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Fleck Rap



Note: Professor Fleckenstein provides his commentary every Wednesday evening for educational purposes - his insights are not intended as investment advice. You can find his daily comments at

Dow 10K? No Way

Obviously, the last couple of days have seen a lot of volatility, but Asia was firm again overnight, and that appeared to boost our equity futures. As I try to piece the recent action together, it seems that a fair amount of Monday's selling in New York was a reaction to world markets, especially India (where subsequent stabilization has helped to firm our market). Friday's option expiration has also been a likely contributor to the volatility.

Nary a Sell at the Opening Bell

In any case, the stock market burst out of the gate and kept going for the first couple of hours, such that the S&P and Dow were up 1% and the Nasdaq almost 2%, led by the Sox. I suppose some people think Hewlett-Packard's (HPQ:NYSE) comments last night had something to do with it. I, for one, do not, because they were basically pretty unremarkable. Likewise, Applied Material's (AMAT:NASD) news was short of earthshaking, with that stock doing next to nothing early on, even as the rest of tech was catching a bid. Of course the tape was also fired by the fact that the S&P has been able to hold the magic 200-day line, (though the Nasdaq Composite has been less fortunate).

After the early-morning ramp job, we traded sideways for a couple of hours, then began to leak a little, before breaking pretty hard. The last few hours saw a nasty selloff that eradicated the gains in the Dow and S&P, and nearly so for the Nasdaq. Today's downside leaders were the housing stocks, with tech the only source of whatever strength could be found. I think today was a very important day. Usually when we see a turn (witness the past few days and the early going today), it "sticks." But the bulls -- so accustomed to building on momentum once they turn the tape -- were unable to prevail today, and that makes the lows in the S&P from last week all the more important.

Momentum, in Memoriam?

The stock market these days is far more a creature of momentum than it is an evaluator of bargains. As Warren Buffett paraphrased Ben Graham, in the short run, the market is a voting machine, and in the long run, it's a weighing machine. The advent of momentum trading and hedge funds over the last few years has produced an environment where that is now truer than ever. In any case, when we take out the recent lows in the S&P 500, whether in the next few days or weeks, you can assume that fireworks will commence to the downside, which will be a catalyst with lots of negative ramifications (see my speech below).

Away from stocks, the dollar was hit against virtually every major foreign currency. It looks more and more like the high for the dollar is in, as the euro is getting farther away from its low. There have been enough white-knuckle rides recently to bolster my belief that the correction is over for the foreign currencies and, by extension, for the metals.

Curtains for a Correction?

Gold and silver have been all over the place lately. Today they had a rally, and it stuck, with gold up $7.10 to $383 and silver up 25 cents to $5.93. This sustained strength stands in contrast to every other rally lately that's fallen apart sometime during the New York session. One tip-off that the metals rally may be for real -- the fact that metal stocks have been acting better lately. Most important, after the metals closed weaker yesterday, the metal stocks I follow closed firmer.

A case can be made that this brutal correction is finally over, and now the path of least resistance may be up, though I wouldn't be surprised to see a few little hiccups along the way. Though silver looked like it wanted to "trade at zero" when in the $5.50 range, I think the chance of it trading materially below $5.50 for any length of time is quite unlikely. To repeat what my friend said a week ago: "Written in stone, those selling today will lose money. The only question is how long it takes." Speaking of silver, for those who feel it's manipulated, please click here to read a letter from the CFTC, with which I agree on this issue.

A Triple Helping of Glad Tidings

Turning to propitious news for precious-metal lovers, the Senate has passed a bill to lower the capital-gains tax on silver, gold, platinum, and palladium, bringing it in line with equities. (The bill is now in front of the House.)

As for the gold ETF, stories were apparently circulating about some kind of inter-agency battle between the CFTC and the SEC. But it looks like whatever the hang-up is rests with the SEC, perhaps even related to tax questions. Meanwhile, Barclays is also in registration to try to launch a gold ETF. It will be interesting to see which one gets done first.

Further, to share what some metals dealers whom I respect told me during my trip to New York, there have been a couple of instances of Asian central banks buying gold in the last week. Whether that turns out to be a powerful trend remains to be seen, since we don't yet have enough data points. But I do find this news interesting, in that before you can have a flood, you've got to have a trickle.

Save the Date

In Fed news, for those who don't know, Mr. Open Spigot himself was renominated Fed Chairman yesterday. That strikes me as kind of interesting. I would not be even slightly surprised to find out that Easy Al has promised George Bush only a couple of baby-step moves between now and the election.

But the important factoid here: He's going to be gone in January 2006. You can only be appointed to one term as a Fed governor. Easy Al filled in for one term. That got him his first seven years. The 15-year term he's now serving ends in January 2006. Therefore, we only have to endure Al for less than two more years.

Lastly, click here to see a copy of the speech I gave in New York on Tuesday. Also, due to my trip there, I have quite a backlog of email, so please bear with me for the next few days as I make my way through it.

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