Both Lucent and Nokia gave earnings warnings before the open, while Wcom announced that it was under an SEC investigation for accounting fraud. The Nokia news caused a broad overnight sell off for tech stocks in Europe which trickled into the US pre-market futures trading. On the open the Nasdaq gapped down over 40 points and spent most of the day trying to build support off of the opening lows.. ......
Today's bad news hangover is the first real negative day the market has had in over a week and a half. Since the first of March the market has been rallying on economic numbers that show that we are currently going through a bounce in the economy. Whether or not this is going to be a sustainable trend that is going to last all year is one question that is being set aside for the future, but over the past two weeks the individual economic reports have spurred a manic buying rally and all sorts of predictions from the talking heads about a second half economic boom.
We have two things to look at. The short term picture, what the market is going to do over the next week or so, and the long term picture.
How the market reacts in the next few days to today's bad news and big drop will give us a feel for what is going to happen over the rest of the month. If the Nasdaq gets its footing back and breaks the 1950 resistance level then it will likely make another 100 point run. However, if it fails to break 1950 and then goes through support(which will become the low of this week) then it will likely resume the downtrend. The rally that began two Friday's ago will look just like a mirage. I would then switch to shorting again.
For now though it looks to me like the market is likely to recover and resume the rally. So I'm optimistic about the next few weeks.
After that everything is up in the air, and my guess is that the market will top out below the January highs and then put on another large correction that will take out the February lows. Such a move would of course spark a panic sell off.
Why do I think that?
First of all there is so too much bullish sentiment to believe that this rally is the start of a new bull market. I also do not believe that the economy is going to recover and boom as much as people think. In fact there is a large danger that we'll slip into recession again. And even if the economy does grow, stocks are still so overpriced that they will probably correct anyway. This is the point that Warren Buffett made in his letter to the shareholders of Bershire Hathaway.
Finally an important report on liquidity and insider trading paints a much different picture of the market then what is being portrayed on CNBC.
Have you ever heard of Trim Tabs? They are a company that tracks insider buying and selling and money flows in and out of the stock market and mutual funds. Maria Bartiromo used to cite them when they had a positive outlook on the market. But the people at Trim Tabs are becoming too negative for her now.
They have found that insiders are dumping shares like mad. Even more so then they had last year. According to a report today they said, "the trading float grows when either companies or insiders sell never before traded shares. The trading float shrinks via stock buybacks and cash takeovers." Trim Tabs explained, pointing out that new offerings of $4.6 billion late week trounced the meager $497 million of new cash takeovers and $235 million of stock buyback announcements. "Corporate investors are bearish and Wall Street market strategists are bullish. There is no doubt that corporate investors have a much better record of predicting the future."
Trim Tabs reports shows a huge discrepancy between the rally last week, the excitement everyone is feeling, and the actual actions of mutual fund investor and insiders. This discrepancy won't last forever, and will probably end in a bad way for stock market bulls. Further quotes from their report:
"Unless last week's corporate buyers strike was just a pause, and cash takeovers and buybacks resume this week, it does appear that corporate investors are resuming adding heavily to the trading float of shares.""The trading float of shares grew by an estimated $17 billion during January - the biggest one month jump since June 2001. The only reason February's estimated float growth dropped to just $5 billion was due a jump in newly announced buy backs to $19 billion. Since only a small % of new buybacks actually get bought the first month after being announced, the actual float growth might be larger."
"Notice that the float shrink sectors - cash takeovers and buybacks - the first two months of this year were a mere fraction of the amount done the first two months of last year. In fact, the $1.3 billion of new cash takeovers was the smallest two month total since we have been tracking."
"Given that all equity funds on balance lost value during both January and February, it is hard for us to believe that individuals decided to pump in $19.6 billion of fresh cash in January, in essence buying the dip."
"We turn somewhat more bearish than we were last week when we covered our short on the S&P and went long two Dow futures and remained short two Nasdaq 100 futures. The reason for our return to the bearish camp was the decline in float shrink activities from bullish back to bearish. However, given that one week is too short a period we will keep our long position on the Dow for another week to see if last weeks drop in corporate buying was a fluke. A bear market, in liquidity terms, to repeat is when less cash is chasing more shares."
"Since the stock market is in essence controlled by corporate investors, if they are desirous of selling new shares, the brokerage industry will sell as many new shares as there is extra cash available in the checking accounts of stock market intermediaries. In other words, when corporate investors are bearish, no rally based upon fresh cash flowing in can last for very long."
You can subscribe to Trim Tabs yourself at trimtabs.com
The bottom line is this - the rally can continue and the market will show us over the rest of this week whether it will or not. But the big long term picture for the market is still bearish. That means there is no reason to make big bets on the long side of the market or buy tech stocks at these levels thinking that they are going to be great long term investments, although we can and will poke out a few breakouts and strong stocks in strong sectors here and there. But we'll have to be on the lookout for signs that this rally is ending and be prepared to flip to shorting again. But for now, there is nothing as fun as a 6 week bubble. |
