Kudos to Lewis and his early forecast.
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September 25, 2003
Gold and Stocks Are Both Smoked
Asia was lower overnight, with Japan sinking another 2 percent to a new low for the move. The yield on the JGBs also jumped to 1.38%, which is a little interesting considering the JGBs usually run counter to the stock market.
Europe was off 2 percent this morning, and the US futures were higher as usual. Weekly jobless claims came in below 400,000 again (this number jumps around so much that’s not even really worth following). The Labor Dept, which gets points for honesty in this case, did say that the claims were lower due to the hurricane. The durable goods orders data was from August, so it’s a little stale and not worth talking about even though it went negative. After all that was out, the stock futures basically yawned and were still up a touch ahead of the open.
We opened higher, and immediately dove lower to a marginal new low for the move. We then got what looked like some short covering (people were no doubt shocked to have finally made some money over the last couple days on the short side for a change and didn’t want to let it get away). That rally took us barely positive and peaked out around noon. From there, we began a slow slide back to the lows. And when the usual bailout rally did not appear in the last hour, we went dumpster diving and plunged to a new low for the day, sending us out on basically the very worst levels of the session. I’d also note that the spoos kept sinking in the runoff and closed below the key 1000 psychological level. Volume was extra chunky once again (1.5 bil on the NYSE and 2 bil on the NASDAQ). Breadth was just shy of 2 to 1 negative on the NYSE and just shy of 3 to 1 negative on the NASDAQ.
The semis were off a percent on average after initially opening a little higher off of some misguided excitement in the wake of MU’s (lack of) earnings report last night. MU reported a slightly less disastrous loss than it normally does. MU also announced that INTC is injecting $450 mil into MU (with MU's balance sheet, this looks more like pity than an investment), which gives INTC a 5.3 percent equity interest and insures INTC a supply of DDR2 memory (not that securing this supply is going to be a problem next year because demand is unlikely to do anything but contract). MU opened a little higher on some hoper excitement and then reversed to close down 4 percent to a new low for the move. Similarly, the equips gave up early gains to sink 2 to 3 percent by the close. The SOX fell half a percent to a new low for the month.
The Internet trash opened higher but turned negative into the close. The tier 1 stuff ended mixed. EBAY and AMZN rose a percent, while IACI and YHOO were a little weaker. The tier 3 trash was lower across the board, however, and some were beat up pretty good. SOHU fell 11 percent, SINA 7 percent, LOOK 10 percent, ASKJ 6 percent, etc. I think you get the picture. Basically, the single digit midgets (many of which are now only “formerly known as” SDMs since they’ve tripled and quintupled into the double digit range) all lost a little in stature today.
Financials were lower. The BKX and XBD both fell about half a percent. The derivative king fell a percent, BAC was up a dime, and GE sunk a touch. The mortgage lenders were off a percent or two across the board. FRE and FNM were basically flat.
Retailers were mixed (up or down a percent on average), with the RTH ending virtually unchanged. Homebuilders were mostly lower by a percent or so despite August new and existing home sales coming in both better than the prior month and the consensus. Of course when you factor in yesterday’s MBA data, which revealed that new purchases fell last week for the first time in 4 weeks and are down 15 percent since May. Yes, I know hopers told us that housing would continue to roar despite higher interest rates, but much like the mythical rebound in IT spending, I think you can see once again that the facts don’t bear that out.
Crude oil rose a nickel. The XOI fell half a percent, and the XNG was off over a percent. The CRB ended flat after initially attempting to trade higher. Gold gapped up about 5 bucks this morning in NY. The metal then traded up to about $395 but failed short of the psychologically important $400 level. The metal then turned to collapse into the close by about $10, ending down $2.50 at $385.60 and on the lows of the day. The HUI opened slightly higher this morning and immediately went red even before the metal did. By the close, the HUI had sunk nearly 5 percent. The XAU actually put in an outside day today (i.e.- it opened at a new high and then reversed to close below the previous day’s low), which is pretty powerful reversal signal in the short-term.
As I have been saying, I was afraid something like this might happen, and I think the correction that I have been warning about since late last week has started. I expect we’ll see the gold shares trade even lower over the next several days before some sort of bounce. Please don’t email me and ask me how low they are going to go because I have no idea. We’ll just have to wait and see, but I do think we’re going to see some pretty nasty declines in many of the shares, especially the juniors, which held up a little better today but will probably get hit even harder as the correction continues. The other side of that though is that if the gold shares are getting sold this hard (they’re always the last to be sold in the secular inflationary environment that we’re in) that tells us that the stock market as a whole is about to come under intense selling pressure as well. So, that deflationary panic that I have been talking about appears to have possibly begun in earnest with today’s slam-dunking of the gold shares.
The US dollar index was flat. The yen and euro were both flat. Treasuries were up a freckle, with the yield on the 10yr falling to 4.1%.
For anyone considering buying a stock in a bear market because it has a high dividend yield, the following should be an eye opener. EK cut its dividend 70 percent today. That reminds us that in a bear market earnings fall and so do the dividends as a result. Dow component EK plunged 18 percent to a 20yr low.
We got a little acceleration of the selling into the close today, and tomorrow is setting up to be pretty interesting considering that we closed below the psychologically key 1000 level on the S&P futures. A close on the lows of the week would be a fairly bearish sign. So, let’s see if we get any further acceleration to the downside tomorrow.
Thus far, we appear to be well on our way to that deflationary panic we’ve been talking about. I think that’s what the sharp reversal in the gold shares today is signaling, and I suspect this decline in stocks is going to be a bit more vicious than the ones we’ve seen over the last few years for the reasons I laid out yesterday. While the chimps that have been chasing tech and Internet stocks of late appear to have thought it was Q1 of 2000 or some time in 1999, judging by their manic trading, it’s not 1999 or 2000. The fundamentals are much worse than were back then, and valuations are nearly as high. That means the lunacy that we’ve witnessed since March is going end even more violently than it did in 2000 when it finally does indeed end. And at present, the odds that we’ve seen some sort of important peak are increasing by the day.
Lastly, the following story is from a reader. My good friend Bill Fleckenstein used to get a lot of those back in 1999 and 2000 (the mania days), but this is the first that I have seen from recent times. Keep in mind that this story is not from 1999. It’s from the last few weeks. The email reads:
A guy in my office told me to take a look at SatCon (SATC) as a great buy. Keep in mind the stock has gone from $.34 to 3.40 or up 10x. He proceeded to hand me a stack of research from JMP Securities and tells me about their great new technology. Here’s the punch line: I then asked him who told him about this obscure name and he said, "my landscaper."
So, there you have it folks. If you didn’t think we already had enough sell signals to mark the end of this manic rally, we now have the “landscaper indicator,” which is also giving us a strong sell signal.
Disclaimer: Lance Lewis' Daily Market Summary is not intended to constitute investment advice or a recommendation to buy, sell, or hold any security.
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