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sidklein@sidklein.com
CRASH
(part two)
Nikkei: 11,721.49
*April low: 7,603.76
*- See March 31 &
For two years,
Still, there are causes for
the consideration of either raising or maintaining liquidity. SKC’s best-case
scenario target for this cycle was and remains 14,000. Even if that were to
occur, however, a Wave-C (within an Elliott Wave “a-b-c flat”) could still take
the Nikkei down to 10,500 again, for those following that index.
Against that backdrop, even
a long-term value stock may correct, if an intermediate term cycle’s peak
earnings is discounted, even though the company’s stock may be remaining well
below long-tern fair value. That under-
(1)
valuation is supported by under-investment internationally in
the Japanese market, along with the prospects for the subsequent cycle’s
earnings. For this reason, last month’s report re-printed the following from
the preceding month:
“With this view in
mind, it is unlikely that foreign managers will allow Japanese stocks to fall
too far, due to the under-investment of
Conclusion: SKC has claimed that indicators that
gauge the performance of the Nikkei versus that of the Dow Jones are lead
indicators for the performance of the Dow itself. Well, the Nikkei has
decidedly broken out versus the Dow Jones, as
NIKKEI – DOW RATIO:
Last month’s letter
reiterated the view that the ratio had hit another higher high, within a
technical formation and equity supply/demand background that suggested much
higher levels. The report continued:
“This assumption
carries serious implications. For short-term traders, this indicator may help
identify the inflection point at which the Dow recommences rolling over to the
downside.”
Well, the Nikkei returned
to the area of its year highs, while the Dow has behaved like a wounded animal.
Finally, then, came this week’s Dow mini-smash. This is the stuff of a bear
investor’s/trader’s dreams.
Technical: Regarding this post 2002-low Dow peak, use of analogies to the Japanese experience of the nineties,
continue to be useful.
Conclusion: While the Nikkei has virtually returned to its
year's highs, the Dow's trading has been heavy, gains have been difficult to
sustain and net movement has been nil for months, against the backdrop of a now
more than 4-month old peak (February). This is entirely consistent with our
thesis of a topping and rolling over period for the Dow Jones, which is exactly
what the indicators of that market are strongly indicating, in SKC’s view.
(2)
Last
month’s comment was entitled: “Moon, Turn The
Tides…gently, gently away.” The following
is an excerpt:
“Jimi Hendrix’ timeless
medley of same title as this report, had a different object in mind but there
is a common sentiment: It is time to go and the stars have divined it, just as
the tides of the Elliott Wave prepare to wash away the memory of what had to
end. Whether it takes more time or less, the fact remains that the Dow peaked
in February and, as long as that is the case, the matter is but one of time
(simply, we’re rolling over).”
Due to the fact that the
market has since played into the above re-printing, the occasion may be used to
respond to a query received that was as much about poetry as the markets. As
Hendrix’ lyrical character was one who was fading into the sea ”not to die but
to be re-born”, cycles (Elliot Wave B) suggested and suggest that the peak was
seen February 19 at Dow 10,753, while so far putting in a
lower high on June 23 just under 10,500. Last month’s report
forecast the resumption of the crash.
Our interest now as
investors is the coming death that precedes the eventual renewal. So, concerned
with such matters as timing, bargain basement put prices have come to reflect
an ideal contrary indicator (suggesting a Dow peak), while creating risk/reward
opportunities that might not have been greater, at any time over the past two
decades.
Concerned with superb money
making opportunities that would be realized in 2005, the larger understanding
includes long cycles. In terms of price level, the worst-case scenario for the
coming phase of secular bear market is Dow 4000. The suspicion here, however,
is that that level will only be seen in a subsequent cyclical decline,
within this massive secular bear market.
Altogether, then, the
idealized scenario espoused by SKC is a Dow low of 6200 by 2006, with a greater
low at 4000, over the subsequent four years. The economy itself is not likely
to bottom out until 2025, or so. This scenario is consistent with the
experience of the 1930’s…and this time is worse.
Strategy: The diagnosis, therefore, is unchanged and, as regards any
possible prescription, hedgers and speculators have been served up put
premiums at historically low valuations and volatilities. As a result, long
term, calendar spreads are at crashed-out levels, thereby setting up extremely
favourable
(3)
risk/reward scenarios,
which include opportunities for protecting capital in six months, if desired or
necessary. Simultaneously, there exists profit potential in excess of 1000%,
should the Dow break the October 2002 lows, by the end of 2005, as forecast.
Conclusion: The
fact that bearish courage, volatility and put premiums hit new lows with each
new Dow high is yet another trademark of a market teetering on absolute
collapse. All market activity to-date has been consistent with the SKC forecast
of
GOLD:
The idea a few months ago
was that gold may have an intermediate term, cycle-concluding advance toward
$340, before commencing the then contemplated correction. The conclusion was
based on the fact that stocks (lead indicators) seemed to be valuing such a
move, along with price patterns.
A sharper than expected
correction (sooner than thought) ensued and dragged down stock price levels,
that was now discounting much of the anticipated intermediate term correction.
For this reason, SKC advised lightening up on gold stocks on a move to $400, to
reflect the fact that there are crosscurrents, against a backdrop of very
substantial returns since January 2002.
Sure enough, gold has
rallied into the lower $400s, along with a re-birth in bullish enthusiasm.
Perhaps one may be 33%, as opposed to 50% invested, for instance. Seeking to
make up some leverage, one may maintain some silver equities, as the metal has
itself returned to a very desirable long-term level.
DOLLAR:
After May weakness, the Yen
quickly regained all lost territory. SKC’s view is that while the September Yen
futures contract has worst-case downside potential of as much as 250-300 basis
points, to around 9100, and the Euro may seem stronger for the nearer term, the
longer term fiat currency of choice remains and is expected to remain the
Yen.
(4)
A belated
Happy
A belated
Happy Gurupoornima (July 2), to our
Indian readers everywhere.
For friends elsewhere as
well: Happy US Independence Day.
Finally, congratulations to
*The next regularly
scheduled commentary is set for the first weekend of August.
Sid Klein
________________________________________________________________
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further developments relating to the information provided herein.
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