Stocks quoted in this article:
I remain bullish on tech for the short to intermediate term, and I believe the Nasdaq Composite (COMP – 1915.3) will continue to strongly outperform the Dow Industrials (DJIA – 9674.7). The charts below speak for themselves, but my call here has not been a pure "trend in motion" momentum play.
The techs, as represented by the COMP, are a classic case of positive price action juxtaposed against bearish or skeptical sentiment. Put open interest and short interest on tech remains at extremely high levels. And how many times have you come across the term "echo bubble" in reference to the tech rally? As long as this term is widely used to describe the action in tech, you can feel reasonably safe that the rally has legs. The initial rally off a bear market bottom is characterized by disbelief, and it is only when the crowd begins to accept the rally that the danger of a top begins to loom.
On the other hand, the blue chips, as represented by the DJIA, remain over-loved, over-owned, and carry major downside risk along with limited upside potential. The "safety" theme that you were bombarded with in the financial media at year-end 2002 ("buy blue chips and avoid tech") has been exactly wrong, yet it remains the preferred scenario on the Street.
The next time your broker cautions you about "echo bubbles" or touts names like Pfizer, Home Depot, Johnson & Johnson or General Electric, do him/her a favor and pull out the chart below. Yes, the Nasdaq "bubbled" into its peak vs. the DJIA from 1998 to early 2000, but tech then proceeded to crash vs. the blue chips into the bottom in late-2002. Note per the bold line across this chart that, assuming an unchanged DJIA, the Nasdaq would have to rally by an additional 47.5 percent just to retrace 50 percent of its loss vs. the DJIA from the 2000 peak to the 2002 bottom.
My target for the Nasdaq remains in the 2200 zone, which represents about a double from its October 2002 low and is also the site of long-term resistance at its 80-month moving average.
While Wall Street continues its efforts to scare you out of tech, here are some genuinely scary "blue chip" long-term relative-strength charts that are being studiously ignored.
And while we're on the topic of vulnerability, take a look at the following chart of 10-year Treasuries (TY) vs. the S&P 500 Index (SPX – 1038.06). Treasuries look to me to be a "top in progress" relative to stocks, with some added negative impetus from the break of the key 20-unit moving average.
Weakness in Treasuries should be no surprise given the ugly action in the U.S. Dollar Index (DX/Y), which has broken below all conceivable long-term moving average levels and recently took out its October 1998 lows.
But what about gold (GC)? Its recent action can also be characterized as "ugly," as it failed once again at resistance in the $380-$400 zone despite ongoing dollar weakness. My response is along the lines of a "yes, but." Note in the chart below that the long-term price action in the gold futures remains quite constructive.
The gold futures do show some signs of tiring a bit relative to the SPX.
And the gold stocks (as represented by the AMEX Gold BUGS Index [HUI]) could use a bit of a breather, as they've spiked in recent months relative to the gold futures.
So what's my bottom line on gold and gold stocks? I continue to believe that gold shares should comprise an aggressive 15-20 percent of your equity portfolio (my Master Portfolio currently has a 17-percent allocation). As is the case with tech, gold is experiencing the skeptical sentiment that is characteristic of the early stages of a bull market (see HUI and Nasdaq charts below). But the gold shares are subject to gut-wrenching pullbacks that can test the mettle of the most adamant bull. So I'd suggest that you don't chase rallies and look for pullbacks to establish or add to gold stock positions.
As for the gold futures, there is a confluence of technical resistance at $380-$400. In this zone is the 50-percent Fibonacci rally off the 1999 low at $260, round number resistance at $400 that turned back rallies in 1991 and 1996, and the 50-percent Fibonacci correction of the decline from the 1987 top at $500 to the 1999 bottom at $260. In addition, there is heavy call option open interest at the $380 strike and higher that poses a challenge for rally attempts. My sense is that a takeout of $380-$400 will be followed by an extremely sharp and extremely rapid rally, but until then patience will be the order of the day.