Last week's commentary. Today's market
activity has only reenforced our belief that the markets
are at or near a bottom and technologies will lead the
recovery in the coming weeks.
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The Select Investor Weekly Commentary October 13, 2000
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The Good News
Pfew! Now we know where the market bottom is : DOW
10,000, NASDAQ 3,000. The markets executed a
classic bottom this week. This means that it is 90%
certain ( in the absence of a major political
crisis ) that the markets will not fall below these
levels in the near future.
The Capitulation
On Wednesday and Thursday we saw the capitulation;
heavy volume selling on sharply lower prices. This
flushed out the short term investors and the Bears.
Everyone that was inclined to sell, sold on
Wednesday and Thursday.
The Recovery
So, by Friday all of the sellers had sold and there
were only buyers left in the market. This led to
strong buying with high volume and sharply higher
prices. It is important to notice that technologies
led the way up by a wide margin; most technology
sectors were up from 8% to 10% on Friday, while
most of the other sectors gained 2% to 4%.
The Long Term Implications
We believe that the bottom formed this week signals
more than an end to the recent - 20% correction,
but also the end of the - 40% correction that began
in March, clearing the way for a rally back to
NASDAQ 4,500 to 5,000 over the course of the next
three to six months.
In March and April the NASDAQ fell from 5,000 to
3,100 as the Internet Bubble burst; most Internet
stocks lost 80% to 90% of their value, while the
technology blue chips held much of their value.
During this last correction it was the tech blue
chip valuations that were brought down to earth.
This is the classic structure of a double bottom :
the first bottom is caused by the collapse of
speculation in a few sectors, while the second
bottom is the result of a revaluation of the
broader sectors in the absence of speculation.
We do not expect the markets to shoot straight up
as they did last Fall, but we expect a long,
sustained recovery to begin; starting today.
The Bad News
Even in the best scenario, we expect volatility and
pullbacks over the next few months.
The real risk to a sustained recovery is the
possibility of a hard landing in the global
economy. There is very little direct risk to the US
economy but higher energy prices pose a great
threat to the global economy. Energy costs are much
higher in Europe and industry is less efficient (
especially in Eastern Europe ). In the third world
the added drain on foreign reserves due to the need
to spend US Dollars to buy oil will put significant
pressure on these economies as they continue to
struggle to recover from the Asia Crisis.
If Oil prices remain in the mid to high $30's the
slowdown in the global economy could make the soft
landing in the US economy much harder.
Russell Cox
selectinvestor.com |
