the shares of Coeur d'Alene on Friday, notwithstanding my bearishness on the precious-metal complex over the near- to intermediate term. We'd been waiting for CDE to fall to a promising hidden-pivot support at 2.69, and on

The momentous debate over judicial filibusters is making C-Span more interesting these days than the stock market. I had both running side-by-side on my desk yesterday, but it was no contest. The E-mini S&Ps were in a trance-inducing pattern that did little more than amplify the overnight session's faint pulse, producing gratuitous six-point swings that only a seer might have traded profitably. Fixate on these patterns long enough and you start to imagine that each might have been easily predicted. Just don't try to trade them, though, because if you do you'll wind up like some desert wanderer who has attempted a swan dive into a mistaken vision of Lake Powell. To show you what I mean, take a look at the chart below. At first glance it looks like the kind of chop that should make a seasoned trader head for the links. However, on closer inspection we find an intraday low at 1185.25 that corresponds precisely to a hidden pivot. Work the numbers yourself if you don't believe me. Starting with the assumption that AB=CD, we find that the distance from A (1191.75) to B (1186.50) is 5.25 points. Subtracting that number from our point 'C' high at 1190.50, we get�1185.25. You might assume that I was waiting at that price with an 1185.25 bid, stop 1184.75. But in fact, I was not even tuned to C-Span or my TradeStation monitors at the time, but rather to Britney Spears' Ten Most Outrageous Moments, on VH1. (Click on chart to enlarge) Returning to our chart, since there is nothing interesting on either C-Span VH1 at the moment, some of you might ask, how do I extrapolate an AB 'impulse leg' from the segment labeled as such on the chart? This is a logical question, since, when we think of

The stock market was at its nutty, kinky, entertaining, devil-may-care best yesterday as shares in the home builders exploded higher on word that the Fed intends to keep raising administered rates. "The federal funds rate appears still to be below the level that we would expect to be consistent with the maintenance of stable inflation and full employment over the medium run,' said Donald Kohn, an obvious stiff who sits on the central bank's board of governors.  With the Dow up over a hundred points, Treasury yields falling and oil quotes in a state of collapse, it was one of those magical mornings when the illusion that the Federal Reserve is in control of the economy temporarily overwhelmed more acute perceptions that, in reality, the central bank is tending a credit bubble that has continued to swell unabated, like a Yellowstone lava dome. (Click on image to par-ty!) So why, some observers may be wondering, did the shares of home builders leap for joy on the news? One can only surmise that a few too many bears had become fixated on the lava dome rather than the sunny illusion, and that this caused them to short the likes of Toll Brothers, Beazer Homes and Horton to significant excess. Although the gap-up opening in these stocks on Wednesday may not have afforded bears a perfect opportunity to cover their short positions, it sure as heck provided them with the inspiration to do so, and quickly. Credit Crunch Begun? With the broad averages climbing sharply in the first half of the session, it was obvious that the wet sponge thrown by Dr. Kohn was insufficient to quell bulls' ardor for shares. But neither did the added dousing provided by news that the Fed has started telling banks to tighten their lending practices. If this is a red flag that

That's gratitude for you. The Chinese have been selling us nearly everything we need to live the life of Riley on the cheap ' flat-panel TV sets, stainless steel patio grills, down comforters, graphite-frame trail bikes, silk scarves, custom furniture, computerized running shoes, robotic vacuum cleaners, laser pointers, you name it. Not only that, they've been lending us the money to buy all of this stuff and much more in return for IOUs that have been piling up like frequent flier miles in the account of some globetrotting salesman who has pledged his business to U.S. Airways. So how do we show our gratitude? By threatening trade sanctions, is how. And the crime? Underpricing their currency, the yuan. According to the Bush administration, this practice is 'highly distortionary' and 'pose[s] a risk to China's economy, its trading partners, and global economic growth.' Apparently, this is how tariff wars are fought nowadays. Instead of slapping a surcharge on Chinese imports, we cajole them into raising the price of their money. Good thinking, guys. After all, didn't the Smoot-Hawley tariff trigger the 1929 Crash? Regardless, why take chances on how historians will apportion blame for the next crash? Just put on a fright-mask and make scary noises until Beijing gooses the yuan sufficiently to give what's left of American manufacturing a little breathing room. Of course, the Bush administration could probably achieve the same affect by leaning on Wal-Mart to raise its prices by 30 percent. As we know, that's not something our local congressman could or would support. But monkeying around with Asia's currency peg? Perhaps only the ruinous policy of inflation is more subtle in the ways that it deliberately obscures economic truth

Both gold and the dollar reached hidden-pivot targets yesterday that deserve our close attention. I'd advertised a 417.70 downside objective last week for Comex June Gold and an 86.33 rally target for the Dollar Index. Both objectives were very nearly met on Monday, with the Dollar Index topping at 86.39 and June gold bottoming at 418.20. I usually like to see my targets reached very precisely, but in this case, because the two vehicles have been approaching potentially important swing points more or less in-synch, we can allow a few ticks' leeway. Under the circumstances, yesterday's price action could prove to be an important turning point for both vehicles. I don't mean to imply that you should mortgage the farm at these levels to make a bullish bet on gold or a bearish one on the dollar. In fact, I still have my doubts that bullion will end its six-month wallow before it has shaken out bulls with a feint below $400. Opinions aside, though, from a hidden-pivot perspective this is the best opportunity gold has had to turn around since late March, when it approached a similarly important hidden-pivot support that subsequently gave way. This time, to be mechanically objective in assessing the significance of any rally that unfolds, we should set the bar at 432.60 for the June contract, since a print at that price would create a bullish impulse on the daily chart. I should also mention that the euro has so far failed to make a low corresponding to the Dollar Index rally target already reached. It would have been nice if all three vehicles 'the dollar, gold and the euro ' were perfectly in synch, but two out of three isn't bad. In fact, the euro's recalcitrance could prove to be especially bullish for gold