<<Wow, what a confused market! Let's start with the SP500. From 11/16
to 11/29, this index traded between 1400 and 1425. The top of that
range is "new all time high" territory. The market was last up at
these highs in late July when the SP500 hit 1420.14. Then on
Tuesday, after two weeks in that range, the SP500 dropped out of the
bottom of the range. This sets up the distinct possibility of a
double top. A big picture double top here would have very negative
implications.
While the SP500 was testing its all time highs last week, the Dow
was still 3.3% below its all time high at 11365. The Dow has spent
most of the year swinging between 10400 and that high at 11365. With
the exception of the drop below that range in late September and
October, the Dow has been rangebound since mid April.
Now onto the Nasdaq, everyone's favorite index (until Tuesday). The
big news last week was that there was actually one day that the
Nasdaq did *NOT* set an all time record (that was on Tuesday,
11/23). For those keeping count, the Nasdaq Composite had 17 record
closes in 21 trading days. These types of runs do not last forever,
and when they do end we usually see some carnage. Last Friday looked
like the final record for this run, as the Nasdaq fell 3.22% on
Monday and Tuesday. Now this does not necessarily mean the
remarkable tech stock run is over, but just remember that blow off
rallies usually end in a spectacular fashion.
Meanwhile, the Dow Utilities have hit a new low for the year and are
now down 9.9% for 1999. On Monday they hit their lowest level since
early September, 1998. The Dow Transports are faring a bit better,
but they are still down 7.7% for the year.
So, with some very mixed performances by the stock market indexes,
we turn our attention to the market internals. In short, they are
just as mixed up as the stock indexes. The breadth indicators (which
use the advancing and declining issues data) have been very weak.
Even last week, when the SP500 was flirting with new all time highs
and the Nasdaq was setting one record after another, these
indicators kept dropping. In fact, they actually fell into
*oversold* territory (pretty strange with the market right at all
time highs!). Meanwhile, the indicators that use advancing and
declining volume have held up better. And several of the indicators
that combine the up and down volume with the breadth data are in
*overbought* territory. Like we said, a mixed picture.
There is one measure of the market internals that needs special
attention. On Monday, the advance decline line hit its lowest level
in over four years. The last time the advance decline line was at a
lower level was on 6/29/95, when the SP500 was at 543.87. On Monday,
the SP500 closed at 1411.18. This means that in the last 53 months,
a period in which the SP500 has advanced 259%, the number of
advancing stocks and declining stocks has been equal. There is only
one explanation for this...the market is being driven by only a
small handful of the biggest stocks. As we have pointed out in the
past, the advance decline line is a pretty rough indicator. It
doesn't figure very prominently in our intermediate term analysis.
BUT, this *huge* divergence should be noted. In the past when we
have had these types of long term divergences in the advance decline
line, things have ended very badly for the stock market bulls. This
indicator is not precise when it comes to timing, but it shouldn't
be ignored.
Finally, the interest rate picture has deteriorated in the last
couple of weeks. Back on 11/16, the 30 year T-bond rate dipped
briefly below the 6% rate. Since then it has moved steadily higher,
and closed at 6.28% on Tuesday. Short term rates have also moved
up...the 3 month T-bill rate has gone from 4.96% at the beginning of
November up to 5.15% on Tuesday. Higher interest rates are not good
for stocks, and if these rate trends continue, the stock market will
start to take notice.
So the market presents a very muddy picture here. But with the
SP500 losing momentum in the area of prior highs, interest rates
heading higher, generally weak internals, and the Nasdaq on thin
ice, we would rather err on the side of caution. After treading
water for the last few weeks, the market is poised for a big
move. Add in the year end shenanigans and Y2K and things should
start to get very interesting very soon. >>from walker letter |
