Profit with Pring

04/14/2006 12:00 am EST

Focus:

Martin Pring

Publisher, Intermarket Review

Martin Pring is as smart as they come; his Inter Market Review is a 40+ page, chart-intensive service for experienced traders and investors. Here’s a summary of his technical view of bonds and stocks, and some favorite US and global positions.

"The next few weeks are very crucial for the bond market because bonds have already begun a short-term decline and are getting closer to a signal of secular proportion. Technically, the level to watch for is 110 for the nearby T-Bond futures contract, and 5.5% for Moody’s AAA Corporate Bond Yield. A price move through this level by Government Bonds would not itself signal a secular trend reversal, but could have the power to push prices to levels that would. The attainment of the 5.5% level for corporate bonds would have the effect of generating a very long-term signal.

"If the 5.5% and 110 benchmarks are breeched, we recommend the purchase of ‘inverse’ bond funds for the more aggressive investors to the tune of a 10% allocation. The recommended vehicles are Rydex Juno (RYJUX), which tracks the Lehman Government Bond Index, or the Pro Funds US Rising Rates Opportunity Fund (RRPIX), which tracks the latest 30-year bond (this is leveraged at 125% of the investment).

"Since the bond barometer is at a very negative reading for prices and its inflation counterpart is at a very positive level, the weight of the evidence continues to point in an inflationary direction. Even at the short end, pressures are starting to mount again. In view of the strong reading in the inflation barometer a 10% allocation to the Pimco Real Return Commodity Fund (PCRDX) continues to be endorsed.

"The terminal phase of the cycle is often dangerous for equities, but the current indications are that the recent rally will continue to extend. Rising prices have not yet attracted the level of bullish sentiment typically seen at major market peaks, although a rally in the Dow taking it to an all time high probably could. This means that the trend is still bullish and some equity exposure is warranted.

"The US Stock Market is posing somewhat of a dilemma. The bull market, by historical standards, is getting very long in the tooth. If you buy into the argument that a secular bear market or trading range began in 2000, the duration of the rally is actually a record for such an environment. Let’s consider the evidence.

"Supporting the bearish case is the negative reading in the stock barometer, which now stands at 35% due to deterioration in one of our liquidity indicators. Also, the long-term technicals remain in an overbought, but bearish condition, and interest rates at the short-end, which lead equity prices, have been rising sharply for almost two years. Surely this is enough to seriously damage the economy in the light of some of yield curve spreads already being inverted?

"The year 2006 is also where the four-year cycle is due to bottom out, although it could be as late as the first quarter of next year. In the past, these four year lows have consistently offered excellent buying opportunities, but buying opportunities are typically preceded by declines, hence the market’s apparent vulnerable position. One indicator that looks particularly ominous is the price oscillator, which is still bullishly above its moving average, but is at a similar level to the one that preceded the 2004 and 2005 declines.

"While most four-year buying opportunities emanate from a decline of bear market proportions, there are precedents for a four year cycle ‘low’ developing at a high level. We saw this in 1986, where the final run up into August 1987 was preceded by an extended trading range, and again in 1998 where a short, but sharp Asian crisis decline offered the buying opportunity. Short-rates may have been rising, but the relative momentum returns between stocks and money market instruments, has not given a bearish signal.

"In the past, yield curve inversions have occurred when both long and short rates have risen but the inversion was caused by short maturities rising at a faster pace. In the current situation, yields at the long end have remained flat and are not acting as a serious drag on the economy as is usually the case.

"Market peaks are typically preceded by weakness in the NYSE A/D Line and brokerage stocks, and these measures, along with the A/D Line for volume are all close to their bull market highs and are not offering their usual negative warnings. However, the trendline, currently at 1250, on the S&P remains a crucial chart point where it is mandatory for the S&P to remain.

"For some time the Dow Jones industrials have been the weakest of the major averages. But it is quite possible the current advance could be strong enough to tip the longer-term balance decisively into the bullish camp. The DJIA has experienced a marginal breakout from a major consolidation; if the breakout remains valid, it sets the scene for a new all time high at some point in the next several months. If this scenario happens, the media will likely pounce all over it, and sentiment may just reach an extreme, indicating the probability of a major bear market.

"One missing ingredient for economic weakness is a rise in bond yields. The really big question relates to whether the secular downtrend in yields that began in 1981 will reverse in the current cycle. We believe the odds of this happening are very high because yields in both the government and corporate markets are close to a signal, and economic and technical factors suggest higher rates in the immediate future.

"At the moment, the Inflation/Deflation series has just triggered a buy signal for yields. At present, the yield (5.3%) is extremely close to the down trendline joining the 2000/06 highs at 5.4%. The resolution could come very quickly. The issue would be placed beyond reasonable doubt if the yield rallies above 5.5% because that is the level of the neckline of a potential reverse head and shoulders pattern.

"While the situation cannot be classified as bearish yet, we may be on the brink of an important intermediate decline. Since the bull market is quite long by historical standards and long-term momentum is bearish, we may well be at the start on the initial decline in a new bear market. We will not know this for sure until the S&P breaks below its 12- MA and 65-week EMA at 1220 and 1227, respectively. In the meantime, these are important things to watch out for.

"The Dow has been resting on its 2006 up trendline, so any additional weakness will confirm the oscillators and suggest a decline of at least short-term proportion is underway. It is important to emphasize that these chart points have not yet been broken, but the price action clearly suggests that the technical situation is at the brink of something very important.

"Another important issue is that both the ten-day ratio and the McClellan Oscillator have made lows which have taken them below the low for the A/D Line set just after March 20. When momentum indicators lead the way down in this fashion, it is often a signal of extreme weakness. We have to stress that none of the support levels identified for the major averages have yet been violated. However, if they are, it will tip an already stumbling intermediate picture into a much more bearish situation.

"The Japanese market continues to look attractive from a long-term point of view, so we continue to recommend a 10% allocation in the form of the iShares MSCI Japan (EWJ ASE). The ETF is still overextended on a short-term basis and may need to experience additional corrective action. However, the primary uptrend is firmly established and we expect higher prices to be seen ultimately. The relative strength line has bounced off support in the form of its late 2005 breakout and this may mark the corrective low for this series. Chances are that the Japanese market will outperform the World Index for quite some time to come.

"The iShares of China Fund (FXI ASE), in the form of its tracking index, reached a new high in February. It is currently overbought on a short-term basis and may correct in the period ahead. However, at this time there are no obvious signs of a bull market top and exposure is still recommended. The iShares Hong Kong (EWH ASE), another of our recommendations, has underperformed in the last few months but the price itself has not yet broken below our Friday close stop level of $12.50. Although we expect that this will happen, experience has taught us to put market action ahead of our subjective views. Since market action is still bullish, so are we.

"The iShares Taiwan Fund (EWT ASE), which experienced a breakout on both an absolute and relative basis some time ago, is also recommended with a stop set at $11.85. The Taiwan iShare looks to be quite constructive at this time since it has just broken out from a large 5-year base. The relative strength line has fallen back to support in the form of an extended trendline and its 65-week EMA, so it is quite possible that the correction for the absolute price may be coming to a close.

"A 5% allocation is being recommended in gold and gold shares since both are in confirmed primary bull markets. But the market is getting very frothy though, so we recommend that those who are overextended in this area nail down some profits. From a risk reward point of view though, it is too late to buy at current levels. From a trading horizon, it makes sense to wait for some kind of shakeout move. If it does not come then all that has been lost is a high-risk opportunity."

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