I think we will know next week if you are going to get your market adjustment which is looking more probable to me. Ordinarily I would think the market will pull back to the 20 day MA. However, I am thinking that the market situation is evolving into a direction where a pullback to the 50 day MA is also possible. This would support your DJIA 8750 scenario. Of course timing is an issue here. I am basing this thinking over a pullback on the following observations:
1. Continued consolidation of the S&P 500 while divergence increased with DJIA and NASDAQ making new highs. Now the DJIA and NASDAQ are responding to their overbought condition. Price momentum was diverging from their new highs per indicators like MACD. As I stated earlier, IMO the S&P 500 is the key index to look at in this liquidity driven market. Also there were growing number of says the market was moving up on small breadth. The NASDAQ still has room to move downward to its 20 day MA.
2. When the NASDAQ increased its upward momentum, it appears that this was primarily from public money speculating in stocks which was helped along by the funds parking their money in haste in a select group stocks like CPQ, GTW, HWP, and even IBM. Even though this is not really a "blow off" top of the NASDAQ, I think allot of the NASDAQs recent action was sentiment induced buying. Some of the public interest has been in stocks like MSFT and DELL and speculative plays in the Internet stocks. Also recently I have seen public interest in INTC and perhaps even COMS. Looks like public money has been returning to the techs despite the poorer growth prospects.
3. I think the funds that have parked their money in the above stocks is more or less a defensive action on their part until they find a home for the money when they complete their sector rotation. They have placed their money in the box makers before right after the market bottomed and firmed up, to follow up by taking their profits by selling into public buying interest of the same stocks and moving the money into more permanent positions.
Evidently the funds are not expecting an outright correction by the market or they would be taking a more defensive position. However I will note that there is a recent interest in oil stocks, gold stocks, and stocks in basic material sector. I did not understand the latter until I realized the basic material sector includes allot of metals which are commodities. I think this is in response to a fear that the economy is slowing down even though I think some market players are misinterpeting the reasons why. IMO oil, gold, and commodity plays are anticipating inflation from an overheating economy. I think inflation concerns are a bit premature. But the result of increasing interest rates can be the same. There have been some of the Fed governors talking about Fed intervention together with the intraday rise of the long bond beyond 6% interest rate has given some weight to these fears.
4. . The type of speculative frenzy we have been seeing for instance in the Internet stocks usually come at market tops. This along with currently very bullish sentiment readings can accent any market correction when it happens.
I think if #3 is a sign that the funds are going to wait this market adjustment out, market liquidity will temporarily dry up which will increase volatility and can help facilitate a more significant correction, perhaps to the 50 day MA. Part of the timing of this will depend on market sentiment which initially may cause the public to buy on the dips. But based on some players of the market who have been positioning into inflation sensative positions portending concerns over an economic slowdown, I do think market sentiment is changing. This makes the long bond interest rate worth following closely. Once fund money is not buying the dips, public money will end up eventually figuring this out and adjusting their approach noticing that rallies are not making new highs but actually showing that a downtrend is in place.
As a side note I find it amusing how the market is in denial of the downward growth rate that for instance the S&P 500 companies have been experiencing which has caused a significant jump in market valuation. This happened on the heels of a market which was already discounting next years earnings. I can see where this can generate fear of a correction in the market. However, instead of seeing this as the result of a slowing economy which has been in the making for some time now, the market is fearing inflation and the results of an overheating economy. Someone correct me if I am being ignorant of current economics, but I do not think we are experiencing an overheating economy. I think are least in the businesses I have been following we have been experiencing a *decrease* in demand for certain products which has resulted in decreasing revenue and earnings. Also it is important to note that much of this is NOT the result of the Asian situation and has happened under low inflation and interest rates and other positive economic measures. So this indicates to me that the market's fears are that of a broad nature related to market overvaluation and ill-defined in form. This can set the market up where there can be a dramatic senitment shift where any news that can come out and be interpeted as being negative which can be the excuse the market needs to sell.
So unless the character of the market significantly changes, I will expect the market to hold at the 20 day MA. I always look to the current pattern to continue unless invalidated by the market by confirmation of a new pattern. But I am seeing a drop to the 50 day MA is becoming more possible. Also, I would not be surprised if we see a market bounce on Monday. I am conservative in this way.
Just some food for thought. Any thoughts or comments appreciated!
Bob Graham |
