game, set, match?
March 12, 2004
Shorts Decide To Book Something They Haven’t Seen In A Long Time (Profits)
Asia was lower again overnight, with Japan and Hong Kong both falling over a percent. Europe was mixed this morning after initially opening lower, and the US futures were higher. We gapped up at the open and dipped slightly when the March preliminary University of Michigan Sentiment index came in a hair below February’s number and slightly below the consensus. The dip didn’t last long though and before we could even fill the opening gap, we took off again to the upside. The rest of the day was a steady saw higher that took us out on the very best levels of the session, in what appeared to be mostly short covering in the wake of four straight days of selling. Volume was off quite a bit from the heavier levels of the last few days (1.4 bil on the NYSE and 1.7 bil on the NASDAQ). Breadth was just shy of 3 to 1 positive on both exchanges.
The semis bounced by a percent or two across the board to end just off their lows for the week. The semis equips were up 2 to 4 percent across the board. The SOX rose just over 2 percent to end just off its lows for the week.
The Internet trash was also higher. The tier 1 junk was up 2 to 3 percent across the board. The tier 3 trash was also mostly higher, but continues to merely bounce within a downtrend in nearly all cases. At some point in the very near future, we’re going to stop even discussing these single digit midgets and this Internet garbage. The only reason I ever began discussing them in the first place a year or so ago was because they were a leading indicator of the bear market rally (because garbage leads in these rallies). Now that the trash has been trending down for months and the major indexes all have tops, this garbage really isn’t worth talking about anymore. So, if I all of a sudden stop mentioning the Internet trash, you’ll know why. I for one am ready to get back to focusing on the poor fundamentals of the vast majority of technology companies out there. For a year, those fundamentals haven’t mattered, as everything not nailed down has soared, but that may be about to change.
Financials were mostly higher. The BKX rose a percent, and the XBD rose 2 percent. The derivative king rose half a percent, BAC rose a percent, and GE rose half a percent. The mortgage lenders were up a percent or two across the board. FRE and FNM both rose half a percent.
Retailers were mostly higher, with the RTH picking up a percent. The homebuilders were also mostly higher by a percent or two.
Crude oil fell 59 cents, or nearly 2 percent. After selling off for the past four days with everything else, the XOI rose a percent, and the XNG rose 2 percent. The CRB fell half a percent, and the CRX bounced a percent. Gold opened flat in NY, but in the face of a stronger dollar, it quickly weakened and spent the remainder of the day sliding lower to go out on its lows, down $5.40 to $395.60. The HUI began the day lower with the metal and actually made a new low for the week, but as equities continued to rally, the shares eventually firmed. By the close, the HUI had taken back most of its losses to end down only half a percent. Again, as far as gold and gold shares are concerned, I think it all depends on the dollar and the rest of the stock market. If stocks collapse and the dollar breaks out to the upside as the reflation trade continues to unwind, gold and its shares are in for a serious breakdown, and more so the shares than the metal obviously, since the shares are leveraged to the price of gold.
I received some hatemail from gold bulls that are a little upset with me calling for a big correction gold and its shares. Let’s put aside the fact that I’ve been right about a correction in the gold shares, which topped in December (the metal in January) because everybody is wrong from time to time, especially me. However, let’s not forget that the shares in many cases were discounting far higher prices of gold back at their peaks in December based on the value of their reserves in the ground (plus even some of their resource ounces) minus cash costs. Thus you hit levels of significant overvaluation, which all stocks tend to do at peaks. Since then, the dollar has begun to firm, and the shares continue to drift near their lows for the year, as the market sends more and more deflationary signals.
Everybody loves a bull market and rising prices, but you can’t do that all the time. If you take the time to go back and look at the bull and corrective cycles in the gold shares since late 2000 when they started up, the gold shares typically moved with the broader stock market, but instead of making lower lows on steep selloffs in stocks, the golds made higher lows. When stocks would have bear market rallies to lower highs, the golds would rally to new highs. This is the way the cycle has worked and has worked even before the last few years. Gold shares go down with stocks during panic-type selloffs (and it worked similarly in 1929-1933, 1987, and the 1970s… gold shares crashed during the worst part of the equity selling in the fall of 1974 and in the 1987 crash. They also crashed in 1929, but then like now, they made higher lows on each market selloff and higher highs on each bear market rally in equities). The golds have moved up sharply with stocks since last March when the entire market caught a bid. Since January, stocks have been steadily getting weaker, and so have the golds. If we get a violent move lower in stocks (and I’m not talking about a trading range or a dribble, I’m talking about something violent like we saw in June-July of 2002), the gold shares will be tossed off a cliff with everything else. That’s just how it works.
Could I be wrong, and this is the one time that things are different? Sure, anything is possible, but unless the HUI gaps up 36 points to a new high, we’re going to have lots of time to see things begin to act differently buy the golds before they take off on us again if they’re indeed going to do that. The safe play is to cut back some if one has too much exposure to gold at the moment, especially when the shares continue to flop around on their lows for the year. I’d also add here that the most of the junior shares are trading much more poorly than the larger cap shares, which I attribute to the fact that hedge funds are probably fooling around in the larger cap names but that real “investment money” that would buy smaller more illiquid names for the long haul is still likely sitting on the sidelines and waiting for better prices.
The US dollar index rose nearly a percent to reverse all of yesterday’s losses and end on virtually the high for the week. The yen fell a hair, and the euro fell nearly a percent and back to its lows for the week. I’d note that that the Aussie and Canadian dollars as well as the British pound all ended just off their lows for the week also. So, the dollar is at some pretty critical levels against all the G7 currencies. If its breaks out to the upside next week against these currencies, we could finally be in for that big upside move I’ve been talking about.
Treasuries were a little lower, reversing yesterday’s gains. The yield on the 10yr rose to 3.76%. The FOMC is next Tuesday. Nobody really expects anything out of the Fed, but if they’re going to move rates up at all ahead of the presidential election, they probably need to move now. I for one can’t imagine the Fed raising rates because I know what it would do to stocks. And I also know that stocks are the economy. The Fed seems to recognize this too, but lately, the Fed has been sending increasingly hawkish signals to the effect that rates cannot remain at 1% “forever,” as I believe were Uncle Al’s exact words last week. This is the same man who claimed victory over the busting of the bubble two months ago and who only yesterday said he felt comfortable that employment gains would eventually come. Is he nutty enough to try and raise fed funds by 25 bps? The Fed was certainly nutty enough to pull out their “considerable period” statement at the last meeting, and we all know how gradual Uncle Al is. Is he now going to pull the “patient” language or just go ahead and do 25 bps? Is that part of the reason the dollar is firming and gold is weakening? Is that part of the reason the yield on the 3-month t-bill has not fallen with the yield in the long end and remains above its 200-dma for the first time since it went below it back when the Fed began its easing cycle in January of 2001? Is that part of the reason that stocks have been under such intense selling pressure over the last few days? Like I said, I can’t imagine Uncle Al doing anything to upset his nice little asset bubbles in stocks and housing, but given the action of late, one has to consider all possibilities.
Today’s rally looked like the sharp short covering rallies that we used to get during steep downtrends in the bear market. The light volume seems to confirm this as well, but we’ll find out early next week I guess because if short covering was all that it was then the selloff should resume and the unwinding of the reflation trade will continue. As for the terrorism scare yesterday, who knows? The more I think about it this news we got yesterday was merely a coincidence. Stocks were already weak for other reasons (extreme valuation, exhaustion, etc), and the terrorism news merely exacerbated the situation. Still, things are pretty dicey, and any bad news next week could see a further acceleration in the selling, so let’s all be careful out there…
Disclaimer: Lance Lewis periodically publishes columns expressing his personal views regarding particular securities, securities market conditions, and personal and institutional investing in general, as well as related subjects.
Mr. Lewis is the president of Lewis Capital, which manages a hedge fund in Dallas, Texas. This fund regularly buys, sells, or holds securities that are the subject of his columns, or options with respect to those securities, and regularly holds positions in such securities or options as of the date those columns are published. The views and opinions expressed in Mr. Lewis' columns are not intended to constitute a description of the securities bought, sold, or held by the fund. The views and opinions expressed in Mr. Lewis' columns are also not an indication of any intention to buy, sell, or hold any security on behalf of the fund, and investment decisions made on behalf of the fund may change at any time and for any reason. Mr. Lewis' columns are not intended to constitute investment advice or a recommendation to buy, sell, or hold any security.
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