By Bernie Schaeffer
10/22/2002 10:49 AM ET
I'm off this morning to the New York Money Show, and attendance looks very strong. Investor conferences like the Money Shows date from the late 1970s and early 1980s when precious metals and "hard assets" were king. Perpetual runaway inflation was the theme that drew the crowds back then. And no one would travel to hear a speaker who plugged stocks (equities were "dead" per the national business magazine of record) or bonds (viewed as "guaranteed certificates of confiscation"). Can the market be near a bottom when Money Show speaker rosters are still bursting with stock pickers and attendance is near all-time highs? I think not.
This market is firmly in the business of unmercifully skewering bulls and bears alike. The bulls gloat over the glitzy rallies off the bottoms, only to be steam cleaned and pressed on the plunges to new lows. The bears (such as yours truly) take comfort from correctly disdaining the "market bottom" talk. But before the ink is dry on a new plunge to further depths the Dow (INDU - 8479) is 1000+ points higher.
What caused the huge reversal on Thursday, October 10? Here's my take. The CBOE Market Volatility Index (VIX - 39.26) hit 50.48, the exact same level as its close at the July 24 market bottom. This caused a bell to ring for a number of key players. Wall Street firms began engineering a massive move from bonds into stocks, perhaps with some "encouragement" from those to whom I will refer as "the powers that be." This money was put to work where most money is put to work these days - in the index futures and the ETFs. Since these vehicles had huge associated short positions, the shorts began adding fuel to the rally by urgent covering.
Next came the benchmark-crazy mutual fund managers, who literally have everything to gain and nothing to lose by jumping aboard any rally that appears to have a pulse, false or otherwise. Though my guess is that John Q. did not flip into net buying mode, he certainly suspended his fund redemption activity and thus helped perpetuate the rally by eliminating a source of supply.
The final pile of rally flammables was provided by some "good third-quarter earnings reports," as in "we've lowered the bar for the third quarter from +16 percent to +4 percent and now tunnel vision investors can view the reports bullishly because these dumbed down numbers were beaten." (Never mind the fact that if the third quarter comes in below +7 percent we will have our second consecutive sequential earnings decline, or that top line growth is absent, or that Microsoft said "never mind.")
So what's next? Perhaps some more upside. The most encouraging aspect of this rally has been the steady increase in the put/call open interest ratios on the S&P 100 Index (OEX - 454) and the Nasdaq-100 Trust (QQQ - 24.21). This means that incremental activity has been on the put side, which means that option players are not believing the rally, which has bullish implications. As long as this trend continues, the uptrend is fairly safe. The problem is that these open interest ratio trends are often abruptly terminated on a sharp counter-trend day in the market. For example, going into the October 10 bottom the incremental OEX and QQQ activity had been steadily on the call side, but this bearish trend ended that very day on the huge upside reversal.
Another options-based indicator that may need to play itself out before we top is our 21-day moving average of the CBOE equity put/call ratio. After putting in a record near 0.80 on the October plunge, this ratio is now below 0.70 and it is likely to bottom at around 0.60 at the next market top. This means the top could still be a week or two away (or more).
Finally, it would be grossly unfair to those whose definition of a "bull market" is a 20-percent gain off the lows if the INDU did not at least rally to 8637, which would be 20 percent above the October bottom. You may recall that the rally off the July bottom gained 20.5 percent, just enough for the "new bull market" to be declared. It is also important to note that a 20-percent rally off the recent bottom in the NYSE Composite Index (NYA - 477) would place this index at 500.28 and there is massive overhead resistance at the 500 level.
Why, in a nutshell, do I not believe that October 10, 2002 marked "the bottom?" For reasons very similar to why I disbelieved September 21, 2001 and July 24, 2002. Way too much hope, way too high earnings growth estimates, way too many risks to the economy, combined with way too ugly technicals. Regarding "capitulation" and "climactic selling," there is no reason that a bear market must end in such a fashion. In fact, the bear markets that ended in 1982 and 1990 each drifted into their bottoms very inauspiciously. And not many are aware that the 1987 market actually double-bottomed in December, probably because that bottom was also very un-climactic. But if in fact we are going to get a full-fledged climactic bottom to this bear market, the October 10 bottom was a pitiful excuse for one. In fact, the sequence of VIX peaks at the September 2001, July 2002, and October 2002 bottoms of 57, 56 and 50, respectively, belies the notion that this latest bottom was climactic and capitulative.
Might I be wrong and this was the bottom and we're off to the races in a new bull market? Yes. In this regard, watch the 9000 level on the INDU. There is not only heavy price resistance there, but it is also the site of the 80-month moving average. If this level is taken out decisively, the bear market may be over or at least on hiatus.
- Bernie Schaeffer |
