The Chart du Jour

Dollar Up, Stocks Down

February 18, 2000

Just to prove that we can be bearish something other than U.S. stocks, note that of the European major markets, the London FTSE has been sagging quite badly ever since the last week of December. It has now reached and bounced off of its first level of Fibonacci support at 6028.9, but the chart does not look compelling for anything other than a potential small bounce.

Note as well how perfectly the seemingly random "chop" of the British pound fits when one draws Fibonacci bands down to 1.4879. This leads us to strongly believe that we are headed there. Perhaps at long last we might even get a three-wave down in the pound someday soon.

Don't be fooled that a strong dollar should necessarily equate to strong equities. Its rise already is one factor in the relative poor performance of companies such as Caterpillar and Deere (let that read the DJIA) compared to the less dollar-sensitive internets. Britain is already slipping toward recession because its currency has remained so firm for so long compared to its weaker European bretheren.

Perhaps what is happening in Britain now is a precursor for what will follow in the U.S. after our currency remains relatively strong for a considerable time globally. Eventually it hurts, and the U.S. has never been one to take such strong-dollar induced pain particularly well. Instead, we typically hear cries to ease and devalue, but this time -- faced with a U.S. consumer who just won't stop consuming -- the Fed can't.

The dollar rallies, but by that rally it cuts off a slice of our corporate profitability. Higher rates slice off another chunk. Soon the Fed gets what it wants: a cooling off, but not before equity profitability and valuations suffer first.

Yes, we can be bearish on more than one thing. At this stage of the game, the British pound pictured above is one of them.

We have just finished an in-depth analysis of the longer term risks to equities that is eight pages in length and examines the Elliott wave pattern of the Nasdaq's Price-Earnings Ratio since 1995, as well as various analog pattern matches involving the Nasdaq. The report looks at mutual fund cash levels, mutual fund positioning, and changes in the monetary base. It sketches out a possible path for the Nasdaq if indeed the next few days prove as dangerous as the Value Line chart above implies.

We are quite proud of this analysis, and think that it may prove a valuable "roadmap" for trading over the balance of the year. This report is now available for $25 via credit card ordering below. Included with this report, for those subscribers who have not yet read it, we will now offer the previous analysis "Three Peaks and a Domed House" that was written January 14, 2000 (and has been working very well since then) for FREE. The two articles together offer some powerful evidence that a crash scenario is most certainly possible and perhaps closer than most realize. One may also subscribe on a quarterly basis to ALL articles past and present for just $55.

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Sand Spring Advisors provides information and analysis from sources and using methods it believes reliable, but cannot accept responsibility for any trading losses that may be incurred as a result of our analysis. Individuals should consult with their broker and personal financial advisors before engaging in any trading activities, and should always trade at a position size level well within their financial condition. Principals of Sand Spring Advisors may carry positions in securities or futures discussed, but as a matter of policy will always so disclose this if it is the case, and will specifically not trade in any described security or futures for a period 5 business days prior to or subsequent to a commentary being released on a given security or futures.

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