<font color=red>2001FEB02: Market Commentary and Analysis
EXCERPT:
“The Federal Open Market Committee at its meeting today decided to lower its target for the federal funds rate by 50 basis points to 5-1/2 percent. In a related action, the Board of Governors approved a 50 basis point reduction in the discount rate to 5 percent.”
“Taken together, and with inflation contained, these circumstances have called for a rapid and forceful response of monetary policy. The longer-term advances in technology and accompanying gains in productivity, however, exhibit few signs of abating and these gains, along with the lower interest rates, should support growth of the economy over time.”
federalreserve.gov
COMMENTARY:
It used to be that FOMC statements, and indeed most words uttered by FOMC Chairman Greenspan required the financial equivalent of the Rosetta Stone for translation, if it could be deciphered at all. My how times have changed, and it is interesting to see that no one is reporting on this, because in the end, it’s not what the Fed said, but how they said it. For more than a decade, interpreting the ever-coy “Greenspeak” had been an occupation reserved solely for those armed with doctorate degrees in economics. Now, he’s speaking in plain English to the man on the street.
Scarcely a week ago, on January 25, Greenspan told the Senate Banking Committee that growth currently is "probably very close to zero." How much clearer can he be? We didn’t even need a dictionary. Sadly, this also means that the situation is grave, and perhaps worse than expected, and the Fed Chairman did not want any of us to not “get it”.
Chairman Greenspan concluded his prepared testimony before the Senate Banking Committee, named “Outlook for the federal budget and implications for fiscal policy” with this:
federalreserve.gov
EXCERPT:
“That said, as I have argued for some time, there is a distinct possibility that much of the development and diffusion of new technologies in the current wave of innovation still lies ahead, and we cannot rule out productivity growth rates greater than is assumed in the official budget projections. Obviously, if that turns out to be the case, the existing level of tax rates would have to be reduced to remain consistent with currently projected budget outlays.
The changes in the budget outlook over the past several years are truly remarkable. Little more than a decade ago, the Congress established budget controls that were considered successful because they were instrumental in squeezing the burgeoning budget deficit to tolerable dimensions. Nevertheless, despite the sharp curtailment of defense expenditures under way during those years, few believed that a surplus was anywhere on the horizon. And the notion that the rapidly mounting federal debt could be paid off would not have been taken seriously.
But let me end on a cautionary note. With today's euphoria surrounding the surpluses, it is not difficult to imagine the hard-earned fiscal restraint developed in recent years rapidly dissipating. We need to resist those policies that could readily resurrect the deficits of the past and the fiscal imbalances that followed in their wake.”
COMMENTARY:
Today, the National Association of Purchasing Managers report indicated that manufacturing activity slowed for a sixth straight month in January and is now at levels consistent with a recession in the overall economy:
From WSJ: ispeculator.com
This confirms our long-held macroeconomic view that last year’s top in the NASDAQ marked the beginning of an historic transition in the economy. The secular disinflationary economic expansion, which began in 1980, has ended, and we are at the beginning of another secular trend, this time, perhaps an inflationary period that will be coupled with a stagnant economy reminiscent of the early 1970s. A year after the best of times, we are looking down a precipice, with the first of the unfunded Social Security and Medicare liabilities coming due later this decade for the first of the Baby Boomers:
imf.org
Greenspan’s “cautionary note” alludes to this, but in the end, it may be bigger than all of us. In the same way as the Fed was unable to talk the stock market bubble down over the past few years, he will be unable to stop the re-balancing process. No matter how hard we try to defy nature, it is natural for boom times to be followed by busts in circular fashion. Monetary intervention is merely an attempt to damper the highs and lows, but in the end, without 20/20 foresight, satisfaction cannot be achieved in any way. The gradual tightenings eventually led to weakness in the bubble. The popping of the bubble under its own weight now brings easings, but the systemic effects, from the weaker dollar to higher inflation cannot be easily projected. For example, a weaker dollar eventually makes goods more expensive domestically in the United States, and given that the current account deficit continually hits record highs month after month, the inflationary potential in this alone is significant. I could go on and on, but it’s time to take a look at the markets through the eyes of a technician.
The NASDAQ 100 Index
We have been watching this wedge on the NDX go on for weeks. To repeat, a rising wedge is bearish, with a minimum target of the lows from whence it came. In this case, it would measure to a test of the January 3 lows. However, once the pattern had moved above the moving average overhead, it was prudent to watch for a pullback to see if the area between 2400 and 2500, the backside of the downtrend line and the topside of the moving average, would be confirmed as new support. So far, this area has held:
ispeculator.com
Over the past two trading weeks, the NDX has essentially been locked inside a range. Not even a catalyst such as the FOMC meeting could take us out, so we look ahead for the next event, which is this morning’s Non-farm payroll number.
The median estimate of 17 economists surveyed by Dow Jones Newswires and CNBC is for a modest 90,000 increase in payroll jobs, a 0.3% gain in average hourly earnings, and a rise to a 4.1% unemployment rate. The Labor Department is scheduled to release the report at 8:30 a.m. EST (1330 GMT) on Friday.
If we zoom in a little tighter, to the 65-minute intraday chart of the NDX index, we can see that it is now coiled tightly, inside a triangle, awaiting a move:
ispeculator.com
It is truly impossible to say which way it will go. If we take a look at the market internals, it’s not bad, with 92 52-week highs vs. 14 new lows on the NASDAQ, but the oscillator that is the 10-week moving average of the net differential is close to turning over:
ispeculator.com
At the same time, the CBOE Market Volatility Index (VIX, based on the S&P 100 Index) is now at a 4-month low, near the bottom of the Bollinger Band. The 5-day RSI tells us that the market is overbought, short-term:
ispeculator.com
I’d like to alert the readers that we now have a new Volatility Index to watch, and that it is called the VXN, the NASDAQ 100 Volatility Index. While we do not have that much data on hand, we have enough to plot a chart, and will be on the lookout for a VXN reversal to signal a short term top, if that is what we are indeed looking at:
ispeculator.com
MARKET STRATEGY:
What is a trader to do? The safe this is wait for at least the triangle seen on the intraday chart to make a break and then get on board after the first retracement (pullback). Given that it’s a symmetrical triangle, we can construct two scenarios with idealized trajectories:
ispeculator.com
ispeculator.com
Whichever way it goes, we would like to see what happens on the first pause and retracement made after a break out of the pattern to get on board. In the meantime, there is not much to do. For all we know, the wedge is still simply evolving and expanding, faking out along with the way to both the upside and the downside:
ispeculator.com
The Dow Jones Industrial Index
One index that is getting exciting is this one, coming up to a test of the top of the trading range. In this situation, we are looking for a pass/fail scenario:
ispeculator.com
The S&P 500 Index
The SPX has managed to hang on, grinding its way up without anyone noticing:
ispeculator.com
The trouble is the lack of speed. If we squint a little more, we can almost make out a wedge here too:
ispeculator.com
So here we have it. Three major indices having been stuck in consolidation areas/trading ranges for weeks and months on end, all testing the high end of their respective patterns. We will simply watch, because it is from these areas that new tradable trends emerge.
Take care.
Teresa |
