TUESDAY 8/20/2001: I HAVE TURNED BULLISH!!!!!!! I am looking for a market rally into early October, that will eventually climb into April next year. To etch my opinion in stone I am recommending long futures. One outright on TODAY'S OPEN, and a second on a trade above last week's high.
In my stock index commentary last week end ( I have left Saturday's commentary below this update.) I started out kind of aimless, pointed out the possibility of up and down, and had a weak conclusion. We had short positions and nothing really got me fired up. On Monday morning, my lack of conviction triggered my trader instinct and I sent out an EMail telling you to exit my recommended short positions.
The thing that put me over the edge is today's Wall Street Journal article about PE Ratios. The Wall Street Journal TUESDAY MORNING has an article that explains the current reported PE ratio of the S&P of 22 is based on the PRO FORMA numbers reported. IF THE CALCULATION WAS MADE USING GENERALLY ACCEPTED ACCOUNTING PRINCIPALS the PE OF THE S&P IS MORE LIKE 36 TIMES EARNINGS!
The author of the article thinks this information about companies hiding their bad news might encourage some to sell their stocks. TO ME, THIS HAS BEEN A HUGE MISSING PIECE OF THE PUZZLE, NOW I CAN CALL A BOTTOM!
Those stupid number fudgers have not let me see the real numbers that indicate the possibility that the market and the economy correction has run it's course. The S&P went from 1500 to 900 - down 40%. The Dow went from near 12,000 to 9,000 - down nearly 25%. Back in March I called a bottom and we rode the bounce up out of the hole. In May I called a top and we have had successful shorts trades on this slide back down. Recently, I have been looking for the market correction to extend deeper BECAUSE I CONSIDERED THE DOW AND THE S&P OVERPRICED AND UNCORRECTED AT 23 TIMES EARNINGS.
If the real PE ratio of the DOW and S&P is more like 36 to 40 times earnings, then we PROBABLY HAD A MAJOR BOTTOM BACK IN MARCH. We HAD THE FIRST BOUNCE MARCH THRU MAY. NOW WE JUST COMPLETED A 62% PULLBACK TOWARDS THE MARCH LOW IN THE DOW AND THE S&P! We are finishing two quarters of negative GDP - we have had our first recession in nearly ten years. WHAT MORE DO YOU WANT TO TELL YOU WE HAD A BOTTOM IN THE MARKET BACK IN MARCH, AND NOW WE ARE FINISHING A .618 PULL BACK CORRECTIVE LEG!
THE BIG CHANGE FOR ME IS THE PE RATIO!!!! Market bottoms have 40 to 50 times PE ratios because the earnings are often negative for many companies and that makes the wild PE numbers. That is the piece of the puzzle that the pro forma number fudgers have not let us see.
Isn't that just like what you would expect from someone trying to hide the bad news. That are so caught up in SPIN, that they don't understand the truth is the best answer at this point. You can't call a bottom till there is a bottom. They have been hiding the bottom in proforma numbers because they are just like the public majority, bullish at the top and bearish at the bottom.
It doesn't matter what Greenspan does today, I think we have had a good pullback towards the March low, and now I think we will be on the rise till early October. I know, I have been saying September is the worst month of the year on average. But everyone else is saying it also, time to go contrary to everyone else. I look for September to be a strong month.
Remember when Greenspan cut rates aggressively, again and again? Many were asking "what is he looking at that is so bad?" Well, now I can guess, he was looking at the "real" numbers. All of us with the fudged pro forma numbers are waiting for the "other shoe" to fall, to set up a market bottom. Well, the Journal article tells me the other shoe has already fallen.
In my weekly commentary I have been confused about the number of daily and weekly highs and lows. The advance decline line also has not made sense for a market that is GOING towards new lows. What about the unemployment numbers? Is 4.5% unemployment a recession. The weekly new jobless claims number have indicated a recession, but the jobs numbers and the overall unemployment numbers have not. I bet they have been cooked also.
I still want to be cautious in making trade recommendations. In this mornings trade recommendation I am only reaching out of the window and trying to catch the falling PIANO CHAIR, not the WHOLE PIANO. I'm recommending a long on today's open, but ONLY one trading unit long, a starter position. I want to see us take out last week's high before adding another position. I'll also recommend additional positions later on.
How far can we go? Well that 's not the great news. I'm bullish, but I think it will be a slow grind like the 1966 market top comparison. The following chart shows the match of the September 2000 top to the January 1966 top. I'm using the September top for the match because that was the all time high in the New York Stock Exchange Index. In the 1966 top comparison we are somewhere in the 1967 market. I look for the market to be in a slow climb from now till April, 2002, possible November 2002, though there will likely be bumps along the way.
Over the past few months, I have often referred to the 1932 bottom as my model bottom for making bottom comparisons. It helped me call the May top. The chart below is the current comparison to the 1932 bottom. The comparison would suggest a rally now through the end of September into early October. Then a pullback into December, then a strong run. That is about the same as the 1966 comparison above is suggesting.
ALSO, IF WE TAKE OUT LAST WEEK'S HIGH IN THE S&P, I'll put out a GOLD update to re buy GOLD. In my Commitments of Traders Report I have open recommendations to buy COPPER on a trade above last week's high, and we are already long in my strategy December Silver. Industrial METALS could soar on the expectation of a stronger economy as the stock market comes out of the hole.
Next Saturday I'll expand on my thoughts about what the market bounce into next year might look like.
Saturday's commentary is set up in a separate page if you wish to see my weekly chart review. STOCK INDEX WEEKLY COMMENTARY
Good luck and good trading,
George
PS. I sent out the warning last night that I was sending a I'm turning bullish EMail this morning and I had some comments back already last night. I expect everyone to have their own opinion. Most of my readers hang on the bear camp side of the market, so do I. But I try to call the turns as I see them. I hear all the time that I was a week EARLY calling the bottom last March. I had the top in May almost to the day. FRIDAY was the low in the NASDAQ, I covered shorts on yesterday's open and making long recommendations for this morning. If last Friday turns out to be the low for a while, I suppose I'll hear sometime that I missed it by two days!
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