MarketWatch
The adjustment has only just begun
Thursday May 18, 12:01 am ET
By Peter Brimelow
NEW YORK (MarketWatch) -- Stocks' startling slump from last week's highs is making the news -- but that doesn't mean it's over, according to some serious observers.
Just as the Dow Jones Industrial Average (^DJI - News) was peaking last week, I wrote about respected institutional service Bridgewater Daily Observations' cogent but blood-curdling argument that a dollar/ U.S. debt crisis is looming -- and that it will be exacerbated by hedge fund herd mentality. (See my May 11 column)
ADVERTISEMENT
This excited a lot of reader e-mail. I can't forward the institutional service's report, alas -- and I know it's expensive.
Bridgewater does seem to be on a roll. At the beginning of this week, it added:
"More ugly market action on Friday. Bonds fell to a new low and the yield curve steepened (led by long rates) despite a big drop in consumer sentiment. And the dollar continued to fall... In these two moves, we can see big money [taking] the opportunity to sell into good news, overwhelming short term traders. U.S. and global stocks are cracking under the pressure of rising rates."
Bridgewater's conclusion:
"The supply of U.S. bonds that is being dumped onto the world is still monstrous, and foreigners desire to hold them is rapidly declining... In order to stimulate enough demand to buy the massive supply, yields have got to rise and the currency has got to fall. This adjustment has barely begun."
For good measure, Bridgewater also noted ominously: "The Michigan consumer sentiment index has now fallen four of the past five months. It is an outlier relative to other economic stats, but it should not be ignored."
Because I always get angry e-mails when I quote bears, and being in an institutional mood, I turned to Don Hays of Hays Advisory, a service with a strong professional following. Hays is generally regarded as a superbull, but in fact he's been quite cautious recently. (See my May 4 column).
Hay's last comment was Wednesday morning --before the big break. He wrote:
"Stocks have now had four down days in a row, with two of them relatively big down days. That has helped our psychology indicators, but not where they need to be to turn the yellow "caution" light into a green "go" signal....
Hays position was exquisitely nuanced:
(1) Very short term optimism -- it's "highly likely that a short-term rally will come whether either or tomorrow, even despite the current negativity in the wake of the inflation news."
Ouch! But there's always tomorrow.
(2) Medium-term pessimism. Hays writes: "The number of stocks making new highs and new lows is one of my favorite ways to 'feel' the internal action of advances and declines." He cites a study by Jason Goepfert of www.sentimentrader.com of the six occasions in the past four decades when the stock market indexes hit new highs, but within the next five days experienced at least 5% of NYSE stocks making new 52-week lows, which occurred on Monday. In every case the market was lower one month later, for an average loss of 5.1%.
(3) Long-term optimism. Hays writes: "Inflation fears will cause big Fed worries, but if we are right we will see the core rate settle down 3-4 months from now. So that fits with market unrest here, and then the return of a healthier bull market in a couple of months."
We just have to get there first. |
