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Short-covering Friday

(February 10, 2002)

By now, most of you should be tired of this chart. However, after updating the chart with the latest prices, we found ourselves, once again, surprised at the correlation between the latest movements of the Dow and the decline of last March. Again, the blue line represents the prior and the orange line below represents the latest period. Here it is:

DJIA (January 18 to March 22, 2001 vs. December 21, 2001 to Friday's Close)

Friday rally brought the correlation close to the prior period. Note that the rally occurred on very low volume, which leads me to believe it's mostly short-covering (the VIX confirms that too). Moreover, the action of the last few trading days leads me to believe the market is being supported by powerful, unknown parties. Every time the Dow is about to plunge through its support level, it miraculously rallied. Too often this has happened in the last week to believe this market is not being manipulated. As Japan already learned (or maybe not) manipulation (even the governmental kind) of the market is a futile exercise in the long-run. There is no stopping the primary trend. And since we are still in a bear market, that trend will be down.

If the above lines are perfectly correlated, then that means we will have a huge bear market rally in store for at least most of this week. A rally that would easily take the Dow above 10,000. Your guess is as good as ours in the short-term but we still believe that in the next couple of months, the market will be down-way down.

The latest upward price movements in gold has been very convincing as gold closed above $300 on Friday once again. We sincerely believe, that this time, it is different. The latest buying is based on real demand, and the gold market of a year ago (when the XAU traded at 40) signified capitulation, in our opinion. The primary trend is now up, and any attempts to stop it will be of grave consequences.

The current consensus is calling for an economy recovery by the end of this quarter and a squashing of the gold price thereafter. To this I reply: where were they when the Nasdaq was at 5,000? Didn't they see the impending crash? Of course not. And they wouldn't see one this time around, either. The light at the end of the tunnel is merely the light of an oncoming train.

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