John Murphy has left CNBC and is devoting more time to his enterprises with Greg Morris. For those interested in his latest commentary:
Update for Oct 18, 1997
CRASH OR NO CRASH? If you watch television or read the newspapers, you know that this weekend is the tenth anniversary of the October, 1987 crash. What I find interesting is that the debate only deals with two questions - will we have a crash or not? That's it. End of story. Wait a minute. Isn't there something in between? Couldn't the market start to decline without a crash? Just because there won't be crash, does that mean all is well. Of course, that would be the worst thing for TV networks. Crashes grab headlines. They're good for ratings. Even if there isn't a crash, talking about the possibility of one is almost as good. The worst thing that could happen is a long and boring bear market. No headlines -- just a long period of gradual erosion. Plenty of time to interview economists and Wall Street analysts telling
everyone to buy the next dip -- no crash. Except that each dip gets lower and lower. Bad for ratings. Too bad.
TIME TO BE CAUTIOUS If you've been reading our updates since August, you know that we turned very nervous on this market when the Dow hit 8000 (a tenfold increase from its 1982 bottom at 800). We recently repeated warnings about the negative implication for years ending in 7 and the first years of relected presidents. We expressed nervousness about the fourth quarter and October in particular. So here we are - in the worst month of the worst year of the decade in the most overvalued stock market in history. Do we think a crash is imminent? No. Are we very nervous about the risks in this market? Yes. Are we forming a top? Probably.
NEW ERA THINKING? In addition to all the obvious warning signs, a couple of things in particular have struck me lately. The first is the "new era" argument. Have you noticed how many TV guests justify their continuing bullishness with the claim that stocks have entered a new era - that the old rules of market valuation and behavior don't apply any longer. In this new era, we're told, traditional market rules have become obsolete. When the guest is then asked what would turn him bearish, however, he immediately quotes all the old rules - higher inflation, rising interest rates, deteriorating market breadth, etc. My question is this. If we're in a new era, and the old rules don't apply, why look to old rules to warn of a market top? If the bull market has been different, couldn't the signs of an impending top be different as well?
BROADENING OR SPECULATION? A number of analysts have pointed out the bullish implications of the broadening out of the market advance as evidenced by a rising advance-decline line and new highs by small stocks. Let's consider the flip side of that argument. The best performing stocks for the past quarterly and six- month periods have been micro-cap stocks. One of the traditional signs of a market top is over-speculation - when trading in smaller speculative issues outpaces large cap stocks. According to Investor's Business Daily, the ratio of OTC daily trading volume as a percentage of NYSE daily volume hit a 12-month high of 182% on October 13. [The 5-year high for that figure was 196% in May 1996]. So the recent swing toward smaller stocks could also be interpreted as a negative factor. Just thought you should know.
DOW DOUBLE TOP? We stated awhile back that a major test of this market would be the ability (or inability) of the Dow to exceed its summer high at 8300. That recent test of that peak appears to have failed. The Dow fell back below 8000 this week, and is now testing possible support at its lower Bollinger Band and 100 day average near 7850. It now looks likely that the Dow will retest its summer low near 7600, which will be a critical test of the current trend. The trend in the Dow has gone from up to sideways. A close below 7600 would turn the trend downward.
NASDAQ 100 FALLS Last Saturday, we pointed out that the Nasdaq 100 of large tech stocks was testing its August high at 1152. We said that "if it is going to fail, this is where it will do so." By this Friday, the Nasdaq 100 had fallen all the way to the bottom of its summer range and its 100 day average near 1060. Whether or not that support level holds will help determine whether the technology selloff will continue and whether the overall market downturn gets a lot worse.
INTEL PULLS DOWN SOX Our mid-week update (Wednesday morning) warned that an Intel (INTC) fall below 90 could push the Semiconductor (SOX) Index through support at 370. Both breakdowns occurred on Thursday. We also said "any serious breakdown in Intel and other tech stocks could unsettle the market." Intel ended the week at 83 and is headed toward its 200 day average at 80. Other chip breakdowns were Applied Materials (AMAT) and LSI Logic (LSI). Texas Instruments (TXN) completed a small "double top" and fell beneath its 50 day average.
IBM AND MICROSOFT ON CRITICAL LIST These two big tech bellwethers will report earnings on Monday and could help determine this week's market direction. IBM is the worst looking of the two. Big Blue has already fallen below its September low at 96 and may have completed a top. Microsoft (MSFT) is testing the bottom of its summer range near 130 - a critical chart point.
WORST TECH CASUALTIES In the tech stocks, some of the week's worst casualties were Apple (AAPL), Seagate Technology (SEG), and Sun Microsystems (SUNW). A bad earnings report at mid-week pushed Apple through its September low at 21 - bad chart action. Sun Microsystems tumbled all the way to its 200 day average. Testing time. Seagate was a chart disaster, tumbling to a 52 week low. We said last week that Seagate was a stock worth watching. We hope that's all you did with it. Ouch! We also mentioned that Cisco Systems (CSCO) was testing its summer high at 82. Cisco ended the week below that barrier.
SEARS AND WAL-MART DISCOUNTED We expressed the view last week the a "Retail Comeback" might be in the offing. We pointed out that several retail stocks were testing important supports. Unfortunately, some flunked that test. The worst was Sears (S). Sears plunged through its 200 day average near 54 and broke an up trendline going back to the summer of 96. While Sears may find some support at its April low near 45, its chart is ugly. Wal-Mart (WMT) fell below its August low by a slight margin on Friday. WMT may also be completing a "double top" reversal pattern that began in July. WMT is also breaking a 10-month trendline.
BONDS WEAKEN, DOLLAR FIRMS Bonds ended the week near their lows and are in danger of weakening further. Bond yields rose to 6.44%. A decisive move through 6.50% could unnerve the stock market even further. Falling commodity prices didn't help much. Oil prices fell sharply at week's end, which may have accounted for profit-taking in energy shares. Coffee prices also broke down. Precious metals (silver in particular) also gave back ground. The Gold/Silver (XAU) Index slipped below its 200 day average and is now testing "neckline" support near 100. A stronger dollar may be hurting gold. The Dollar Index jumped back above chart support at 97.00 and is bouncing off its 200 day average. Where has the money been going? T-bills had the best performance of the week, suggesting that traders are seeking a safe haven there. The sharp jump in the TED spread (Bills-Eurodollars) also reflects nervousness about bonds and stocks.
BOTTOM LINE This is a time to be especially cautious in the market. As you know, we've been favoring gold, energy, and REITS - or generally defensive stocks. All three lost ground this week, but not as badly as the rest of the market. Utilities turned in a relatively strong performance and may be a good place to look. Electric utilities show good relative strength. We mentioned Long Distance Telephones last week, especially AT&T (T) and Sprint (FON). Both had good weeks. Money flows during October show funds leaving bonds and stocks and moving toward money funds. It's probably not a bad idea to raise some cash by doing the same.
THEY DON'T RING BELLS AT TOP Whenever the final top does come, It will most likely take a market decline much greater than 10% to make people rethink "buying the dips.". By that time, we will have given back at least 15% of our winnings. That's the price investors will probably pay for waiting for definitve signs of a market top. The fact is we won't know for sure that an important top has been seen until well after it happens. That's the unfortunate reality. The price we will have to pay for not leaving too soon is staying too late. It's too bad they don't ring bells to announce market tops. But they do sometimes sound early alarms - like now. |
