[Long Post Warning]
The market reaction here on a Monday indicates to me growing negative market sentiment. The exuberant public speculator was nowhere to be found except in a few select stocks, at least as far as their impact on the major indices goes. As I have mentioned earlier, there has been an underlying but growing negative sentiment. Lately I have been hearing about money moving to bonds and the defensive stocks seeing some play. Here Judy is seeing a distribution phase of the market, which is opposite of what I would expect with fund money buying in this trading range. Also the market has been seeing low volume over the recent past in its trading range that has validate a bottom and a top to the range. There was a false breakout by the DJIA during this consolidation phase of the market which then came down to retest the magic number 9000 without the bounce and follow through. The next couple days will give us additional clues as to where the market it heading.
Market sentiment and attempting to get an idea of what is going on in the minds of the market has always been an interest of mine. So I will paint here one possibility that can fit with much of what I am seeing right now. I will appreciate any comments. This is just a suggestion and not what I call a determination on my part. Perhaps we can end up making this a current topic of the thread and have others here post what they been seeing and how they have been responding to the market from their vantage point. The next couple days will help to determine if the scenario I will outline here has any substance.
I do not think the market as a whole likes what it is seeing right now and the market is "stalled". I think many are waiting to see what is going to happen next. Fear and uncertainty is what we have here in the market. The fear will take form soon by inventing something to be afraid about. This is the way it works in the mind of a human being when it comes to the market. First comes the emotion, then comes the rationale. When this happens, it first reexamines recent evidence like past economic reports for news that can be interpreted negatively, unlike what it was looking for the first time around, which was evidence that "everything is OK". The recent series of economic reports were actually mixed with good and bad news, so I am sure the market will find something there. This is a very vulnerable time for the market right now.
Old issues will come back up related to market overvaluation, the Fed and interest rates (next month's meeting), inflation, and perhaps even the Asian situation. Any news that comes up in this period of time will be looked at in terms of "what is wrong" and not "what is right". If no significant news comes the markets way in the near future then the market will look at other more unorthodox places for this news. Clinton may even get his chance to have his Zipper Effect on the market once again. The market can even invent news that feeds into the current backdrop of fear and uncertainty. That atomic bomb testing in India can take on more significance, for instance.
As long as the market does not end up finding something substantial to hang its hat on, perhaps after a few false reactions and regroupings, and they see as evidence their everyday life still in order and positive with money in the bank, along with a growing anxiousness to do something, then this fear can flip to positive sentiment very quickly. At this point the market can spring to life and rebound.
The important question for us to answer now is what helped this negative sentiment come to a "head" and surface like it has, both with the big money and even with the public speculator? For instance, after the initial market adjustment, the hedge fund took the market up like the ship had blasted off. As soon as the public became interested, the hedge fund took their quick profits. This probably also helped interest in the DJIA which is a more conservative play on a market that looks to be starting another bull run. When the hedge fund sold, the public speculator probably asked themselves: "what happened?". One false start to the market that was experienced by the public speculator. I think this is where their confidence started to erode. Now we have what many were thinking to be a big bull day and instead it fizzled out into a sell off on what the market considers positive news. Talk about something to make those exuberant speculators nervous! They all were waiting at the launching pad, saw smoke come from the rocket ship, and to their amazement, nothing at all happened.
After the initial run up and sell off after the previous market adjustment, I though I saw evidence of churning where the mutual funds may be stepping up with their purchases. This apparently has come to a close, if it happened at all. So what is keeping the mutual funds in "idle" mode when it comes to moving the large amounts of cash they have on hand into the market? I think key earnings reports may have impacted their sentiment toward the market. Here we had the analysts across the board slash their earnings estimates for the next quarter during the earnings season last quarter. So it is no big surprise that many earnings reports were beat by companies in their reporting this time around. This gave the public speculator fuel to speculate with. However, I think a closer look at the figures indicates many of these companies showed very low or flat revenue growth in comparison to the extremely good revenue growth a couple quarters ago. Also this was the second quarter there was evidence of flattening revenue and earnings growth. As mentioned by Briefing, all of this cannot be explained by the Asian situation. I think this got the attention of the funds. The market starting thinking that "next quarter will be better". How predictable! But under this type of circumstance, I think much more attention is placed by the funds on the conference call for forward guidance. I suspect that they did not hear what they were looking for in these conference calls.
Basically, the funds have for the most part abstained from any short rally. No rally will work without the support of fund money which needs to build the base and launch it on its way. At this point the public speculator takes the bull run forward with enthusiasm. I do not see enthusiasm from the public speculator right now and I see a pessimistic posture taken by the larger, longer term money like the funds. If Wednesday does not see a rally, I think the public speculator will not be happy and the market can end up retesting its lows on the negative news it will eventually end up finding somewhere out there.
I am soliciting any observations, reflections, or general comments on this topic. So what does everyone think? What has been the forward guidance of some key companies in the market during their conference call? Have many companies been actually reporting relatively flat earnings? What types of stock are seeing the action? What type of stocks that you would expect to see the action right now are showing disappointing action?
Just some ideas here.
Bob Graham |
