Don Hayes has never been more bearish. Interesting comments on the "smart money indicator"
MORNING MARKET COMMENTS
by
Don Hays
January 12, 2000
Was yesterday the seminal day? I think there is a good chance
that it was.
The similarities with the major top that was made in January 1973
continue,
as the massive disparity in the typical stock from the last 21 months
continues. We've had that last little blip in the cyclical stocks, but
still in general far below their major tops made in recent years. The
bulls
are once again displaying their undying faith in Intel to meet their
expectations. The bond market continues to tank and the bulls totally
ignore this increasing burden on the economy. And the herd is totally
dismissing the next Fed's meeting, and the box that Alan Greenspan has put
himself in.
It is not just 1973 that gives us good comparative illustrations.
In 1990
when the Japanese market was on fire, and at price/earnings ratios in the
100's, their monetary authorities had raised interest rates three times
(just like current US policy), but the word went out that you couldn't
stop
this machine. It was somewhat symbolic to me yesterday that someone sent
me
a copy of Ruykeyser's market letter in which he interviewed John
Templeton.
His view of the US in particular, and the world's stock market in general
was that it should be avoided the most of any time in his investing
life-time (that covers a lot of market history.) The symbolism came from
Ruykeyser's obvious covering for poor old Mr. Templeton's bearishness by
explaining that he had been bearish on US stocks in the last two January's
interviews-Obviously wrong, right? Yeah, wrong like he was on Japanese
stocks in 1988, and 1989 while they continued to skyrocket. Mr. Templeton
is one of my heroes, and his wisdom at valuation of the world's markets
has
withstood so many decades that we believe this interview is almost exactly
like the ones he was giving in 1990 about the Japanese stock market.
I want to remind you of several key factors in the economy/stock
market in
the last few months that have set the stage. The first one, and the one
that has had such an amazing record at predicting major tops in the market
is still the "3 Steps and a Stumble" rule that was activated on November
16,
1999. To repeat this rule states that major trouble lies ahead for the
stock market after the Federal Reserve restricts monetary policy for the
third time. It does not say that the market turns negative the next day,
in
fact it is almost never the next day. Usually it takes a few more months
for the herd to really accept the fact that the Fed is serious. With Mr.
Gradualism Greenspan, it seems like the market keeps hoping that this time
he will pull off the perfect "soft-landing." But the evidence is
overwhelming, you don't fight tighter monetary policy, regardless of who
is
enforcing it. (Quite often the Fed is just tagging along with messages
being enforced by the bond market.)
With the leverage in the economy/stock market, the risks to the
world's
economy is that much greater. Margin debt, corporate debt, government
agency debt, corporate debt, derivative risks are all based so much upon
the
perpetual bull market machine. And once that machine takes a hit, the
dominoes will fall that much faster on the downside than they were put up
even on the magnificent (?) upside. Bear markets are always faster than
bull markets when the rug is jerked out from under the unsuspecting
lemmings. We are seeing the tip of the iceberg in the drop in AOL and
AMZN's stock in recent months. In fact the stock market under the surface
is telling a lot of stories that the herd refuses to listen to.
Yesterday,
I looked at the basket of benchmark stocks that I randomly selected a few
months ago to help me "see" the real stock market. I didn't just look at
the last three months, but the last three years. This may put you to
sleep,
but I measured how yesterday's performance compares with prices in recent
years. Of the 19 stocks, only two were making new highs--Cisco and
surprisingly Intel. But the other stocks had done some wild
oscillations,
but had shown no gains from levels reached in the months behind. Most
were
far below their previous peaks. Let me list them.
AMZN, down 39% from peak in early 12/99, which was just barely above the
4/99 peak. The stock is about equal to where it was in 12/98
AOL back to 4/99 levels-no gain
AMR back to 12/97 levels-no gain
BNI back to 4th quarter 1995 levels-no gain
C back to 11/98 levels-no gain
DH back to 2/99 levels-no gain
DUK back to 12/98 levels-no gain
F back to 2/98 levels-no gain
FDX back to 1/99 levels-no gain
FTN back to 9/97 levels-no gain
GE made a new high on 12/99-huge gain
INTC made a new high, but gain lethargic since 9/99
IP back to 7/97 levels-no gain
KO back to 2/97 levels-no gain
MER back to 9/97 levels-no gain
WCOM back to 12/98 levels-no gain
XOM back to 4/98 levels-no gain
This shows that for even these prominent stocks, in general they
have not
enjoyed this New Era economy that is living off of stock market Internet
cash nearly as much as the consumer sentiment is telling us. Even poor
old
"Stuart" of Ameritrade advertisement fame has got to be feeling the heat.
I'm afraid he has been fired, and no-body knows it. After all, it was
Stuart who talked his boss, with pulsating pelvises and wild gyrations to
up
his purchase of K-Mart from 100 shares to 500 shares when the stock was
18.
Uh Oh! Stuart you better have another wild dose of gyrations to explain
the
recent drop in the stock to 9. The boss is not quite as enthralled with
those cheap commissions as he was. I wonder how many others chose to
increase their investment as the "New Era" boogie caught their
imagination.
Now, let's get back to other evolving factors in the last few
months that
set this stage. I am indebted to one of my new Internet friends, Wally
Hert, for bringing a study to my attention, that I remember seeing back in
Barron's in early 1988, of a chart the author had named the Smart Money
Index. This index works under the premise that the first 30 minutes of
market action is fluff, based upon hot news, and emotions. It subtracts
the
first 30 minutes of action from each day, but then adds the gains/losses
made in the last one hour, believing that the real pro's use this calmer
period to make their investments. The confirmation of the cumulative
Smart
Money Index with the Dow, or even more appropriately the significant
non-confirmations have led to huge declines in the market. They foretold
the 1987 crash, the 1990 debacle, some lead on the 1994 wash-out,
tremendous
signal leading up to the August 1998 crisis, and now has spoken loudly
again. It gave probably its sharpest decline (non-confirmation) in Mr.
Hert's observation (since he read the article in Barron's 13 years ago).
The latest huge non-confirmation occurred on October 27, 1999. In the
1998
period, the previous signal of impending trouble, the non-confirmation
came
81 days prior to the top, this one has now been 68 days, and I believe
that
the top to the 1982-2000 bull market in the NASDAQ Composite has been
made.
If not in the last couple of days, in the next few weeks.
A few months ago, I mentioned the extreme low level reached by the
Arms
index (MKDS or TRIN), as the 10-day moving average dropped under 0.70.
This
is not as record shattering as some of the other indicators such as the
"3-Steps and A Tumble" rule, but in the past it has often led to major
problems for the stock market in the following 90 days. The calculation
of
this daily statistic compares the number of advancing stocks to declining
stocks, and then compares that to the volume it takes to generate each of
those. In other words, the formula is (A/D divided by A vol/ D vol.)
When
the number drops to extreme lows it means that it is taking an abnormally
high volume to push the market up, and in danger of running out of energy.
It usually takes a few months for the bull's momentum to roll to a stop,
but
typically when it does it spells trouble.
I could go on to many other obvious signs that the momentum of the
bull
market has continued to dissipate. And as the Fed's next meeting draws
closer, and as the fragile economy is already showing signs of growing
weary, as the stock market tends to devalue the Internet cash that has
fueled much of this economy, we believe a momentous top is being forged.
It was interesting that Ed Yardeni, who I believe is a very
far-thinking
Economist, blinked. After the Y2K deadline did not produce any major
bottlenecks, he repented, said he would never go on another Crusade, and
turned bullish (I think that is what he said.) Mr. Yardeni might turn out
to be the sacrificial lamb to turn this economy and market around. Too
bad
Ed, but somebody had to do it.
Last but not least, the bond market. Nothing could look worse.
It has
been absolutely horrendous, reaching a yield of 6.68% yesterday. It has
moved higher than I ever thought possible, but even so, I'm not giving up
the belief that the top in yields is momentary. This is similar to 1994,
when the yields actually moved back above 7% in the hysteria of the
moment,
even with the Fed moving fed funds rate up to the 5.5% range where they
are
currently. The economy looked unstoppable, and the bond bears were
running
wild, but that low bullishness was met with a huge rally in the months
ahead
as time proved that the economy had already started to slow. So I'm
holding
my bonds, and looking for another buying juncture on any reversal on the
charts. |
