A rare good article from Aaron Task
thestreet.com
Market Ignores Good News, Feeds the Bears
By Aaron L. Task
Senior Writer
04/17/2002 06:39 PM EDT
Alan Greenspan gave the market a reprieve from near-term tightening concerns. Earning news was generally positive, save disappointments from Boeing (BA:NYSE - news - commentary - research - analysis) and United Technologies (UTX:NYSE - news - commentary - research - analysis). Yet major averages proved wholly unable to build on yesterday's gains or their early morning ascent.
In his testimony before the Joint Economic Committee of Congress, the Federal Reserve chairman took pains to dampen expectations for near-term tightening.
"Prospects for low inflation and inflation expectations in the period ahead mean that the Federal Reserve should have ample opportunity to adjust policy to keep inflation pressures contained once sustained, solid, economic expansion is in view," Greenspan said.
Following the testimony, Pimco's Paul McCulley quipped that the chairman "really, really -- like Sally Fields -- wants the equity market to like him." But traders treated him more like Susan Lucci at the Daytime Emmys. (For more of McCulley's quips, check out our Q&A here.)
Despite the chairman's efforts, stocks and bonds slid today, in conjunction with a weakening dollar.
While equity traders fretted that Greenspan wasn't more upbeat about the economy, fixed-income participants worried that the Fed is going to fall behind the inflation curve. Weakness in the dollar, notably vs. the euro, further exacerbated those concerns.
Reaching as high as 10,326.44 earlier in the day, the Dow Jones Industrial Average closed down 0.8% to 10,220.78. The S&P 500 fell 0.2% to 1126.09 after trading as high as 1133, while the Nasdaq Composite dipped 0.3% to 1810.72 vs. its intraday best of 1832.01.
The price of the benchmark 10-year Treasury note fell 9/32 to 97 10/32, its yield rising to 5.23%.
Cold Water Brigade
Losses for major averages weren't terribly large, and traders may have "priced in" the friendly comments from Greenspan in yesterday's rally and last night's after-hours surge following Intel's (INTC:Nasdaq - news - commentary - research - analysis) earnings report.
But just as withstanding bad news is bullish, the market's inability to capitalize on good news is bearish. More troubling, trading volume increased during today's losses vs. yesterday's gains.
None of this is surprising to Steve Hochberg, co-editor of the Elliott Wave Financial Forecast, and Woody Dorsey, president of Market Semiotics. They come to similarly bearish conclusions from distinctly different methodologies. And while their views are more extreme than most market participants, overall frustration is rising with the market's inability to mount a sustained advance.
When I called late yesterday, I half expected Hochberg would say major averages had hit some significant Fibonacci retracement, which Elliot Wave devotees use to determine key support and resistance levels. Instead, he was downright dismissive of any rally talk, even of the short-term, tradable variety.
"I think this year is going to be a nasty year, and that is going to be a surprise outcome that a lot of people aren't seeing correctly," Hochberg said, adding that the market's fall from its March 2000 highs to its September 2001 lows was just "the first wave down in the bear market."
The rally from the September lows through the March 2002 highs was "a countertrend move to correct the initial leg down," he continued. Furthermore, that "bear market rally" is "running into some cyclical trouble."
In the Elliott Wave vernacular, the September to March move was a "three-wave move" or "ABC rally," characterized by an up, down, up pattern, Hochberg explained. "There's a very strong potential that wave C ended at the March 19 highs [for the Dow and S&P 500] . If that's correct, we're on our way down again [to] below the Sept. 21 lows."
Hochberg said a near-term rally might emerge but expressed doubts that any of the major averages would materially eclipse the respective March highs. "I'm telling people now's the time to be as liquid as possible," he said. "There may be a trading opportunity later in the year," but it isn't upon us.
More controversially, Hochberg forecast that small-caps are likely to show "relative underperformance" to big-caps in the coming cycle, based on Elliott Wave patterns and a ratio of the Value Line Index to the S&P 500. Again, he made those comments yesterday while the Russell 2000, S&P Small-Cap 600 and Mid-Cap 400 indices were making 52-week highs; today, each rallied intraday but closed lower. Notably, Hochberg's outlook converges with the one expressed by Oakmark Funds' Bill Nygren in today's Wall Street Journal.
As noted above, Hochberg's broader negativity dovetails with that of Woody Dorsey, who views the market through the prism of behavioral economics, as reported previously.
From Dorsey's vantage point, the question is whether sentiment has reached the "opposite extreme" of the runaway bullishness evident in the late 1990s and early 2000. "We have not yet seen the quality of capitulation that would make sense based on how the market has behaved in the past two years," Dorsey declared, notwithstanding claims to the contrary at market lows in March 2001 and last September.
Many share that view, but Dorsey provocatively forecast that the real capitulation is coming, and fairly soon. "There's great potential this thing could unfold in the next couple of months, possibly the next four to six weeks," he said.
As to why, he first noted the majority of market players believe the market bottomed -- "with a big 'B'" -- in late September, the economy has recovered, and that a new bull market is under way. But recent trading in blue-chips such as IBM (IBM:NYSE - news - commentary - research - analysis) and General Electric (GE:NYSE - news - commentary - research - analysis) is "very atypical" for a bull market, he said. Furthermore, "negative concepts" such as accounting irregularities, high valuations, global uncertainties and terrorism are "ganging up more and more" on psychology.
"The risk is any of these things escalate to a point where there's some dramatic catharsis," he continued. Complacency about the situation in the Middle East and the war on terrorism are the market's most vulnerable points, but "it could be a further extension of [all] these issues," the market watcher continued.
Shooting the Messenger
I don't publish views of people forecasting crashes or panics lightly, and I'm not trying to "spook" anyone. Faithful readers will recall several recent columns have been dedicated to those who've been forecasting a rally is in the midst. But the market isn't cooperating, yet another sign trouble may be afoot. |
