What a Week: Market Pond Suddenly Restocked With Bottom-Fishers -->
By Aaron L. Task
Senior Writer
7/13/01 7:17 PM ET
thestreet.com
SAN FRANCISCO -- The sound unleashed by Thursday's big rally was that of market players scrambling to avoid missing
the latest bottom. With major averages extending the gains Friday -- despite more negative earnings and economic news --
the noise got turned up to 11. (Yes, like the amps in Spinal Tap.)
The Dow Jones Industrial Average rose 2.8%, the S&P 500 gained 2.1% and the Nasdaq Composite climbed 4% this week,
during which much was revealed about investors' sentiment.
Major averages were headed lower and seemed destined to revisit their springtime lows until Wednesday evening, when
Microsoft (MSFT:Nasdaq - news - commentary) preannounced that its fiscal fourth-quarter revenues would slightly exceed
expectations. That, plus modestly better-than-expected earnings from Yahoo! (YHOO:Nasdaq - news - commentary) and
Motorola (MOT:NYSE - news - commentary), sparked a big run-up in (almost) all things tech.
But investors' enthusiasm was met by an equal (or greater) amount of skepticism about the rally's staying power.
Critics noted that neither Motorola nor Yahoo! exactly hit the cover off the ball. Also, Microsoft's "upside surprise"
overshadowed the fact that the company will take a $3.9 billion charge related to losses in its investment portfolio. The
charge will reduce Microsoft's diluted earnings to a penny per share for the quarter ended June 30, leading Bernie Schaeffer,
of Schaeffer's Investment Research in Cincinnati, to declare "that much of what Microsoft has been reporting as earnings in
recent years was pure vapor."
This week's advance will "prove to be as durable as the vapor rallies" earlier in the year, Schaeffer wrote. If the Nasdaq has
just bottomed, "it would mark the first market bottom in history where hope, and not fear, was the byword."
Who's Scared of the Big, Bad Bear?
Fear, or the lack thereof, was prominently discussed this week, particularly after the latest Investors Intelligence sentiment
survey showed bearishness among newsletter writers at 25%. That's the lowest level of bearishness since July 1999.
"Using this indicator in a contrary fashion, we believe it is unlikely the market is putting in a major bottom," John Roque,
senior analyst at Arnhold & S. Bleichroeder and occasional contributor to this site, wrote Thursday morning.
Roque also noted that the Chicago Board Options Exchange Market Volatility Index, or VIX, closed below its average this
year of 27.69 every day this week, peaking Wednesday at 26.98. The index also never approached levels reached at
important market turning points such as the Spring lows, April 2000, and the fall of 1998. The VIX fell 2.7% to 23.87 on
Friday.
The CBOE equity put/call ratio did reach levels associated with fear on Tuesday, when it hit 0.94. Since 1990 there have
been only eight readings above 0.90 before this week, according to Schaeffer's Research, meaning I did not give the put/calls'
spike sufficient due in Tuesday's column.
The put/call ratio dropped to 0.51 on Thursday and closed Friday at 0.58. But its 10-day moving average is around 0.70,
data supportive of a bounce, Roque reported. "But we still think that's all it will be."
It's too cute to say that if "everybody" thinks sentiment isn't sufficiently bearish, then that's a contrary indicator suggesting
the bottom must be legit. Also, not everyone is dismissive of the data.
In a midweek report, Don Hays of Hays Advisory Group in Nashville, Tenn., noted the 39-week moving average of the
equity put/call ratio was at an all-time high.
"This is not just one of those short-term bursts of fear but a very persistent turning away from stocks," Hays wrote. "So
don't tell me that investors or traders are too bullish. I think their actions are much more truthful" than their words.
The veteran market watcher reiterated his short-term bullishness (and did so again Friday). But he also reaffirmed a
longstanding belief that near-term gains will be followed by another market downturn, beginning later in the year or early
2002.
While sentiment gauges provided conflicting data (and are subject to interpretation), the bottom line is that the past week was
a positive one for stocks.
However, the onus remains on the optimists in the week(s) ahead as earnings reports arrive. Whether the market can sustain
an upward move if the profit picture doesn't improve, the economy continues to struggle, and international developments
worsen (including a possible default in Argentina) remains very much an open question.
In Part 2 of this column, we'll take a look at the capitulation debate
Part 2: Capitulation Dance
Sorry folks, but the data just don't back up that view.
Equities comprised 51.6% of U.S. households' wealth at the end of the first quarter with bonds at 19.5% and cash at 28.9%,
according to J.P. Morgan. While the equity quotient is down from a peak of 61.2% at the end of 1999, it remains well above
the average of 41% since 1945.
J.P. Morgan complied the data using the Federal Reserve's flow of funds report. The figures cited above include funds
directly under household control, meaning direct ownership, mutual funds and bank trusts (pension funds, for example, were
excluded). At the end of the first quarter, these accounted for more than $9 trillion of corporate equities, or 60.5% of $14.9
trillion "holdings at market value" identified by the Fed.
"Equities now represent a smaller share of household assets [than] at its high, but in a historical context, households still have
a lot of equity exposure," said Tom Van Leuven, a strategist at J.P. Morgan. That is, investors have far from "abandoned"
the market, even if they're less enthusiastic about it than in 1999-early 2000.
Furthermore, "it seems like the news [Thursday] was moderately positive and there [was] a very good reaction," Van
Leuven said. "That doesn't sound like capitulation to me. If the market didn't care [then], I'd say people had capitulated."
The strategist, who works with the very skeptical Douglas Cliggott, considers capitulation far less important than an
improvement in earnings fundamentals, of which he sees little evidence.
Another issue is that many define capitulation as a big whoosh down. Several emailers noted that a "crash" is not necessary
to end a bear market. They have a point, according to a foremost expert in the field, RealMoney.com contributor Helene
Meisler.
In an email exchange with me earlier this week, Meisler pointed out that rapid, dramatic selloffs are characteristic of bull
markets, not bear markets. In bear markets, she wrote, it's rallies that are sharp and dramatic while capitulation occurs in
phases.
In the first phase, the weakest holders "panic" and the market has a big slide, the technician declared. In the second phase,
those who thought the decline was temporary and bought the first dip realize they are wrong, and then sell.
We've certainly had evidence of both of those phases in the past 18 months.
"But the final leg down is not when folks stop buying -- we've seen that already," Meisler continued. "They need to give up
hope that Redback Networks (RBAK:Nasdaq - news - commentary) is going back to $200, or even back to $50. And that's
the capitulation that's missing."
That phase of capitulation can take months, or even years to complete, Meisler added.
Prior to the 1990s, the high watermark for household ownership of stocks occurred in the mid-1960s. Judging by the
experience of the 1970s, it's not unreasonable to think the capitulation phase following the 1990s boom would be of equal
magnitude, if not greater.
Big rallies may occur along the way, and one may have gotten under way this week. But full-blown capitulation just hasn't
happened yet. |
