Low Volatility; the Lull Before
the Storm
Dr Richard
Appel
Financial
Insights
July 30, 2004
An increasing
number of vocal onlookers believe that the Federal Reserve is
determined to use any power within their means, to hold the system
together until at least after the approaching presidential elections.
Alan Greenspan and other Fed governors are talking up the economy,
and are filling the airwaves with statements attesting to its
increasing strength. Additionally, along with their likely market
intervention, Fed and government officials are pulling all stops
in their attempt to bolster the stock market with similar rosy
forecasts. To this end, the Fed has flooded the banking system
with liquidity. Witness the 11% increase in M3 alone during the
past twelve weeks. Also, they grudgingly only raised the Federal
Funds rate by 0.25% from its multi-decades low. If they truly
believe their own indicators that inflation is beginning to appear,
they should be aggressively increasing interest rates to ward
off future price rises.
In contrast, there are others who feel that the Fed is acting
in this fashion for another reason. They view the same data and
opine that their true motive is to prevent a return to recession.
The last thing that the Fed now needs is for stock prices to
collapse! They fear that this would drive consumers into a state
of withdrawal, and cause them to reduce their spending which
is needed to sustain the economy. Further, the latter contingent
points to something of which they believe the Fed is well aware.
It is the lack of real, concrete data that the economy is indeed
on the road to recovery. Yet, no matter what are the reasons
for the Fed's present posture, and despite all of their efforts,
it appears that recent evidence indicates that they are losing
the battle to maintain a strong economy.
The past few months has seen an increasing flood of data that
suggests that the economy is again slowing. Newly issued reports
indicate that not only is the housing market beginning to weaken,
with recent housing starts posting a year over year 8.5% decline,
but retail sales are slowing, and capital spending is on the
decline as companies instead repair their balance sheets by paying
down their debt. Further, the stock market, which acts to foretell
the future direction of our economy, is being inundated with
negative data and signs indicating lower stock prices are potentially
looming on the horizon.
All of the major stock market indices have now fallen below their
respective 200 day moving averages! This has enormous significance
because it forebodes the likely resumption of the full force
of the Bear Market. Also, Lowry's buying power index completed
and broke down from a head and shoulders top while their selling
pressure index, after having posted a multi-year low, appears
to have completed its bottom and has begun to move higher. A
continued fall in buying power combined with what is likely the
beginning of a sustained increase in selling pressure, has the
potential to create havoc in the stock markets! To cap this off,
following five consecutive weeks of decline, the Industrials
again closed below the important psychological 10,000 level.
To me, it feels like the economy and stock market have absorbed
everything that the Fed and government could throw at them in
order to keep them afloat. Unfortunately, the bearish forces
are now beginning to gather and threaten all of their efforts.
If this assessment is correct the end result will be sharply
lower stock prices, and a following weakening economy.
Fortunately, a stock market trading pattern exists whose resolution
may prove invaluable in predicting the stock market's future
long-term direction. Historically, periods of low stock market
price volatility have typically given birth to great price movements.
We are presently in the midst of an unusual time when U.S. common
stocks have been held within an abnormally small trading range.
For nearly eight months common stocks as measured by the Dow
Industrials, have been trading in a band which is bordered by
about 9,800 on the low side and 10,800 at its upper limit.
The last time that a similar relatively narrow price range transpired
was in1996. Then, common stocks backed and filled across an eight
month time-frame, when the Dow Industrials were held between
about 5200 and 5850. When the Industrials finally broke above
the upper trading limit it rapidly moved higher. Its first stop
was above 7,000 before a short correction occurred, and the rest
is history. It posted its ultimate Bull Market peak at 11,722.98.
This was little more than three years after breaking out from
that narrow trading range.
Periods of low market volatility appear to represent times when
the various market players are in great conflict. They are periods
when either accumulation or distribution of shares are occurring.
Those who believe that a Bull Market exists are accumulating
shares. Conversely, those who are certain that the bear is in
charge are divesting themselves of stock and are distributing
their shareholdings into the market. The tug of war between the
bulls and bears is ultimately resolved in favor of those who
are correctly attuned to the market's major secular direction.
If the common stock trend is in a bullish mode the buyers will
eventually overwhelm the sellers, and the market will move significantly
higher over time. Conversely, if a Bear Market is in force, the
buyers will finally give way after they virtually drown in a
sea of offered stock. It is as if those who are betting in the
wrong direction will throw everything that they can at their
correctly attuned opposition, until finally they are forced to
run for cover to limit their further financial damage.
When the final capitulation occurs by those who are on the wrong
side of the market, the stage is set for a sustained move in
the market's fundamental direction. In essence, break-outs from
important periods of low price volatility have time and again
correctly forecasted the market's long-term direction.
This observation not only holds true when dealing with common
stocks, but it can be applied to virtually all other trading
markets! Like all technical formations it is not 100% accurate.
Further, if common stocks are in an accumulation phase, which
would truly surprise me, a break above 10,800 would indicate
substantially higher equity prices. In either event, when the
resolution of the Dow Industrial's present trading range occurs,
betting against the market's verdict will likely prove quite
costly.
The Dow Industrials closed last week at 9,962.22. This places
it only about 150 points above the 9,815 intra-day lower limit
of this trading range. Complacency reigns among today's investing
public! If 9,815 is appreciably violated it will announce the
great potential for far lower across the board stock prices.
Additionally, given the fact that the important psychological10,000
level has similarly been breached, it is possible that our complacent
investors will become concerned, if not frightened. This, combined
with the obvious headline grabbing deterioration of an increasing
number of economic indicators, and a weakening investor sentiment,
may combine to turn the reigning complacency into abject fear.
If this results it will not only bode poorly for stock prices,
but also for the fate of our economy. Be aware and act accordingly.
The above was
excerpted from the August 2004 issue of Financial Insights ©
July 25, 2004.
Dr Richard Appel
contact
website: Financial
Insights
I publish Financial
Insights. It is a monthly newsletter in which I discuss gold,
the financial markets, as well as various junior resource stocks
that I believe offer great price appreciation potential.
Please visit
my website www.financialinsights.org where you will be
able to view previous issues of Financial Insights, as well as
the companies that I am presently following. You will also be
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CAVEAT
I expect to
have positions in many of the stocks that I discuss in these
letters, and I will always disclose them to you. In essence,
I will be putting my money where my mouth is! However, if this
troubles you please avoid those that I own! I will attempt wherever
possible, to offer stocks that I believe will allow my subscribers
to participate without unduly affecting the stock price. It is
my desire for my subscribers to purchase their stock as cheaply
as possible. I would also suggest to beginning purchasers of
these stocks, the following: always place limit orders when making
purchases. If you don't, you run the risk of paying too much
because you may inadvertently and unnecessarily raise the price.
It may take a little patience, but in the long run you will save
yourself a significant sum of money. In order to have a chance
for success in this market, you must spread your risk among several
companies. To that end, you should divide your available risk
money into equal increments. These are all specula-tions!
Never invest any money in these stocks that you could not afford
to lose all of.
Please call
the companies regularly. They are controlling your investments.
FINANCIAL INSIGHTS
is written and published by Dr. Richard Appel and is made available
for informational purposes only. Dr. Appel pledges to disclose
if he directly or indirectly has a position in any of the securities
mentioned. He will make every effort to obtain information from
sources believed to be reliable, but its accuracy and completeness
cannot be guaranteed. Dr. Appel encourages your letters and emails,
but cannot respond personally. Be assured that all letters will
be read and considered for response in future letters. It is
in your best interest to contact any company in which you consider
investing, regarding their financial statements and corporate
information. Further, you should thoroughly research and consult
with a professional investment advisor before making any equity
investments. Use of any information contained herein is at the
risk of the reader without responsibility on our part. Past performance
does not guarantee future results. Dr. Appel does not purport
to offer personalized investment advice and is not a registered
investment advisor. The information herein may contain forward-looking
information within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of
1934. In accordance with the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995, the statements contained
herein that look forward in time, which include everything other
than historical information, involve risks and uncertainties
that may affect the company's actual results of operations. ©
2004 by Dr. Richard S. Appel. All rights are reserved. Parts
of the above may be reproduced in context, for inclusion in other
publications if the publisher's name and address are also included
for credit.
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321gold Inc
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