Very level headed comments from Tony Dwyer today....
Tony Dwyer
MARKET
5/11/01 8:17 AM ET
Part 1 of 3: In all the morning papers, yesterday’s mixed action, where the Dow Jones Industrial Average (DJIA) was up and the Nasdaq Composite (COMP) was down, was perceived as disappointing and negative. As we walked into the session, all the markets were indicated up big on the back of a surprise interest rate cut by the European Central Bank (ECB) and a variety of high technology upgrades by the Wall Street research community. Instead, we got a mixed session, which caused disappointment by those who had been looking for a breakout in the market to the upside.
Whether the session was disappointing depends upon your strategy and your time frame. If you have been buying recently for a trade, there was no question that the action suggests more of a pullback. If you have been holding off buying due to the overbought condition, across the board, and have been expecting a pullback, it appears to be going as planned.
It is key here to realize how much we rallied in a very short period of time. People are still looking at the market based upon how far it has declined rather that the current environment. We can’t change the past and should not forget that when implementing a daily strategy based upon a longer-term outlook. There are so many stocks that have rallied by 30% to 50% that it seems to make sense that a rest is needed.
In other words, profit-taking is natural and normal, especially after the greatest one-month gain in history.
Part 2 of 3: As I outlined a couple of days ago, we are heading toward a pivotal time for investors. The market was unable to break through key resistance levels and should, as a result, pull back and work off the overbought condition. The key question is how much should it pull back and whether the historic rally was in the context of a bear market where we will ultimately make new lows. I would like to point out the following:
The late March/early April low was climactic by any technical measure, suggesting the worst has been seen technically. In addition, the volume and power of the rally off the lows indicates that there was shift back to the buy side by the institutional money that ultimately drives the market.
There is a significant difference in the individual stocks’ bottoming patterns vs. prior bear market rallies. The average stock has established a solid basing pattern and has more than just a couple of weeks of moving higher. In addition, we have been consolidating the gains since the unexpected Fed rate cut in April and as a result are well along the consolidation process from a timing standpoint.
The aggressive Fed action and ECB move on Thursday should enable the economy to reverse its downtrend and begin growing as we move toward 2002. This is key because, while the television focuses on the current quarter’s earnings, those who are fundamentally buying stocks are doing so based upon their expectations for economic, and therefore corporate profit, growth in 2002.
It is important to remember here that the market is a discounting mechanism that prices in today what is expected to happen six to nine months down the road. The recent rally is discounting that things shouldn’t get too much worse after the second quarter. The market has yet to discount significant improvement in 2002.
Part 3 of 3: The Fed is likely to further cut rates at Tuesday’s FOMC meeting, which is already factored into the market, but further increases the likelihood of economic and earnings improvement next year.
Corporate America is indicating that the current environment is still very difficult, but there are some early signs of stabilization. Now that five months have passed since the first Fed rate cut, there should be more signs as we go forward of the positive impact of rate cuts. In other words, the really bad news should abate and better news should be coming over coming months.
As we have been constantly saying, the key here is to manage your expectations. If you agree with our thesis, you wait for the market to either break out to the upside or wait for it to work off the overbought condition before adding to positions more aggressively. If you are looking for second quarter earnings to drive the market higher, then you are likely to be disappointed. We believe that we have made the low and are in the bottoming process. The markets have not even broken their intermediate-term downtrends yet. That means there is plenty of time to buy and as a result, investors should use patience and wait for fear to reenter the market.
From a trading standpoint, the bad news is that most of the decline as you work off an overbought condition comes quickly and toward the end of the consolidation process. The good news is that we are close to that point and recommend that investors stay tuned, get ready to buy and not get overly concerned about the coming few sessions. Over the long-term scheme of things, the pullback should look rather shallow. Rest assured though that at some point over the very near-term, investors will wonder if they have made a mistake and want to sell. It is at that point, that you add to your positions. |
