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The Market Rap
William A. Fleckenstein
06:00 PM 11|13|2001
'Six to nine months' -- the gestation period of a knucklehead.
Overnight, our futures market and the equity markets in Europe were very strong on the back of Kabul's capture by the Northern Alliance. By the time the casino opened for business, the Nasdaq was up about 2.5%, and the S&P and the Dow were up a little better than 1.5%. We then had a sell-off and another rally, such that a couple of hours into the day, the markets had advanced slightly although not dramatically from their opening prices. However, a volley of victory M80s in Sox land had that index up 4%. As for the other engine of romantic speculation, the biotech index was up about 3%. In the early going, there was a tremendous amount of short covering.
There Are A Million Stories In The Naked Tech Sector The feel-good mood engendered by our winning the war on terrorism -- which, in my opinion, has been fairly predictable from the start -- was aided and abetted by some warm and fuzzy feelings spewing from the tech sector. There has been a bounce in DRAM prices. Intel's CFO, Andy Bryant, is around having one-on-ones about how great business is for the moment. And, there are a couple of tech conferences. Never mind that most of the stories are only partial truths, i.e., even though DRAM prices have bounced a good deal, they're still below the cash cost of production. That hasn't stopped Micron's stock from nearly doubling. Over at Microsoft, there has been crowing about XP sales and how they are doing so well vs. Windows 95. But the release dates of the boxed software and PCs have been staggered this time, whereas when Windows 95 was released, that was not the case. So, the comparisons that Microsoft is touting in the name of explosive sales are mixing coconuts and golf balls. Recall, for example, what RadioShack had to say last week about PC sales.
Behind Every Euphoria Is A Good Puke So, when you couple today's good news on the war front with the fact that we are now in the mid-quarter "no bad news" period, the manic twist to the rally already in progress seems predictable. In any case, it will be interesting to see how lopsided the boat gets before all of this is through. My expectation is that we will get a good deal of enthusiasm and expectations built into tech stocks once again, such that when the inevitable bad news starts up in a week or two, it will be enough to take the stocks down. Once stocks start going down on bad news again, they will gather some speed. For the moment, our little mini-burst of euphoria ought to usher in the end of the rally, even though it could still last a little while.
Shorts Await Turkey With All The Trimmings This is part and parcel of my expectations, mentioned in late September and early October, that the market could do better. I fully anticipated that once terrorism appeared to be on the run, so to speak, people would assume the economy and the stock market would come back. They will not, in my opinion, which is an important distinction to make. But I think it's been safe to assume that people would make that mistake. Once they build all that optimism into the tape, though, there will be no place for it to go but down. So, we should be looking for signs of exhaustion prospectively, and we may find a wonderful opportunity to once again buy puts and sell stocks short in the coming couple of weeks.
Bulls Drape Themselves In Serge After the early-morning surge, the market backed off for about an hour, and then we had another surge that took us to the high of the day. From there we had a decent-sized sell-off on the back of a pronouncement by John Chambers that "slower spending forecasts could last up to eight quarters." That caused the market to sell off almost back to the lows, although that would still have been up substantially on the day. But when that selling didn't stick, and Mr. Chambers offered that Cisco had picked up huge market share gains, the tape came firing back to basically close on the highs of the day that you see in the box scores. As previously mentioned, the Sox was hot, up 4%, and the biotech index did a little better than that. The bank stock index was up a couple, with particular emphasis on brokerage stocks, which have had a tremendous surge lately.
Repo Bear Eyes Bull's Rolls So, with speculation making a comeback from prior mania days, it's beginning to look like last spring and other such moments of frothiness that we have seen over the last couple of years. For the time being, the bulls are in charge and the bears are on the run. But I expect those roles to be reversed in the not-too-distant future.
Away from stocks, fixed income took it on the chin due to "the economy is getting better" psychological impact on that market. The dollar was up a bunch against the yen and the euro. The metals were mixed. Oil continues to be a bit of a nonevent, though a small bounce now has it trading closer to $22 instead of the high teens, where it was about a week ago.
Mamis KO's Pangloss Since I already got up on my soapbox, I would like to step aside to make room for Justin Mamis, who in his letter yesterday stated brilliantly, as only he can, why this is not a bull market but just an "intervening rally": "Still others cite the 'huge rally' the market has staged already since the Sept. 21 low, which they have arbitrarily decided 'proves' that everything is wonderfully bullish again. One of the consensus verities, fueled by reporters who of course only confront the daily news, is the belief that because the indexes are going up today -- and don't go down -- that they'll keep going up forever, again. And perhaps the record-breaking consensus of all time is the mantra that 'in 6 to 9 months, the economy will be okay again.' We've heard that since even before the Fed started cutting rates 10 times and 10 months ago."
End-Stage Entitlement Justin continues: "We've gathered together such comments, guarantees, and worshipful beliefs into one paragraph because they all have one thing in common: They're hollow. They contain nothing analytical -- not fundamental, not technical, not non-rational, not astrological, not experiential, lacking any proof of precedence. These are all expressions of not just hope, but need. They are all greedy -- a different kind of greed than in parabolic times. More desperate, more determined, from 'I'm entitled to it' to 'It's mine; I want it back.' In the middle of a prolonged bear climate, the need for everything to be all right all over again is blinding. One can see nothing beyond that need. Losses need to be retrieved; jobs need to be held; savings for retirement need to be re-secured; the bottom must have been seen already. Advice, therefore, must be bullish. How jealous we are that others can be so confident. 'Just once,' we keep muttering at 3 a.m., 'just once, let the market be that easy.'"
Mamis On Masked Bull Justin concludes: "The nature of a bottom and a new bull market is to keep investors scared, disbelieving, and out. 'It's just a technical rally' is the familiar quote that helps prove a true bottom. The nature of a contra-trend recovery is to lure investors back in. Seduction is its hallmark. The nature of a contra-trend rebound is to be all emotion and no substance, causing those who fear the factual fundamentals to re-short too soon." |
