The Worden Report (Tuesday, April 4, 2000)
Weeding Out The Garden
We have no basis for concluding the decline in the Nasdaq market is coming to an end. Today?s shakeout will very likely result in some further gains, but at the very least a test of the lows can be expected. If COMPQX rolls over on comparatively light volume and then down to or somewhat below the low on continued light volume, there will be a good chance a bottom has been found. If volume picks up again on the downside, we?ll be riding a toboggan down to another shakeout. The chances of this happening are very real indeed. This looks like a complete restructuring of the tech market. The weak sisters may be driven down to one-digit numbers. The Nasdaq decline so far has been modest in extent. At today?s low it was only down 29 percent from the high (made in March). For such a volatile sector, that?s not much of a bear market, particularly measured from an intra-day high to an intra-day low. It would be easier to believe that a closing low down thirty percent might represent a bottom. What we saw today seems cataclysmic to many in the audience partly because violent downside action in the market has become so rare in recent years and partly because it has been so fast. We have learned before that institutionally dominated markets move fast. Those managing other people?s money move fast and boldly when they make up their minds. There has been a lot of talk about margin calls today, implying public selling. This may be true, but the institutions still dominate. Bear markets are not caused by margin calls, though margin calls can cause exaggerated moves on a short-term basis (such as today, maybe). But the best way to look at this is not through the rose-colored glasses of excuses or passing it off to operational and psychological details. It is probably a complete change of attitude toward allowing stocks without earnings to fly at high altitudes. The garden is being weeded out with a powerful weed killer and some of it is bound to do some damage to good plants, but this only creates buying opportunities.
A selloff in specific sectors will inevitably affect other sectors (the innocent, so to speak). We saw this today in the temporary selloff in the Dow. However, the Dow was overbought - something we have already pointed out. The Dow has room to maneuver while holding itself above the March low. The most reasonable assumption at this point, in our opinion, is that the Dow?s March low will hold if approached. It is possible it will not even be seriously threatened.
There is little doubt that an important change of leadership is taking place. On a day like this, with the Dow down 500 points at one time, one is generally satisfied just to see signs of survival. But we see more than that. This is a time to be shopping. Today we saw impressive one-day reversal patterns - something we did not expect to find. We saw stocks breaking upward from bases. We even saw breakaway gaps. We wrote optimistic Notes today on the following blue chip stocks, along with others: LLY, WAG, GT, KO, K, HNZ, PHA, AMA. It?s still a Gemini market. When it tech selloff ends, it will be with a whimper.
Greg |
