There is a lot of talk on SI about the COTs this weekend. After updating this weeks numbers and staring at the charts, I am starting to come up with a SPECULATIVE read on what is going on.
The Commercials aren't getting long and have been basically stalling, refusing to cover the remaing short positions they have carried the last 2 years. Reminder that they have never been this short, ever in history. They covered about half their short positions into September 21st and continued to do so in the early days of the rally but now they are just flipping contracts from large to -eminis and back again. Why aren't they covering their last positions or else why aren't they shorting more into the rally?
See my COT chart here marketswing.com
Throughout the history of the stock market, there have been very few "V" bottoms. AS Don has said, most declines of 7% or more have had "W" bottoms or some mutated form of a double bottom retest either higher or lower.
I am starting to think that the commercials feel as I do that the fair value of this market is somewhere between our September low and where we are now. Now when I say fair value, I mean as far as the information we have now and bright expectaions that the earnings declines will cease and some sort of a base will start to form to build future earnings on. More on this later...
Anyway, if the Commercial COTs know that most markets in a decline like this double bottom/retest lows, then I feel they may have covered half their shorts on the initial September low and are waiting to cover the other half on the retest.
As for where fair value is.... Who knows for sure. Will there be enough currency pumped into the market to prop up stock prices and maintain these high PE ratios? Is this a semi permanent "new economy" due to so much money chasing so few stocks that PEG ratios can stay out of historical norms for the next few years? Will a low interest rate, one that is lower than any other time in recent history be able to fuel enough borrowing to keep things afloat? Those types of questions require economic models that are waaaay over my head.
I still prefer to stick to my expectations that we are going to go into a prolonged trading range that could last a year or more. Most likely years and years. The meat of which will be between here and the September lows but could get momentary irrational exuberance bounces up near NDX 2000.
I think the reason that the COT commercials are long the DOW but short tech and the SPX is that this low of interest rates, especially with another 50 points being priced in to a rate of 2%, does allow for higher PE ratios and the Brick and mortar companies of the DOW have been through enough tough times to know how to survive. Most DOW components have real earnings and some are actually still showing growth in those earnings in this decline, and not all by pro forma accounting games. Many of these companies produce "must have" products such as PG with diapers, soaps etc and MMM tape, building coatings, sand paper and grinding wheels etc....
Tech on the other hand is a totally different picture that is very disturbing. Most if not all the tech firms were originally started in the 80s. None of these companies have seen a "real" recession barring the momentary dip in the 1990 time frame which was actually still a good time. Most of these, yes MOST of them, were not able to put forward positive earnings in the best of times, those late 90s tech huge spending boom times. By GAAP accounting standards, most of these tech firms LOST money. Who knows what they are going to do with a more normal economy that just clips along at 3% growth much less if we go into a multi quarter recession or worse yet a multi year recession. Also once it becomes clear that tech stocks aren't going to climb 30% a year, Many of their employees aren't going to be in such a rush to accept stock options as compensation and will want real cash to pay their bills. This will hurt cash flow, decrease profit margins and eliminate some tax write offs.
Luckily the NASDAQ has a slurry of companies in it and recently the bond funds, biotechs and some small brick and mortar companies have taken the lead in this slowdown to carry some of the weight. The NDX has been steadily dumping losers that have gone Chapter 11 or lagged so badly they were fired, and they have stuck in new companies to take their place. I have often said that it is best when playing long term plays to go short individual companies and go long indexes due to the reshuffling that always occurs and because in the weightings system used on the indexes, the best performers usually gain weight in moving the index and the poor performers go to the back of the line and thus move the index less. It is one of the most often forgotten publicly known secrets of this ponzai scheme.
My point is that the DOW is almost completely devoid of tech barring MSFT and INTC which are cash rich and do make money whereas the NASDAQ is laden with it, especially the NDX 100, and the SPX has about a 30% weighting of tech in it.
I think the COT commercials are heding long with the DOW in case of a breakout upwards due to low interest rates and in case a turn around does occur in the economy and they are staying short tech and SPX until the retest happens. I expect us to stay in a long trading range from here on out until the economic picture becomes more clear, the interest rate cuts have time to filter through to see if Greenspan is still pushing on a string or if there is some demand for cheap capital etc.
I have short term cycle turn date set for 2 November which I think will be a short term high but nothing earth shattering, a mid term cycle turn for December that will be much more important and then my next major turn which just hit 2 October ( I suspect it was implying the 21 September low) will be in late 2002/early 2003 but it is so far ahead, I haven't gone to the effort to zoom in and look for sure.
COT charts breaking down by type can also be seen here by percentage including the DOW and the second link is charted by pure raw numbers.....
marketswing.com
marketswing.com
Good Luck,
Lee |
