Don Hays Market Comment
December 13, 1999
We now have only 18 more days until we put a cap on this 1000 year
millennium, and move into whatever the next 1000 years bring us, it is very
exciting. But unless I'm totally out of my tree, the fireworks of today
will have a sobering up time before the next millennium can really show its
stuff. Do you think when the year 2999 comes around that Uncle Sam will
still be the powerhouse it is? When you look back 1000 years, and see the
humongous changes that have occurred, can you imagine what the next 1000
will look like? The velocity of technology changes are picking up speed,
so I don't think this old earth can hold the results, so look out universe.
I thought I would talk about 1000 years from today, since forecasting the
next 6 months is so difficult. But let me make a stab at it. Three months
ago when the put/call ratios signaled that the market had another rally in
it, I suggested that mid-December would be produce a topping action, the
final little mini-top for the advance/decline line. Of course I never
dreamed that the NASDAQ would scream to current levels, but the
advance/decline line has been even weaker than anyone would have expected.
So now, here we are at mid-December, and the stage is set in my opinion for
an impending change in the market's direction. With the biggest divergence
in market action in US history, the past tells us the bigger the divergence
the bigger the reaction. The past examples are 1929, and 1972 so if this
one has any message it says that "new era's" come and go, but markets
always remain the same.
With the exploding money supply obviously distorting the personality of
the stock market, and with the Producer Price index moving above the
Consumer Price index for the first time in the last three years, Mr.
Greenspan has 18 more days to see if his huge reservoir of unprecedented
liquidity is to be needed to calm Y2K emergencies. With the huge bubble of
money floating out there, much more than the economy can use, the velocity
of money supply is plummeting but still enough to keep the unemployment
rate at a 30-year low. But the big question will be, how will he reduce
the almost insatiable growth of money and what effect will it have when the
1.5 billion shares of NASDAQ volume starts to dry up? All of that
liquidity, despite the higher fed funds rate almost guarantees higher
short-term rates in the future.
Using the 1972 example, we believe the recent rally will have produced the
last mini-rally in the advance decline line, even as disappointing as it
has been. The McClellan oscillator is treading water at the oversold level
of -99, so we might see--as we did in January 1973--one more unconfirmed
rally by the large-cap indices. Whether or not Y2K proves to be a problem,
I believe that the extreme economic optimism about next year will prove to
be misplaced. As of the first few weeks of the year, I suspect that
reports will turn much more negative, and by the end of the quarter we will
see the first negative comparison with this year. And when the US catches
a cold, the rest of the world catches the flu, so our US economic weakness
is expected to spread to cool the expectations of the recent resurgence in
those reviving economies.
Of course, the stock market looks ahead, so even though the major signs of
economic weakness are not expected to be revealed until March or April, I
still expect the Fed to raise interest rates at least once, and maybe twice
before then. I also expect the bond market to pick up on the impending
slowing of the economy by starting a strong rally. As I mentioned in last
week's market comment, my bond momentum gauge has finally fallen to a -100
level. I know that doesn't mean anything to you, but just let it suffice
to say that in every example in the last 20 years this level of long-term
oversold condition in the bond market has been the trigger for a tremendous
bond market rally. To confirm the buy zone, we wait on the momentum to
turn upward, but even buying on the first downward penetration of -100 has
produced huge capital gains. Nothing is perfect, of course, but once again
we believe this sets the stage for one last decline in long-term interest
rates in the next two years under the 4% level. With our valuation model
now showing the S&P 500 to be 52% overvalued in relation to the 10-year
Treasury note, this signal is a powerful inducement to buy bonds. We have
also seen the highest bearishness on bonds in history, which adds a little
frosting to the cake. |
