A few weeks ago the CEO of CSCO, John Chambers, told a group of analysts that he expected his company's revenue to fail to meet expectations during the current quarter, because of the slowing economy, but if the economy rebounds in the last half of the year they will be back on track to increase their revenue and earnings in the next 2-5 years. They don't want to predict what will happen in the next 6 months, but somehow he felt comfortable predicting what will happen years from now.
This has been the familiar battle cry of analysts and talking heads on CNBC. Yeah the economy is in the dumps right now, but we are predicting that the economy will boom at the end of the year and the stock market will go up. They say that right now is the bottom of the economic downturn. They expect a V shaped economic recovery and current stock market valuations are dependent on this happening. The economy must rebound in the next 6 months or the Nasdaq will be in big trouble. Not only must January be the bottom of the economic downslide, but the economy must begin to pick back up soon, practically immediately.
If they are right then expect the Nasdaq to stay within a trading range between 3000-3200 and 2300 until the middle or end of the summer and then breakout into a new bull market. But are they right? These guys haven't been very reliable. Very few economists for saw this economic slowdown coming and I can't think of any Wall Street analysts that did. The CNBC crowd certainly didn't. The truth is predictions on the economy are extremely unreliable, but most investors are investing their money based upon these predictions.
Last year, I was one of the few people who warned that this economic contraction was right around the corner, while the analysts and technology gurus got it all wrong. But I wasn't predicting that this was about to happen, I was merely looking at the economic data and the bond markets last fall. In the third quarter there was a massive drop in investment spending by corporations, the junk bond market was factoring in economic turmoil, and the treasury bond yields were inverted. It didn't take a genius to figure out what was going on.
Yes, Alan Greenspan has dramatically cut interest rates, but I don't see any signs that suggest that this is the bottom of the economic downturn. In fact I see many obstacles, chiefly the massive corporate and individual debt levels, that can hinder a quick recovery, no matter how low interest rates go.
So the main question is what happens if we don't get the V recovery everyone else seems to believe is going to happen? What if the economy merely stalls or just fails to pick up momentum for the next several quarters? Then I would expect impatience and worry would send the speculative issues - the technology stocks - into another tailspin. Right now Wall Street is selling the most wildly optimistic scenario possible, but it is a scenario in which everything has to go exactly right and right now the stocks are priced to perfection.
Let's hope for a quick recovery, but no matter whether the economy picks up steam or busts I expect to make money. It is important to use an investment and trading strategy that fits the current market cycle. There are basically two schools technical analysis. The first is the momentum traders who believes it's best to buy high and sell higher or sell short low and cover lower. Then there is the oscillator school which recommends buying when technical indicators say that a stock is oversold and selling when they signal an overbought condition.
In 1999 and the first few months of 2000 my main strategy was to buy breakout stocks in the technology sector. It worked great. Then in the first week of April I warned that the markets were weakening and in serious danger of a complete collapse. Starting on April the 10th I then began to short the rallies when they broke down. The rest of the year most of my profits came from short selling, although I still played momentum breakouts in the tech sector from time to time.
In the coming months I believe it will be difficult to play momentum breakouts in the technology sector. The breakout plays that will come will be in sectors such as banking, finance, construction, and, lastly, retail. These are the sectors that have traditionally been leaders at the end of bear markets and the beginning of bull markets. The best way to trade tech stocks will be using the oscillator school of technical analysis.
The best case for the Nadsaq will be for it to stay inside a trading range in the coming months. In the worst case it will bounce around a bit, top out, and then collapse again. Either way to make money trading the Nasdaq one will have to short it when it tops out and cautiously buy when it reaches a bottoming point.
The main technical indicators people use to identify oversold and overbought conditions are stochastics, macds, and Wilder's RSI. However, I do not believe that technical indicators are very reliable. Instead they need to be used in conjunction with chart patterns and option sentiment measurements, such as the put/call ratio and the CBOE volatility index, to identify psychological turning points. in the markets. As potential tops and bottoms come into play I'll try to identify them and explain the chart and indicator patterns that provide the weight of the evidence. |
