A pretty good John Roque column... big reversal day in DJUA and UTY.x
No Visible Means of Support
By John Roque
Special to TheStreet.com
11/29/99 4:10 PM ET
Every once in a while, I go through this little exercise I call "What have you done for me lately?" I go over a roster of bonds, commodities, currencies, indexes, indicators and stocks, and ask (silently, of course -- I only talk to myself aloud when I ride the subway), "What has the item under review done lately?"
While it is always easy to figure out what has happened near term, it is often much harder trying to figure out what the heck such action means. And, most importantly, if the latest move will or will not have broader implications.
That said, here's my "What have you done for me lately?" exercise for late November:
Question: If there's no inflation out there -- why aren't bonds acting better? Why aren't interest-sensitive stocks bullish? Why aren't bond bulls coming out of the old woodwork on CNBC, or TheStreet.com, telling us that bonds are the biggest cusp-of-the-millennium buy we've ever seen? For that matter, where is Bill Gross?
Answer: I think the answer to this one is simple. Bonds and interest-sensitive stocks aren't acting well, and bond bulls aren't coming out of the woodwork, because the Fed is not done raising interest rates -- because the economy is not slowing. As long as the rate on the 30-year bond continues to work higher and as long as utilities keep declining I'm going to keep on believing the economy is Earl Campbell. You remember the Tyler Rose, the great Oilers' running back from the University of Texas, don't you? Skoal, brother.
Question: Why did the dollar break down vs. the yen?
Answer: Got me! But while I've got no clue why the dollar continues to look like the woeful New Jersey Nets (watching the current Nets certainly makes me appreciate the Nets of yore, with stars like Julius Erving, Super John Williamson, and the Whopper, Billy Paultz) -- I can't imagine it's a good sign. I do know the consensus thinking is that it's not really dollar weakness, but merely yen strength. But I figure this is the same type of argument that was used when the bond was weakening earlier in the year. ("Don't worry," they said. "The bond will rebound because growth will slow.") In other words, price action usually leads to some fundamental news somewhere down the road, and I can't imagine whatever that is is going to be good for the dollar.
Anyway, it just doesn't feel right to see the greenback look like the canvas-back kid vs. the yen. As of the close on Friday, Nov. 26, 1999, the dollar broke beneath three months worth of support at the 104 level to close at 101.71. The dollar is now at its lowest level since late December 1995 and, gulp, a case can be made for further weakness to the low 80s. Those sumo-wrestling tickets are going to get expensive.
Question: How long can the major averages stay strong if performance remains narrow?
Answer: I'm guessing my answer to this question is going to result in a bunch of emails suggesting I find a new day job.
Plain and simple -- the market is not bullish, and hasn't been for a long time. The Nasdaq, advertising, biotech, technology and telecom sectors are bullish. I'm sure there are fundamental reasons why these sectors are as strong as they are, but in the meantime, most groups are bearish.
What's been most interesting about 1999 is the continued bifurcation of the market and the continued supercilious statements from pundits, commentators and analysts alike about how the "fundamentals" have driven the Nasdaq to Brobdingnagian gains. Seriously, is there really any fundamental reason extant to explain how and why Qualcomm (QCOM:Nasdaq) can be this strong? Please, be polite.
Furthermore, everyone(!) owns the same stocks. This is not an indictment of styles -- it is merely an observation. If these stocks stop working, the environment will not be pretty, especially if bonds continue hemorrhaging.
Question: Why do I bother to check indicators like cumulative breadth if they no longer have any (apparent) predictive power?
Answer: Indicators often go through periods where their utility waxes and wanes, so I still find it helpful to check my numbers and review my indicators. Breadth, though bearish, is helpful because it merely confirms that I'm not going to make anyone (myself included) any money if I decide to be a hero and recommend a stock or group not currently performing well.
Bearish breadth has reinforced the idea that stock picks need to be concentrated. It does not mean, as some have claimed, that all stocks or the major indexes will behave similarly. Interestingly enough, the U.S. has done a good job of exporting this breadth anomaly to other G-7 markets. Breadth from Canada through the U.K. is nothing to brag about, and in many cases, it is bearish, too. But, like in the U.S., uninspiring breadth has not stopped the CAC-40 of France from moving to all-time highs -- nor has bearish breadth prevented the Nikkei 225 of Japan from moving to its highest level since August 1997. Indicators are merely pieces of some grand market puzzle. They are not panaceas in and of themselves.
Question: What do the crosscurrents in the "What have you done for me lately review" mean?
Answer: The over-the-top, ridiculously strong action in select sectors and stocks notwithstanding, there are more reasons to be concerned than not. It does not mean one should sell stocks willy-nilly. It does mean that it is too much to believe that the combination of bearish bonds, bearish action in the dollar/yen, the bearish indicators, or the way-overboughts won't result in some pullback.
That's what I'm expecting -- a pullback. Let's say 5%. Nothing more -- unless the rate on the 30-year bond closes above 6.40%. And yes, that's my final answer.
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