December 8, 1999
Market Comments
by
Don Hays
Well, well, well. Finally the stock market was weak on good news. The
productivity revision was great yesterday, and the bond market certainly
responded favorably to the news. But not stocks. And gold rallied a
little as well, after its big breakdown of last week. One day certainly
does not make a new trend, but at least it was refreshing to see that there
are two directions in the indices. Obviously there are two directions in
most stocks, because of the action in the advance/decline line, and the new
high/new low list, but the world has dismissed that as nonsensical. But I
can't seem to get those little peculiarities out of my old head. In a
period when the NASDAQ Composite has made 20 new all-time record highs in
the last 27 days, the number of stocks on the New York Stock Exchange
making new lows ballooned to 352 yesterday, with only 89 new highs. Of
course, this is being biased by the very poor action in Utility stocks, and
many other interest sensitive stocks that are listed on the NYSE, but back
in the old days poor action by those stocks used to be considered leading
indicators of problems ahead.
I can't get out of my old brain that interest rates do matter--especially
short-term interest rates. And even though my doubts about Alan Greenspan
are HUGE, and I refuse to give him the Savior (or even a hero) mantle just
yet, I think he has to be nervous as a cat about the humongous flooding of
new money hitting the streets. This new drug has certainly caught the real
hero--Stuart's, attention as he seeks the next new "high." With M2 and M3
exploding, and the NASDAQ screaming, and Yahoo going up 25% in one day, Mr.
Greenspan has to be a proud father. He single-handed produced this big
baby bullish bubble. What power. But I guess that is what his late
marriage has done for him-produced a Stuart in an Alan Greenspan skin. Can
't you just see Alan Greenspan taking his picture on the glass of a Xerox
copier? But after we pass the Y2K "sweat" date, the thrill of the long
honeymoon (since mid-1996) is going to be taking a very cold sobering up
shower, and he can't possibly ignore the similarity to other historic times
when these type of excesses caused major problems.
For instance, in the 1971-72 period that we are comparing today's highly
selective markets to, we had a Federal Reserve Chairman who the world
considered the Savior of the world--Arthur Burns. But good old Arthur's
conservative discipline, that every one considered so tough and
tight-fisted and intellectual, got lost along the way. When Richard Nixon
told him to loosen up while he was preparing to run for the second term,
pipe-smoking Arthur Burns turned into Stuart's grandfather, and poured it
on. Excess money hyped the stock market and the economy, and sure enough
Nixon was reelected in a landslide. But it also set the stage for all
kinds of inflation and market troubles in the next two years, and the hero
of monetary discipline turned into a goat. So we'll see. Alan Greenspan
came in with a bang, and a market crash in October 1987, so it'll be
interesting if he goes out in a similar fashion.
But let me get back to interest rates. Could this overvalued stock market
have been waiting on a bond market that was positioned for a BIG, BIG
rally? Years ago, we adopted a exponential moving average momentum
calculation that O.S.C. Coppock, an English market statistician developed,
and have applied it over the years to sectors, stock markets, and bonds.
Our adaptation blends a 14 and 11-month exponential moving average of these
criteria. Mr. Coppock 30 years ago used it almost exclusively for the Dow
Jones Industrial average, and his thesis was that it was his most accurate
confirmation of the start of a bull market. In our opinion, it was a
little too much "after the fact," and our study of the combined psychology,
monetary, and valuation was much more timely for stocks. But even with
that slant on it, we have found it extremely useful for bonds.
In the months ahead, when I get my web site developed, I will show you
this gauge, but as for now, take my word for it that any time this momentum
for bonds drops to a certain (oversold) level, and then turns up, it has
produced a major bullish move for bonds. In recent years this has only
occurred at the beginning of the big rallies in 1981-82, 1984, 1988 and
1995/ Just like with the stock market, it typically is a few months after
the fact, but it gives tremendous confidence for bond investments and gives
plenty of time to capture most of the gains. The bad news is that it has
not turned up yet. But the good news is that it finally this month has
dropped under the critical -100 level. In other words the trigger is
cocked.
Now at the same time I see the point and figure guys at Investors
Intelligence telling me that a move in the Dow-20 bond index that is
currently at 98.58, will give a buy signal if it moves to 99.60. So I'll
be watching that potential buy point very closely. We believe the strong
bond market is waiting on a weak stock market, so for my cautious stock
market stance this is a very important potential alert.
Next week will be one of those rare weeks that I will not be sending
market comments, unless a major unexpected trend develops. I will be
traveling to Boston and New York on Monday and Tuesday to speak to
institutional clients, and the big, big day will be on Thursday and Friday.
After spending the last 13 months, we are planning on moving into our new
home. Oh what a day that will be. After 35 years of living in nice, big
homes, Brenda and I have been living in a small apartment. But Monday
week, If the good Lord's willing and the creeks don't rise, I will no
longer have to share my office with an ironing board.
We're hoping the moving van arrives before the divorce decree. (Just
kidding)
The Hays Market Focus Advisory Group does not guarantee the accuracy or
completeness of the report, nor does the Hays Market Focus Advisory Group
assume any liability for any loss that may result from reliance by any
person upon any such information or opinions. Such information and
opinions are subject to change without notice and are for general
information only. Hays Market Focus Advisory Group, 2828 Old Hickory
Blvd., Apt. 1808, Nashville, Tennessee 37221. |
