Saturday Food for Thought
by: exbondguy, 10/27/01 09:51 am
I tend to be most interested in smaller and medium-sized companies due to their higher volatility (or potential reward for correct analysis) and their superior growth potential relative to larger, more mature companies. Nevertheless, I keep my eye on the big guys - they help me spot trends. Maybe I am not correctly interpreting what I will present in the paragraph below, but I think that it suggests that those who want to make money in stocks over the intermediate-term had better play from the long side. I have suggested in prior posts that there is a strong potential for the broad averages to reach their 200 dmas over the next few weeks to months, based upon seasonals and statistics of momentum.
Every Saturday morning, I look at 10 stocks that were the largest of the S&P 500 at the beginning of the quarter. I try to assess whether their trend is positive, neutral or negative, and then calculate a top-10 index. I also assess the OEX, SPX, MID, SML and NASDAQ. I could post ad nauseum (which, evidently I do anyway) about how this information can be useful, but that is not the point today. My point is this: 6 of the top 10 stocks are ABOVE their 200 dma already, 2 are essentially there, and 2 are not. I think this is a signal. In descending cap order (as of 9/30/01), GE (12% below), MSFT (above), XOM (close, but not important in the scheme of things), PFE (above), WMT (above), C (close), AIG (above), JNJ (above), IBM (above), SBC (below - is anybody shocked besides me that this company was #10 as of 9/30?). Many of these averages are now pointing higher. This is a broad representation of U.S. companies - Tech (HW and SW), Finance, Health, Retail.
The OEX, or the top 100, is still 8% below the 200dma. The SPX is also about 8%. The Nasdaq is more like 15% (and showing the best near-term momentum from the deepest oversold). I encourage some alternative interpretations from mine. I suppose one could say that it shows that the very largest MFs are just deploying cash or that the largest pension funds are reallocating from bonds. Any other thoughts?
......
Nice Week [10/26/01 04:10 pm]
Hey, the QQQs held the breakout level of 36 and extended the rally today. Not surprising to see the weak close after such strong NASDAQ performance this week. I don't think that violating 36 is necessarily terrible, but it would be nice to see the market ride a bit higher without doing so. From my vantage, people certainly appear to be acting differently than they have all year, even in the short but powerful rally in April. This feels more real from my perspective. I don't think anyone wants to get caught with a lot of cash and bad YTD numbers if the market rallies - it will look pretty bad to clients (nailed on the way down, out on the way up - What the hell do I need YOU for???).
I use a measure of price momentum that has not been positive for the S&P 500 in over a year. Even in the bull market, it always went at least 1 sd against trend every single year (except 1995), if not more. That level on the S&P 500 would be about 1200 were it to move to just 1 sd overbought. Similar story for the NASDAQ. Just getting to 1 sd overbought would take it to a little over 2000. For reference, the only Index that I can run for post-73/74 is the Dow, and it moved from extreme oversold (-4 sd) in SEPTEMBER 74 to +2 in APRIL 75. That is what I would be AFRAID of if I were short. The seasonals are there....
If this is a buying panic, these are probably reasonable targets to sell in November...
Checking historicals, there are precedents for massive rallies now. In 74, as I mentioned in the prior post, the DOW was over 5 sd oversold on my measure in late September. It rallied 60% over the next six months. On 9/21, it was 5 sd oversold as well... Also, it did not get as oversold in 1990 (early October - only three units), but it rallied over the next few months by over 20%. As an aside, it then went sideways for the rest of the year. I guess that the adage "when you least expect it" applies here...
So, you Dow Theorists may prove right in the end, but you could miss one heckuva rally over the next few months...
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The above is from "exbondguy", a cyberpal on the Y! boards. His commentary is often insightful and useful.
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