November 22, 1999
Market Comments
by
Don Hays
As we start this Thanksgiving week, we know that based upon historical
evidence the strongest seasonal period of the year will begin on Wednesday,
and not end until a couple of trading days into the new Millennium. But we
see this bullish development and at the same time on the other side of the
argument we find the equity put/call ratio last week dropping to 35%. We
find the equity call option volume setting new all-time record highs. The
CBOE put/call ratio has just dropped to 41.26%, which is the lowest since
the explosive rally late last year (11/27/98). For this indicator, I have
developed an index that turns negative when the 1-day P/C ratio drops 30%
under its 30-day moving average. This has had a very good record at
indicating an extreme of optimistic speculation, and on Friday dropped
28.60% under--close but not quite. But even this level has been sufficient
in the past to either be on the verge of giving a full-fledged sell alert
on any further rally, or indicating that even if it does not go all the way
into that territory in the following few days, it means that the market has
to experience at least a short-term pause.
At the same time the bullish advisory service sentiment as measured by
Investors Intelligence moved back up last week to 50.4%. We also find the
McClellan oscillator on the New York Stock Exchange peaked on November 5,
1999 at +175--extremely overbought, and now showing a market that is
definitely losing momentum with its Friday's decline to +25.
And we also see that the 10-day average of the Arms index (also known as
MKDS or TRIN) has just dropped to 0.701. That is the lowest in several
years, and has reached a level that traditionally has signaled a major top
is on the horizon in the next three months. To explain briefly, this index
measures the daily advance/declines and then divides (compares) that to the
upside/downside volume. When the 10-day Arms index drops this low it means
that an inordinate amount of volume has been used to push up the advancing
stocks. Just like your car, if you pour that much gas through your
carburetor for that long, there is no other solution but your car has to
stop for gas. This level of being empty means that you are running on
fumes. And if you just happen to be in the desert (high
over-valuation/poor monetary conditions), you are about to have a long,
dry, hot, feet-blistering walk ahead to the next gas station.
We also can't help but keep pointing out the advance/decline line, which
has been so weak for so long that now it is being dismissed as a non-event,
is falling back to the threshold of its October 26, 1999 low. While the
world is starting to dismiss this, we note that since July 15, 1999, there
have been 57 days when the market had more declining stocks than advancers,
and only 31 with net advancers. This had tried to turn more positive after
that October 15, 1999 panic attack, but now in the last 10 trading days has
reverted back to its old ways by having more declining stocks than
advancers in 7 of the 10. We'll talk about that a little more if you (and
me) are still awake after the next couple of thousand words, but you see
the background that is facing market prognosticators this morning.
The pure momentum investors are having a ball. It has been a long time,
but the investors that make up indices like Investors Business Daily's
mutual fund index, which typically are the larger go-go aggressive mutual
fund investors who use price momentum more than any other parameter as
their buy criteria, are showing strong break-outs and strong relative
performance. They are concentrating on the hot relative strength stocks,
and that has been a secret of success in the last few months.
In fact, I read that when analyzing the NASDAQ Composite--the hero of the
moment--that 65 stocks have accounted for 99% of that asymptotic move.
Without this tiny 1.3% contingent of the approximately 5000 listed stocks,
the NASDAQ Composite index would be down. I also see that based upon last
Friday's close, only 35% of the stocks on the New York Stock Exchange have
been able to move above their 200-day moving average. That low level, my
friends, would ordinarily be happening in only the worst of stock market
conditions, and here we find the NASDAQ and S&P 500 making new all-time
record highs.
Now, that brings us to stock ownership. Back in August 1982, when I
received signals that a major bull market was about to lift off, one of my
arguments was that the stock ownership was so low as a percentage of
household assets (17.8%) that it had nowhere to go but up. Now that
argument is gone. As of the latest data, that percentage has now moved
back up to 34.9%, almost exactly the same as at the peak in 1968.
Speaking of 1968, it brings us back to the comparison that we gave in our
Friday's comment, comparing today's market to late 1972. But that period
started giving its clues in the peak that was made in 1968. The major
market indices and the advance/decline lines made their last confirmed new
highs in the last few days of November 1968. The bull market since 1950
had been fantastic, taking the price-earnings ratio from 7 to a new record
high of 22, but no one was worried because the US was obviously the
Super-Power of the world. Inflation and interest rates were so low and the
economy had been so good that the public investor was knocking the doors
off the brokerage houses trying to get in. Believe it or not, the
brokerage houses had to start closing early in order for the back-offices
to keep up with the orders. By the way, it was that excitement that
convinced this young engineer working in the space industry to change
professions. But by the time I convinced J.C. Bradford & Co. to hire me it
was June 1969. At that time the juices were still flowing. The bull
market, as measured by the big-cap indices had just made another rally at
the old 1968 high, not quite reaching that level but still not a big deal
in the herd's mind. I didn't know enough to pay any attention--I was
reading the herd's propaganda--but the advance/decline line was telling an
ominous story for anyone who would listen, by continuing to decline despite
the Dow's last rally.
But by June 1970, no one could ignore the desolation. The Dow Jones fell
to 630 in the next one-year, a dose of realty when the trap door was
sprung. That is what convinced this engineer that the popular guru of the
moment (or popular opinion) was the wrong source of accurate information.
But that is not the example that I am comparing today with. That example
came on the next big fake-out rally that took the big-cap indices to new
highs, exemplified by the Dow Industrials moving from that low point in
June 1970 back to the 1000 level by late 1972. As described in last Friday
's comment, that rally took the Dow up to a strong close in the first
couple weeks of December 1972, and even the advance/decline line was trying
to rally (just like in the last few weeks), but that proved to be the last
little mini-high by the advance/decline line. But again baiting the trap,
the Dow and other big-cap indices made one last new high in early January
1973. Throughout all these attempts by the big-cap indices, the cumulative
advance/decline line was failing to confirm--making lower lows. But that
obvious anomaly was finally dismissed, as the popular investment theme of
the day became "one-decision" stocks. They had found their perpetual
solution to market declines.
All of these "long-ago" memories are what fashioned our "hunch" in
mid-October of this year, when that panic attack occurred, that a "final"
rally would start that would last until mid-December. But I didn't even
come close to expecting that the rally in the technology stocks would be so
overwhelming. (I thought I would confess that before you reminded me.) I
certainly didn't expect that the S&P 500 and NASDAQ composite would make
new highs. So I guess Abby Cohen was right, huh? We'll see. My
remembrances are that those investors who bought stocks in October 1972,
and were sitting on huge gains in mid-December 1972 were not too happy with
their rampaging bullish advisors of that time after the ensuing devastation
of 1973-74 wiped out 60-80% of most people's portfolio values. They never
had a chance to get out.
So if I have to put a time-line to today's crosscurrents noted in the
opening paragraphs, I'll revert back to that previous memory. The current
spike in optimistic speculation probably will cause a short pause to the
rally of recent weeks. But the hot NASDAQ has had a close correlation to
Christmas shopping, so despite high debt, rising interest rates, and rising
oil prices which typically depress Christmas shoppers, Mr. Greenspan's
rabid splurge of new money just in the last 8 weeks, bloating up those 65
stocks, will probably cause one more debt-financed Christmas shopping orgy.
David Orr and his excellent economic team at First Union are now
forecasting an 8.5% increase in Christmas shopping on top of last year's
hot retail season. We would have strongly disagreed two months ago when it
seemed Greenspan was getting religion, but now we have to admit that this
strong Christmas forecast is possible, although not advisable.
But debt limits always hit a brick wall. Not only that, but the last
three months are showing an inventory build-up in advance of Y2K. So come
January through March of next year, the hot-hot economy will probably run
into a stumbling block. At the same time, Mr. Greenspan and his minions
would be looking at an even hotter economy (always based upon past data)
and another round of rate boosts can be expected to put the last nail in
today's bulls' coffins.
If that pattern continues, we could possibly see one more rally as this
strong seasonal period kicks off, lasting into the first few days of
December. That rally would be the last good news for the advance/decline
line. Then as the Santa Claus season approaches, those 65 stocks (probably
down to 20-30 by then) would have their last run, before the cord is
pulled.
So here comes the perennial question, I know. What would it take to make
me change my mind? Lower short-term interest rates, but that possibility
certainly looks remote at this time.
See you Wednesday.
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. |
