If we see higher risk assets further over-valued, do not chase the move, but rather sell into price ...
John Murphy's Technical View
05/23/2003 12:00 am EST
John Murphy is the chief technical analyst for Stockcharts.com, the leading online source of information regarding the field of charting and technical analysis. He is also the president of MurphyMorris Money Management and has been well known in the financial community for some three decades. In Las Vegas, he presented a special 4-hour intensive workshop on using charts as an investment tool.
"Throughout the three-year bear market, stock prices and bond yields have been moving together (which means that bond prices have been rising while stock prices have been falling). Since the start of April, however, bond yields and stocks have been moving in opposite directions (meaning that bond and stock prices have been rallying together). We're not sure if this is just a short-term aberration, or a sign that the bond and stock markets are re-coupling. We think we'll know pretty soon."
"Here's why. The yield on the 10-year T-note falling to a new low this week (actually the lowest yield in 45 years). That's primarily owing to deflationary PPI and CPI numbers this week. [The Dollar fell to a new low for the same reason]. Normally, this would be bearish for stocks, since it's symptomatic of economic weakness and would siphon money out of stocks and into bonds. So far that hasn't happened. At least not yet."
"Which brings us to the moment of truth
for stocks. The major stock averages have reached the tops of their trading
ranges -- and continue to look over-bought. If the combined effects of a falling
dollar and falling interest rates are going to sabotage the rally attempt in
stocks, this is where that should happen. If stocks manage an upside breakout,
however, that would suggest to us that some changes might be taking place in the
intermarket relationship between the stock market and the dollar and
"Meanwhile, the gold market continues to benefit from a falling dollar. The Dollar Index fell sharply on Friday and remains under pressure. That explains why the price of gold keeps rising. In a climate of falling interest rates -- and a falling dollar -- gold thrives. The Fed's battle against deflation means that they're going to either lower rates or keep them from rising. They're also happy to see the dollar fall because they're trying to ‘reflate’ the economy by creating a little inflation. That means the Fed is happy to see the price of gold and other commodities rising. That's the first we've seen that in more than half a century."
"With gold stocks riding high, Newmont Mining (NEM NYSE) has been one of the strongest stocks in the S&P 500. The daily chart shows NEM climbing to a three-month high on strong volume. The stock is nearing the highs of last year around 30. That's a very important resistance area. Newmont appears to be in the final stages of a major bottoming formation (possibly a 'right shoulder' in a 'head and shoulders' bottom). We recently commented on the consolidation over the past year as 'triangular' in shape. That's a bullish pattern -- as is the head and shoulders. A decisive close above the $30-32 zone would represent a major bullish breakout. Given the down-trend in the dollar, we think an upside breakout by Newmont has a high probability. We continue to believe that gold stocks are the main beneficiaries of the Fed's fight against deflation."
"Gold stocks rise in both an inflationary and a deflationary environment. Gold shares surged during the 1970s when gold spiked over $700. During the deflationary years from 1929-1932, Homestake Mining gained 300% -- while the market lost 90%. [Gold was set at a fixed price at the time]. There are three primary ingredients in a major upturn in gold and gold stocks. Historically low interest rates, a weak dollar, and a secular bear market in stocks. All three are now present. I believe that gold has entered into a new secular bull market -- just as the stock market has entered into a secular bear market. That should make gold (and gold shares) a big winner for years to come."
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