September 6, 1999
Last week, the Dow Jones Industrial Average was down 11.72 points to 11,078.45 (-0.11%), the Nasdaq Composite was up 84.21 points to 2843.11 (+3.05%), the S&P 500 was up 8.97 to 1357.24 (+0.67%) and the Russell 2000 index of small cap stocks was up 3.52 to 435.97 (+0.81%).
For the year, the Dow is up +20.66%, the Nasdaq up +29.66%, the S&P up +10.41% and the Russell 2000 up 3.32%. The StockMotions Newsletter Tracking Portfolio is up 41.59% for the year. [great moves in AAPL and NVLS contributed strongly to this week?s portfolio performance]. To automatically receive portfolio updates before they happen, you may sign up at:
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To the casual observer, the Dow is only down some 22 points in the past few weeks?to the rest the Dow spent those two weeks in a 600+ point trading range!
During the past week, some unusual occurrences existed with three internal indicators ? the cumulative A/D line, the intraday NYSE Arms Index and the NYSE Up/Down Volume. Let?s spend a few moments on each.
First, the NYSE Cumulative A/D Line
On Thursday, September 2, 1999, this indicator closed at 39,474, a level not seen since December 19, 1996. Of course, back then it was in a well-defined uptrend, as most of the market enjoyed the bull market. This indicator put in its top on April 3, 1998 at 81,712. The bear market in most stocks has been going on for 17 months. The chart that most reflects this is that of the Russell 2000. The divergence between the overall trend in this indicator and that of the major moving averages is striking?.and there are three ways of bring the two together ?
1. the major moving averages drop to close the gap
2. a new bull market begins with the forgotten laggards
3. something in between
Let?s move on to the Intraday NYSE Arms Index
On Thursday morning, this indicator was screaming ?BUY? at the top of its lungs. Why????
Well, during the first hour selloff, the NYSE Arms index hit 2.52, meaning that there was a large amount of fearful selling occurring in the market ? the type that tradable bottoms are made of. Usually, 2.00 is a strong enough intraday signal, but when I saw 2.52 early on and then followed by some slight buying and more importantly, the indicator falling under 2.00 and continuing to drift lower, it was a good bet that the market was on the verge of popping ? and did it ever. These extreme signals in the arms index don?t occur that often, but when they do, it is fun to take advantage of them.
Finally, the NYSE Up/Down Volume
With Friday?s melt-up, this indicator finished the day at 5.10, a rather high ratio of advancing volume to declining volume. Is this a sign of good things to come? And how uncommon is such a high reading?
I?ll answer the second question first.
Since January 1, 1980, there have only been 158 market days where the ratio has closed at or above 5.10?.that?s out of 4,975 market days?.or 3.18% of the time. Actually since the beginning of 1990, there have been only 41 days or 1.68% of the time?.and if you must know, it was the first occurrence in 1999 and only the third such occurrence since the beginning of 1998.
Does it mean much?
One?s instinct would say that it should, but looking at the data, good and bad have occurred in the 30 and 125 market days following. There were 9 times when the Dow dropped more than 5% in the 30 days following the reading (which means that 94.3% of the time the Dow returned more that ?5%) and there were 100 times when the Dow returned more than 5% in the 30 days following the reading. Looking ahead 125 days, the Dow dropped more than 5% on 14 occasions (8.86% of the time) and returned greater than 5% on 129 occasions (81.7% of the time). Sounds encouraging, doesn?t it? Well, consider this ? between August 10, 1987 and September 22, 1987, this indicator closed above 5.10 (but below 6.00) on three different occasions. Less than one month after the third occasion, the market crashed?.that?s why I don?t give much power to this indicator. I find it more useful in finding the bottom of a selloff.
A Short Piece on Barron?s Page 17
In this week?s Barron?s, Edward Yardeni, chief economist and global investment strategist at Deutsche Banc Alex Brown writes a short and well-done explanation of his revision of the Fed?s stock market valuation model. In it, Mr. Yardeni explains that the older model has been revised to attempt to look beyond the next 12 months? earnings. After fully developing the various variables in the new model, a few scenarios are given that would put the market back to ?fair value??.of them is the Dow 8000 conclusion. Although I haven?t gone through the calculation, I wish he would have entertained the scenario of significantly lower interest rates?it would be interesting to see what the valuation model would say, if, for instance rates (on the 10 year bond) were 100 or 200 basis points lower.
(Do I have any mathematicians with spare time out there????)
What the heck does all this mean?
Again, for the time being, interest rates remain the main catalyst for any sustainable market move. In addition, I am a bit skeptical of Friday?s move. I would really like to see a better performing A/D line before getting more aggressive.
The Major Moving Averages
For those who are interested in the moving average levels, here they are. As of the close on Friday, September 3, 1999: The Dow?s 200 day MA is at 10142.80, its 50 day MA is 10970.60. The 200-day MA is in an uptrend and the 50-day MA is in an uptrend. The Nasdaq 200day MA is 2443.90, and its 50-day MA is 2690.20. The 200-day MA is in an up-trend, the 50 day MA is also rising. If any reader would like to see the charts that indicated the relative movement of the 50 day MAs on the Dow and the Nasdaq, please click on
stockmotions.com for the Dow and
stockmotions.com for the Nasdaq.
Paulo
stockmotions.com
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Copyright: 1999 StockMotions.com |
