Late Selling Takes Some Luster off Big Rally
By Aaron L. Task
Senior Writer
08/06/2002 06:31 PM EDT
A potentially stellar rally morphed into merely an impressive one as some late-day
selling took some shine off the market's action. Still, major averages rose smartly
and market internals were bullish.
After trading as high as 8418.15, the Dow Jones Industrial Average closed up
2.9% to 8274.09. Similarly, the S&P 500 ended up 3% to 859.57 vs. an intraday
best of 874.50 while the Nasdaq Composite rallied 4.4% to 1259.55, about 20
points below its earlier high.
The day's gains were fueled by a combination of short-covering, speculation of Fed
easing and the dollar's renewed strength, as reported earlier. Additionally, there
was anticipation of the post-close earnings announcement by Cisco
(CSCO:Nasdaq - news - commentary - research - analysis), which reported pro
forma fourth-quarter earnings of 14 cents per share, two cents ahead of consensus
estimates. After climbing 6.3% to $12.07 in the regular-hours session, Cisco
shares fell initially in after-hours trading but have since rallied to near $12.50
although the company's revenues of $4.83 billion were slightly below forecasts.
Some attributed the late-day selling to rumors of cautious comments by Merrill
Lynch ahead of Cisco's results. Additionally, technicians cited resistance for the
Dow at 8400 and the S&P 500 at just above 870. Finally, some suggested the
advance, which began with strong pre-opening futures buying, merely got beyond
what fundamentals, and optimistic buyers, could support.
Still, all but three of the Dow's 30 components finished higher with 3M
(MMM:NYSE - news - commentary - research - analysis) and United
Technologies (UTX:NYSE - news - commentary - research - analysis) exerting the
greatest positive influence on the price-weighted index. Broader averages were
buoyed by strength in a variety of sectors as reflected in market internals.
Advancing stocks bested declining issues by better than 2 to 1 in both Big Board
and over-the-counter activity. Up volume totaled about 80% of the Big Board's 1.5
billion shares and nearly 88% of the 1.33 billion shares traded over the counter.
Downside Volume Just Half the Equation
There's been a lot of discussion lately about the absence of a 90% downside
volume day, which historically occur at major market bottoms. Yesterday,
downside action accounted for about 90% of the volume in Nasdaq trading and over
88% of Big Board activity, leading some to declare that the 90% down day had
arrived and thus a bottom was (finally) in place.
Unfortunately for the bulls, that is not the analysis of Paul Desmond, president of
Lowry's Reports in North Palm Beach, Fla., whose study on the subject earned
him the 2002 Charles A. Dow Award from the Market Technician's Association.
"The historical record shows those kind of days should generally be regarded as
not valid 90% downside days," Desmond said in an interview today, noting that
90% downside volume is "just half the equation" of a true bottom-demarcating
session. Those are characterized by 90% downside volume in conjunction with
90% downside price action, meaning 90% (or more) of the price movement of all
stocks on a given exchange is lower.
"Most people are saying volume is good enough but the result is they end up
getting whipsawed," he said.
There have not been any 90% downside volume and price days since April 3, 2001,
according to Lowry's. That none occurred during September 2001 was one reason
Lowry's said at the time "we could get a rally but it's not going to be a major
market bottom," Desmond recalled. Notably, he's been saying the same thing
about the current environment: "We [could] get some kind of rally lasting several
weeks but it's not going to be a major market bottom."
Desmond's call is based mainly on two factors:
One, 90% downside volume and price days are evidence of "panic selling" when
investors "dump stocks with abandon," he said. Such action "exhausts the
overhead supply of stock," meaning the amount of stock that was bought at levels
above current prices. Essentially, the 90% down days reflect that "anyone who
wanted to sell has sold," the technician explained. "At that point prices have been
driven down to extreme, irrationally low levels and buyers come rushing back in and
create 90% upside days."
To date, there has been "heavy selling but it has never reached the panic proportion
at every other major market bottom back to 1933," Desmond reported. (There have
been some 90% upside days recently, suggesting, again, that many investors are
more afraid of missing out on the next rally then of additional future losses. Again,
that's not something historically associated with capitulation, which is what
Desmond is referring to.)
Two, there have been at least five 90% downside volume and price days before the
final low at other major bottoms, he reported. In 1974, to which the current
environment is often compared, there were 14 90% downside days before the
market finally stopped falling. (See "capitulation" doesn't mean a one-day affair -- or
breakup between investors and stocks, in this case.)
"If you see the first 90% downside day, that's not an indication we're near the
bottom," Desmond said. "It's an indication investors are just beginning to panic.
What concerns me is that the worst phase of a bear market is the final panic
stage. If we haven't seen that yet, investors who are searching so desperately for a
bottom may get caught in the final bottom."
I'm publishing Desmond's views because I share that concern and not (as some will
contend) because I'm perennially bearish or want to rain on today's rally. Rather it's
to point out that those anxious for a 90% downside day should be careful what they
wish for or, at least, know what it is they're looking for and what it means. |
