If anyone in interested, Don Hays is presently distributing his (free) market perspective by email. Contact at donhays@mindspring.com
November 19, 1999
Market Comments
by
Don Hays
The wolves are definitely howling, and that is good. It means that we don
't have long to wait for the final confrontation. Victory or Death!!
Obviously, I'm glamorizing the life of a market strategist, or a money
manager, but when you are inside my skin you know that it really feels like
that "career threatening" test of will. When I say the wolves are howling,
I am now hearing howls from those same wolves that were eating out of my
hands a few months ago. A few months ago, I could show them how I was
beating the performance of the S&P 500 even with a risk adverse portfolio
allocation. They were delighted. But now, even though I am still keeping
up with the S&P 500, the wolves have tasted blood. They now want to keep
up with the NASDAQ. Pretty soon it will be the Internet Options index, or
even worse.
I'm not exaggerating. I've fought off these wolves many times in my life,
but the battle strains are still just as stressful, and each time you have
those nagging doubts that maybe the wolves are going to win this time. But
so far, so good, I leave a long trail of slaughtered wolves in the past.
But I have to admit, this time they are the biggest wolves, and the
hungriest wolves that I have seen since 1972. Yeow!! 1972.
That brings back so many similar memories. In 1972, I had only been in
the business for three years, after leaving the engineering profession (the
Space race) in 1969. My heroes were giants like Edson Gould, who also
talked and analyzed like an engineer. After three years of very tough
markets in which I was fortunate enough to be learning under another very
good technician, Ned Davis, who was (and is) a genius at developing
fundo/technical indicators. He had an indicator to describe everything
from bunions to dandruff, and even though I developed some strong
differences in our analysis of those indicators, I will always be very
indebted to him, and being able to learn from his genius. Using this
background, in 1970, and then reaffirmed in the fall of 1971, I had been
able to almost exactly pinpoint the buying junctures. It felt good to that
young aspiring market strategist as the rally blasted out, but then as 1972
evolved, the pattern of that move started to make strange noises.
The theme of "one-decision" stocks became the "new era" of investing.
Large trust departments had found all these wonderful big-cap growth stocks
that had "perpetual" growth. The idea was that it didn't matter what you
paid for them, the earnings growth was so reliable that the market would
always bail you out. Corrections were just phenomenal buying
opportunities. They would never have a bear market. So outstanding
"perpetual" growers like Avon Products moved from 60 in 1970 to 140 in the
next two years. The price/earnings ratio moved to 45. Polaroid was a real
superstar. It's price moved from the low 50's to 150, and since it had
this product that was revolutionizing the camera business, it's
price/earnings ratio moved above 60. These are just two examples from what
was called the "nifty fifty." Well guess what? In my young career, I
couldn't swallow those historic high P/E's. So despite calling the bottom
of those bull markets almost to the second, the wolves started to howl.
And after only a few years in the business, I really was afraid of those
huge, blood-thirsty, all of a sudden know-it-all, career-ending wolves.
But just as the howls got to the highest pitch, guess what? The big old
Grandfather Market and the Federal Reserve quit tempting the wolves and
slaughtered them so unmercifully that they disappeared for quite a few
years. For example, Avon Products stock dropped from 140 to 19 in the
slaughter of the next 18 months. Polaroid dropped from 150 to 14.
One-decision "new-era" investing died a terrible death.
So in recent days, weeks, months, I see so many similarities to that
former time that it increases my resolve that the wolves are being set up
for another mighty slaughter. For example, yesterday the Dow Jones was up
almost 150 points, and there were more stocks on the New York Stock
Exchange down than up (1498 up versus 1541 down.) With the S&P 500 making
a new record high, there were only 91 stocks on that Exchange able to
confirm that record high, and 148 stocks made new lows. This was the most
stocks making new lows since the October 15, 1999 panic sell-off.
This pattern is virtually identical to the calendar year performance/price
action of that prior "new-era" of investing in 1972. For instance, in 1972
the advance/decline line had started to under perform as far back as April
1971 (this time April 1998). It continued to make lower lows, and lower
highs, but finally starting in October/November 1971 (this time October
1998) it seemed to find a bottom on the advance/decline line even though
the lower high pattern continued. I know this detail is too much, but hang
in there with me. And then between March/April 1972 and October of that
year, the big-cap indices started to move sideways, even though the A/D
line continued to lag. (Identical to 1999's pattern) But finally in one
last mighty blast-off in October to mid-December 1972, the indices blasted
out of that sideways consolidation setting the wolves howling, especially
because the A/D line was trying to come back to life. The indices kept up
that charade even into the first few days of 1973, but the A/D line couldn'
t make it past early December 1971, failing once again to move to a higher
high. The trap door was sprung, the shotguns rang out, the slaughter
started in January of 1973 and led to the bloodiest massacre of those
marauding wolves since the 1929 debacle.
There are many other similarities of that era to today's--like the
flagrant lack of confirmation of the Dow Industrials by the Transports-but
I think you get the idea.
Now the wolves are saying the Federal Reserve has been neutered. They are
saying that the triggering of the "3 Steps and a Stumble" rule does not
matter. This would certainly violate something that has proven true since
the Fed's beginning.
The bullish advisory service sentiment has moved back up to 50.4%. The
equity put/call ratio dropped to 33% yesterday. Despite the new highs in
the averages, only 35.6% of stocks are able to even move above their
30-week moving average.
The Arms index (known by some as MKDS or the TRIN indicator) dropped to a
1-day reading of .527 yesterday showing that it was taking a huge amount of
volume to power the upmove. In 6 of the last 10 days this indicator has
been under 0.7, and in two of them it has been under 0.6. The 10-day
indicator has now dropped to .737, which is closing in on dropping under
0.70. In the past this low level has often marked an approaching major top
in the following months.
It will be interesting to see if the pattern continues, but earlier this
year many Strategists got hyped up over the bounce that was occurring in
the basic industry stocks. Even the small caps were trying to start
breathing again. That hype turned out to be nothing more than a bounce,
and both economically sensitive groups have now turned back into stark
under performers. Recently the hype has been that the financial stocks are
going to move back into leadership. Maybe you will be right oh wolves, but
I doubt it. In fact, yesterday revealed a big pause in that new supposed
"leadership," and we will be watching that area closely for further
comparisons to the 1972 comparison.
So if you are a wolf, or even a Werewolf for that matter, and if the smell
of flesh or the full moon is causing you to howl at your counselor, Market
Strategist, or even the nice man who sends you e-mails, you might try a
little Valium, or other sedatives to resist the urge. Remember, those who
howl the loudest usually get slaughtered first.
The foregoing information and opinions are for general information use
only. They are the sole opinion of Don Hays, President and Chief
Investment Strategist of the Hays Market Focus Advisory Group, and may or
may not agree with the opinions of any outside party furnishing these
comments to you. The Hays Market Focus Advisory Group does not guarantee
their accuracy or completeness, nor does the Hays Market Focus Advisory
Group assume any liability for any loss that may result from the reliance
by any person upon any such information or opinions. Such information and
opinions are subject to change without notice, are for general information
only and are not intended as an offer or solicitation with respect to the
purchases or sales of any security or as personalized investment advice.
Hays Market Focus Advisory Group, 2828 Old Hickory Blvd., Apt. 1808,
Nashville, Tn. 37221. |
