<<Well, the new year got off to a bang, but the bulls probably wish
they had stayed in bed for the first couple of days of Y2K. So far
for the year the SP500 is down 4.7%, the Dow is down 4.4%, and the
Nasdaq is down 4.1% (and 6.8% from its Monday high).
If you watch the financial shows on TV, you will see everyone
scrambling around for reasons that the market is off to a rough
start this year. But all the clues were there for the last few
weeks, and we have been pointing them out. The market internals were
weak and not confirming the new market highs, interest rates have
continued higher, the market was very overbought, and the Nasdaq was
putting in a blow off top.
In the first two days of January, the Dow and SP500 have now given
back all their gains from December. And in doing so it looks like
they have put in an intermediate term top. The main question is just
how deep will this selloff go? We don't think the selling is over
yet. With the indexes down more that 4% already, we suspect we are
looking at a selloff of at least 7%. The Nasdaq Composite has
already dropped from a high of almost 4200 down to 3900. We don't
have any trouble envisioning the Nasdaq dropping to the 3600 area,
which would be a selloff in the 15% range. Of course, this won't
happen all at once. We will see some sharp countertrend rallies. In
fact there will probably be one right around the corner, probably
starting Wednesday or Thursday. But we really think that the buying
will be relatively short lived...and then the sellers will come
back.
There is one thing we hesitate to mention, but if you have been
subscribing for long you know we love these calendar quirks. The
Japanese stock market was the world's standout throughout the
1980's. Then on the first day of the 90's, it set a new all time
high and started to sell off. That was the start of a decade long
bear market that *still* isn't over. Now here we are starting a new
decade, and the U.S. market had an all time high on the first day of
the decade and then started to sell off. Long time readers know
we are not doom and gloom perma-bears by any stretch of the
imagination...but it just seemed like an odd quirk how these things
can line up, at least for a short while.
Given our bearish outlook, we are pretty comfortable with our model
being on the sideline and out of stocks. Of course, we will
continue to watch the model for an "all clear" signal to get back
into the market.>> |
