STOCK MARKET COMMENTARY
<Picture: STOCK MARKET COMMEMTARY>
December 20, 1997
firstcap.com
SHORT TERM RATING: 5 UNATTRACTIVE
INTERMEDIATE TERM RATING: 5 UNATTRACTIVE
The tip of a titanic iceberg
The averages do not adequately describe what took place in the market this past week; they are just the tip of a titanic iceberg. For the week the DOW lost 82.01 points (1.05%), after a Friday that saw the market down 269.57 points in the morning before recovering for a 90.21 point loss for the day. The other averages performed marginally better than the DOW but exhibited similar price volatility. For the week the S & P 500 lost 0.69%, the NASDAQ Composite lost 0.77%, the Wilshire Small Cap lost 1.00% and the Russell 2000 lost 0.62%. The real picture was in the market internals. The Advance-Decline line continued the recent pattern of not much strength on rally days and considerable weakness on sell off days. The A-D lines are trailing the averages, especially the NASDAQ market. New lows on the NYSE are a dismal picture; Monday thru Friday they were 105, 78, 61, 75 and 137 respectively. It would be a rear occurrence for a market to generate this many new lows without having a sell off.
The WEINTRAUB BREADTH OSCILLATOR (WBO) went negative after the close on Tuesday. It now is at 39 down from 55 last week. This was another good call for this proprietary market indicator. The market started to sell off mid day Wednesday. The change was posted on the WBO page. This is a mid range reversals and may preceded a very sharp sell-offs. MARKET SEGMENTS are back from the over bought side with 32 of the 78 segments rated negative (3 and 4) and 18 rated positive (1 and 2) this is only a slight oversold position and should be expected to cycle to an extreme over the next several weeks, especially with the WBO on a negative signal. The Put/Call ratio is at 0.97, not significant. The Put/Call ratio for the OEX is 0.99, slightly negative; it did get 0.87 on Wednesday before the late week sell off. The Option Volatility Index (VIX) is at 29.10, about where it was last Friday and peaked at 34.99 during the Friday sell off. This remains a high number indicating high market risk. At the bottom on Friday, where the DOW turned up from a 269 point loss, there were very high negative ticks, around -1400, this may define a temporary support area.
There are so many negatives in the market and very few positive at this time. The days surrounding holidays tend to be up days. My guess for the coming week is that the market may be down early in the week and then rally on light volume on Wednesday and Friday. This is a yo-yo market and the string is about to break. It is interesting that economics at present seem to verify what the technicals are telling us. This is a softening economy. We have seen a string of earnings disappointments and stocks taken out and shot. I think that we will see a lot more of this. It takes increased earnings to maintain high Price to Earnings ratios. When earnings disappoint the P/E ratio for the market will contract. This is the thing that BEAR markets are made of and we are in the first phase, the denial phase, of a bear market. I find it amusing that some of the big name market analysts and strategists are now making noises that the market may not be as strong as they had previously said. Have any of them actually said get out and preserve your capital. Where were they months ago. Remember that you got the correct market call here. On bonds too.
As usual the long term DOW CHART has been updated, to see it just click on the link.
My advice to intermediate and long term conservative investors is that we have started a BEAR market. The market is still very highly priced and over extended. The market has had a parabolic hyper extension. Prudence dictates the sidelines for those concerned with capital preservation and those who are cognizant of risk verses reward. This is a high risk and expensive market.
My INVESTOR STRATEGIC ASSET ALLOCATION remains as follows: BONDS 50%, STOCKS 0%, CASH 50%. Bonds should be laddered in maturity from 5 to 30 years. I also think that it is wise to extend maturities, that is to over weight in the long end. Cash means treasury securities with a maturity of two years or less or insured deposits. Laddering Bonds means staggering maturities. This is a risk control strategy. For example, of your total bonds you might put 10% in each of the 5, 10, and 15 year maturities ,20% in the 20 year maturity and 50% in the 30 year. That would be a ladder weighed heavily to the long end. To do this you need a large portfolio because of the costs involved in buying small numbers of bonds. For a smaller portfolio go with the 30 year maturity. |
