Thank you, that is an example of the informative post I mentioned, I appreciate it very much!
You are exactly right, a debt-free company does have an opportunity to buy back their shares, as long as their cash flow is in shape, or they are willing to absorb debt to buy the shares.
I don't know of many companies that have the free cash flow to facilitate buying back enough shares to alter the price trend, and in the current environment of potentially increasing interest rates, I'm not sure how many companies are going to be willing to buy back shares at the expense of assuming a debt load.
Companies like GE with a price/cash flow ratio of 120, or IBM with a price/cash flow ratio of 60 may not be that well positioned to burn up their cash by buying back shares at these levels. It depends on what they feel the future growth of the company is likely to be, and how much they have been manufacturing vs. actually earning their numbers.
Companies with tons of free cash (ala MSFT, and GMST in proportion to market cap) are in the best position to make such a move. I think you are right, and monitoring how many companies make such announcements seems a reasonable way to predict a potential reversal of the current trend. I like to use the price patterns, specifically the "follow through day" as my guide when looking for a bottom.
It is a good time to gather as much information as possible, in order to make informed decisions. Here is detailed analysis from Raymond Norris, someone I can personally vouch for, though after reading his words it will be clear he doesn't need my support :o)
I apologize for any formatting irregularities, I'm cutting & pasting.
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Some General Observations During This Most Testing Time
The $64 question is "Can Things Get Worse?"
To arrive at a good answer, I've been comparing historical declines with the current one. In particular, since
this one is so great in magnitude, I've reviewed the '87 crash to get a feel for the current direction. But first, I
think it's important to "draw the lines in the sand" and outline what we need to see before we can be sure
things are or will be turning around:
(1) A retest of the lows, or a "W" formation
This has been spoken about extensively by Ian and its importance in a time such as this one cannot be
overstated. Historically, the vast majority of intermediate corrections and I believe all major corrections have
had some type of retest of the lows before finally continuing up. The low on Friday was 3265.98, so that's the
number I am eyeing for now. There is of course the chance the Nasdaq heads lower Monday morning, but I
believe in the very short term, the Nasdaq will bounce (more on this later).
(2) The Nasdaq must drive back above its 200 day moving average
Because Friday's close was the first close below the 200 day moving average, this condition could easily be
satisfied this week though it is necessary to mention because declines of this magnitude often eventually
trade below the 200 day for some period of time.
(3) The 17 day must cross back above the 50 day
If the market stays at these levels for a sustained period of time, this condition might have to be altered to "the
17 and 50 day must cross back above the 200 day." At this point, the decline isn't that bad so the condition
remains as is.
(4) The short term downtrend line must be broken
Last week's rate of decline was an astounding 25% for the week. Of course, that rate is unsustainable and
should, IMO, end this week. However, beginning from the height of the Nasdaq in March and connecting the
lows of the past few weeks, the current decline is measured at a rate of 23.4% per month. What I find
interesting is the rate of ascent from the October 18th low is 11.3%. Double that and you get 22.6%. So, this
current decline is roughly twice the rate of ascent from October through March.
Now we have some idea of what should occur before we can know it is safe to get in. At this point, I'm not
particularly optimistic because of the current interest rate environment and monthly cycle. I remember a study
done be William O'Neil in "How To Make Money In Stocks" where he graphed the S&P 500 against interest
rates. The charts were negatively correlated; that is, whenever interest rates fell, equity prices rallied and
whenever interest rates rose, equity prices fell.
This struck a chord with me because during the past 12 months, it has been difficult to explain why interest
rates were moving up and the broader indexes were not significantly adversely effected. However, now we are
seeing equity prices being slashed by half or more. The explanation may be that when the hikes began, we
were already at a relatively low level (since previously from end of 98, the Fed cut rates 3 times). The second
reason may be that Tech stocks were not as sensitive to rate hikes but after 5 consecutive ones, they buckled
under the pressure.
In any case, the interest rate environment cannot be discounted because at this time, the Fed is likely to
continue raising rates given the inflation jitters caused by the CPI. What the Fed has to deal with is whether the
0.4% reading of the CPI is an anomaly or a trend. Another important inflation report will come April 27th when
the advance GDP chain deflator is released. It is a more comprehensive measure of prices.
I mention the market cycle because historically April through October has been a bad time for equities while
November through March has been a good time for equities. It is difficult to believe the market will correct in a
month and then be on its merry way. Coupled with the interest rate environment, equities are unlikely, IMO, to
make much headway for a few months.
Looking back at the 1987 correction in the Nasdaq and comparing it to today actually makes a bullish case
rather than a bearish one. The Nasdaq's high in August of 1987 was around 455 (incredible where we are
today!). The Nasdaq precipitated from 455 to a level near 290. That represented a 36.2% fall, perhaps the
greatest fall for the Nasdaq (The Dow and S&P fell more during the 74-75 bear market where the low was
near 50%).
As of Friday's close, the Nasdaq is 36.3% off its highs (the high was 5132 on March 10th and the low was
3265). Amazing, isn't it? Almost to the dot the same correction as the one in 1987 (so far!). As I mentioned,
some may interpret this as a bullish sign - that this correction is unlikely to worsen since it is now of the exact
same magnitude of the 1987 crash. But I do not...
The next question that popped into my mind was: "What was the Ian High Jump extension of the 17, 50 and
200 day moving averages in 1987?" Here they are:
As of October 27th 1987, the
17 day moving average was at 380
50 day moving average was at 425
200 day moving average was at 422
The associated extensions are:
The index was 25% below its 17 DMA
The index was 33% below its 50 DMA
The Index was 32.4% below its 200 DMA
Adding these up gives us 90.4%. So at the worst decline in the Nasdaq, the IanHighJump was at a reading of
-.90. What is the current reading? As of Friday, the current reading -.55. This confirms my previous fears, that
there is still possibility for more pain (however, I must concede the lowest reading on the IanHighJump during
the 1998 correction was -.51).
The reason today's number isn't larger is because the Nasdaq only recently closed below its 200 day moving
average. During the October decline, the Nasdaq broke that support several days before the bottom. Of
course, the Nasdaq broke the 200 day moving average on Friday only because it had such a stellar move
before the fall.
So the decline is the same magnitude but in relation to the moving averages, today's decline pales in
comparison to the 1987 crash.
I believe the decline can worsen because of (1) interest rates (2) the fact pain has not been felt long enough
(3) the optimism still present in the market as shown in the VIX index and the put/call ratio and (4) the monthly
cycle. The worst reading on the high jump gives us a "margin of safety." The worst we could expect the index to
go is -.90 with the knowledge that the most recent bear market gave us a reading of -.51. However, since the
previous rally broke so many records, it is not inconceivable the current decline will do so as well.
In the short term, as I mentioned earlier, the Nasdaq is likely to rally. This rally may last only a week if that long,
but there are four reasons why I believe so:
(1) The Nasdaq is resting near its 200 day moving average. Mutual fund managers like to buy at this level
which will give support.
(2) The index is 36.3% off its highs in a matter of 2-3 weeks. Too many will see this as a temporary oversold
condition and buy. We will likely see some panic Monday morning, but my opinion is that the index will rally
sometime in the week by a good amount (possibly 3-5% or more).
(3) The fibonacci retracement levels. This is perhaps the most interesting. If we use the closing base bottom
for the previous rally of the Nasdaq as being set on February 17th 1999 (which I know is somewhat of a stretch
of an assumption but it was a bottom at one time) at 2248, and the closing high as 5048 on March 10th, the
difference between the two is 2800. The fibonacci numbers of 38.2%, 50%, and 61.8% provide guidance for
likely retracement levels. Specifically, applying the 61.8% retracement yields: 61.8% of 2800 is 1730; subtract
that from the high of 5048 and we get 3318.
Whew! So, the 61.8% retracement of the previous rally is 3318. What was the closing price on Friday? 3321,
which is exactly the same as the retracement level, between friends.
(4) Finally, if we draw a channel for the Nasdaq going back 10 years (chart attached), we see that the Nasdaq
traded in a tight channel for much of the 1990s. Then, in early November 1999, the index broke out of that tight
channel and rallied to 5048. Now, it has come back to the very trendline it broke above in November. As we
know, broken resistance often gives support - all at this level.
The confluence of these indications, IMO, is not by coincidence. The 200 day moving average, extent of the
decline, the 61.8% retracement level, and finally the tight channel will give support for a rally in the short term -
perhaps one strong enough to convince those "savvy" people at CNBC that the decline is over. Just when
everyone feels safe again, I think the market will dive again.
Conservatively Yours,
Raymond J. Norris
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It seems like his analysis is short-term positive, with the potential set-up for another long-term negative. Very speculative, but I wish to voice my opinion that Raymond has been very accurate as long as I've known him.
Regards, JB
P.S. I will be seeing my dad tomorrow night for dinner, I am going to take your "Uncle Frank Advice" and tell him exactly what you said, since it is good advice and quite appropriate. Thank you :o) |
