the bear circle remains unbroken, by and by, oh by and by
got rocky top?
March 10, 2004
Bears Come Out Of Hiding On The Anniversary Of The Day The NASDAQ Bear Was Born
Asia was broadly lower overnight, with Japan falling a percent and Hong Kong falling over a percent. Europe was also off over a percent this morning, and the US futures were flat. We opened slightly lower, and after a small bounce, we began slowly rolling over. What followed from there was an all-day trip to the water park, as we basically spent the whole day sliding to new lows. With about an hour to go, we tried to stabilize like always, but instead of the usual bailout rally in the last hour, we accelerated lower and went out on the very worst levels of the session. Volume was extra extra chunky (1.7 bil on the NYSE and 2.2 bil on the NASDAQ). Breadth was over 3 to 1 negative on the NASDAQ and just shy of 3 to 1 negative on the NYSE. Down volume on the NYSE was also notably just shy of 90 percent of the total volume on the day.
The semis were all down 1 to 2 percent on average, although there were a few notable losers that were beat up even more. XLNX, which has held up better than most of late, was off nearly 4 percent. INTC fell just over 2 percent to another new low for the year. I should also probably point out that everybody’s favorite money-losing DRAM maker, MU, was down 5 percent. The equips were off 1 to 2 percent on average, although there were a few 5 percent losers sprinkled in. The SOX fell 2 percent to a new low for the year.
The Internet trash was slapped again. The tier 1 junk was hit for 2 to 4 percent across the board instead of the usual 1 percent. Standouts included YHOO, which fell 4 percent to a new low for the move, and INSP, which lost 7 percent. Over in the tier 3 trash, things were even heavier. The Chinese net trash (SINA, SOHU, NTES) were off between 7 and 9 percent. SOHU lost 9 percent and fell to a new 10-month low. BVSN lost 10 percent, CMGI 6 percent, TSCM 4 percent, etc. The speculative trash area continues to unwind at an ever-accelerating pace, which once again confirms that the bear is returning to town.
Financials were lower across the board. The BKX fell a percent, and the XBD fell 2 percent. The derivative king fell a percent after topping just a few days ago. BAC fell 2 percent, and GE fell another 2 percent to just shy of a new low for the year. The mortgage lenders were mostly lower by a percent or two and for a third day in a row have basically ignored the fact that mortgage rates have either fallen or remained flat, as they did today. FRE and FNM both fell a percent. The FT ran a story today highlighting derivative losses at these two GSEs, as well as the Snowman’s recent comments to the effect that these two highly leveraged institutions do not have an implied guarantee from the US government. So, it will be interesting to see if agency spreads begin to widen now, meaning that we could see mortgage rates actually rise at some point even though treasuries yields continue to fall.
Retailers were lower across the board, with the RTH falling over 2 percent. The homebuilders were mostly lower by 2 to 3 percent, which is also their third day in a row to basically ignore flat to down mortgage rates. Thus, we could be seeing people finally begin to focus more on demand and how a weak economy would impact that demand rather interest rates. The Mortgage Bankers Association said its market index, a measure of weekly mortgage activity, rose 1.2 percent to 889.1 in the week ended March 5. Its refinancing index rose 1.0 percent to 3,567.6 from the previous week's 3,532.2 as 30-year mortgage rates fell to 5.34 percent last week from 5.49 percent in the Feb. 27 week. The group's purchase index rose 1.4 percent to 428.6. So, despite mortgage rates plunging, we’re not seeing a big jump in refinancing or purchase activity, and that spells big trouble for housing and consumer spending.
Crude oil fell 46 cents. The XOI fell a percent, and the XNG fell 2 percent. The CRB was flat, and the CRX fell over 2 percent to a new low for the month. I’d note the continued break in the industrial metal’s shares like N, AA, and PD today. Likewise, the silver shares also finally came under a good deal of pressure today, despite the metal closing unchanged after once again challenging its 1998 high and failing today (silver is sort of a hybrid precious and industrial metal in my opinion because it can trade as either one from time to time). Silver is one of the last metals to still be hitting new highs, but given what the shares did today, the metal may finally be ready to join the rest of the metals complex to the downside, as the reflation trade continues to unwind in the commodities markets.
SIL, which we’ve discussed here many times for the piece of junk that it is, fell 10 percent today. The company also broke the news that was issuing $125 mil in convertible notes on top of all the stock that it issued just last month. I have to hand it to management at this company. Its primary asset in Bolivia will never get developed and is essentially worthless, but management certainly does a great job of monetizing ignorance and selling more shares to the public.
Gold opened down about $2 this morning in NY on the back of a stronger dollar. We slowly worked our way down to nearly $397 on the lows, but a bounce into the close would take us out only down $4.80 at $399.70. The HUI fell 4 percent and closed on the very worst levels of the session. Once again, the metal traded with the dollar index, but the shares reacted more to the general equity market than the metal. With the equity market in general appearing to be potentially in deep trouble, the break we’ve been looking for in the gold shares may finally be upon us. Once we flush out all the people that have been buying gold shares and the metal based on it being a part of this “global reflation back to prosperity” idea, we’ll be left with people that have been buying gold and gold shares as a hedge against what they see as an inevitable devaluation of paper money in general, as the world’s governments and monetary authorities try and print their way out of the mess that they’ve gotten us into. Again, once we get this corrective phase out of the way, it should lay the foundation for a rally in gold in all currencies, but it may take a while to get to that point. So, patience will likely be rewarded, as it has already been for those who have held off on gold share purchases since December when the\ shares topped.
The US dollar index rose nearly a percent, as it appears to have turned higher and may be ready for another leg up. The yen bounced a touch, and the euro fell nearly a percent. I’d also note that the pound fell nearly 2 percent to a new low for the move. It should also be noted that the January US trade deficit was released this morning, and it rose to another new world record at $43.1 bil. Yet, the dollar powered higher anyway, as it continues to shrug off all bad news. The dollar’s bear market rally continues…
Treasuries were off a freckle after 4 straight days of rallying, with the yield on the 10yr rising a hair to 3.73%.
Investor’s Intelligence revealed that bulls had fallen ever so slightly to 56.1%, and that bears had risen to 20.4% as of last Friday’s poll. Basically, there is no new information here other than the rampant bullishness continues.
The Transports (TRAN) fell 2 percent to a new low for the year today, and by taking out their February lows and confirming the Dow’s breach of its February low yesterday, we have a Dow theory sell signal for those that care about that sort of thing. So, in laymen’s terms, Dow theory says, “the bear is back.”
Today’s selloff leaves us with the Dow, SPX, and NASDAQ all well below their 50 day moving averages. Today’s 160-point decline in the Dow is also the first such large triple digit decline in that average in over a year, and the public primarily watches the Dow. So, with us closing under NASDAQ 2000 level yesterday and now getting a large triple digit decline in the Dow, there’s a good chance that the mutual fund investing public is going to get a bit spooked. After all, after 2000-2002, they know what it’s like to lose money in stocks now, and they’re more likely to sell first and ask questions later than they were in the past. With stocks breaking down all over the charts and closing on the lows today, it’s becoming pretty apparent that trouble has arrived. As the “reflation trade” continues to unwind, the market is giving more and more of a deflationary message. At some point as it becomes more and more obvious, that unwinding process is likely to accelerate.
Now, for those in the bull market camp, this is just the beginning of a correction, while for those that are long stocks and in the bear market rally camp, the rally is basically now officially over more than likely. So, it will be very interesting to see what happens over the next couple days as the now likely somewhat spooked public, bear market rally longs, and the even some of those in the bull market camp that want to take profits all decide to try and sell. This is the sort of inflection point that I have been talking about where things could really accelerate to the downside once we took out enough of these important “levels” that everybody has been watching to tell them when to sell because obviously everybody thinks he or she will know when to get out before the other guy. But the vast majority will get caught. That’s just how it always works.
Thus, there’s the possibility that we’ll see a violent acceleration in the selling over the next couple days. It could just as easily be that we have more flopping around to do before any sort of substantial move lower, but a violent acceleration at any time now becomes a real risk in my book from here on out. Everybody remembers how the 1999-2000 bull run ended, and this rally has been just as speculative and crazy (in many ways, more so). It seems “appropriate” that this rally should end in a similarly violent manner.
Lastly, today was also the anniversary of the NASDAQ’s top of 5049 back in 2000, which was basically the birth of the bear market. Today’s slide reinforces that the bear hasn’t gone anywhere, and while he may have been slumbering for a year, he’s beginning to wake up again. And he’s likely going to get more and more cranky as the year goes on…
Disclaimer: Lance Lewis periodically publishes columns expressing his personal views regarding particular securities, securities market conditions, and personal and institutional investing in general, as well as related subjects.
Mr. Lewis is the president of Lewis Capital, which manages a hedge fund in Dallas, Texas. This fund regularly buys, sells, or holds securities that are the subject of his columns, or options with respect to those securities, and regularly holds positions in such securities or options as of the date those columns are published. The views and opinions expressed in Mr. Lewis' columns are not intended to constitute a description of the securities bought, sold, or held by the fund. The views and opinions expressed in Mr. Lewis' columns are also not an indication of any intention to buy, sell, or hold any security on behalf of the fund, and investment decisions made on behalf of the fund may change at any time and for any reason. Mr. Lewis' columns are not intended to constitute investment advice or a recommendation to buy, sell, or hold any security.
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