Rock N Roll Market
By Jeff Cooper
July 22, 2000 11:00 AM EST
Here come the jesters 1-2-3
It's all part of my fantasy
I love the music
And I love to see the crowd
Dancin' in the aisles
And singin' out loud, yeah yeah
Here come the dancers 1 by 1
Your mama's callin'
But you're havin' fun
You find you're dancin'
On that Number 9 Cloud
Put your head together and sing out loud
It's all part of my rock 'n' roll fantasy
Yeah, it's all part of my rock 'n' roll dream
It's all part of my rock 'n' roll fantasy
It's all part of my rock 'n' roll dream
Yeah, put out the spotlights, one and all
Let the feelin' get down to your soul
The music's so loud you can hear the sound
Reachin' for the sky and tearin' up the ground
It's all part of my rock 'n' roll fantasy
It's all part of my rock 'n' roll dream, oh yeah
It's all part of my rock 'n' roll fantasy
It's all part of my rock 'n' roll dream, yeah
Fantasy yeah yeah yeah yeah
Fantasy yeah yeah yeah yeah
From "Rock 'N' Roll Fantasy"
Performed by Bad Company
It was a rock-'n-roll week, marked by lots of wild swings and turnaround days. The market rocked into the green in response to Fed Head Greenspan's testimony that the economy was, in fact, showing signs of slowing. However, the celebration was short-lived as the market rolled over on Friday, when many players worried that they might be overstaying the nice Nasdaq run off the May lows. After all, it was the failure to sell while the ducks were quacking in March that left many position players sucking pond water.
As the week drew to a close, the market just seemed to run out of energy, as the indices opened down Friday morning and stayed in deep red into the bell. Ain't it just like the market to pull the plug just as the merry-making momentum looked like it was pushing throughout all sectors of the Street and turning into a good old-fashioned rock-'n-roll block party? As Jimmy Paige once said, "It's been a long time since I rock-'n-rolled, been a long time since I got down and strolled." This weekend, he'll probably be singing "Whole lotta red."
Like Paige, momentum players know how to pick up the beat and turn a different riff when a sour chord is struck. And turn on a dime they did. Just as momentum players began to kick up their heels, anticipating a possible challenge of old highs on the S&P and the Nasdaq, the realization began to sink in that if the Fed is content to go from a preemptive posture to a reactive stance, then maybe -- just maybe -- the interest-rate medicine is taking. "As the first rock-'n-roll
presidency draws to a close, the first rock-'n-roll market in history looks all shook up."
The market is a discounting mechanism. As legendary trader Bernard Baruch once said, "Speculation is about anticipating the anticipators." Right now, there appear to be some major anticipations about earnings deceleration as we go into the rest of the year. If the Fed has done its job, maybe it will be the last one dancing.
As I mentioned a few weeks ago, reports suggest that this quarter's earnings growth would be the fourth quarter in a row in which the average stock's earnings were up 20%, but that this would likely be the last quarter in this cycle that the average stock posts that kind of gain. As it happened, corporate earnings growth appears to already be decelerating somewhat, coming in at approximately 17% for the average stock.
Jitters took over as an avalanche of earnings hit this week. And caution about revenues going forward tempered expectations about the third quarter. So it should be no surprise that many high-flyers had their wings clipped when their numbers were light. For example, Documentum (DCTM) closed at 90 3/8 on Thursday -- only to gap-open at 76 3/8 on Friday. It closed at 59. Macromedia (MACR) closed at 108 3/4 on Thursday, gap-opened on Friday at 91 11/16, and ended the week at 79, after trading in the low 60s! Warnings from technology companies such as Agilent (A) and Lexmark (LXK) slammed those stocks 25 points and 18 points, respectively.
Another example of the carnage is Xilinx (XLNX). Despite beating the abhorrent whisper circuit, Xilinx careened 11 points, closing below its moving average, after making a new closing high as recently as Monday. You puts up your money, and you takes your chances. Not! Not if you're a short-term trader. It takes a lot of winners to recover from that kind of damage. The market giveth, and the market taketh away.
Is this week's reversal from new highs on the Nasdaq just a breather? Will the rock-'n-roll fantasy on the go-go growth and concept stocks hit even a higher note? Or will the market continue to sing the blues? These are the questions that market participants will ponder this weekend.
Going into this week, I suggested that if the arbs had 'em to sell for expiration, then Monday's action would likely tip their hand. The September S&Ps kicked off the week with a Lizard Sell Signal, setting the tone for a reversal week. And that's certainly how it played out.
Going into next week, it feels as if we've seen this movie of musical chairs before. The S&P has essentially gone nowhere for a year. The S&P close ending the week of July 16, 1999, was 1,418.75. Today's close: 1,489.50. Is this the 1994 soft landing?
There's no guarantee that the Fed won't tighten further. There's no guarantee out there about a soft landing, either, especially with the Fed released from restraints of liquidity concerns driven by such events as Y2K, LTCM, and Russian/Asian currency debacles. To put things in proper perspective, Alan Greenspan expressed his concerns with rampant stock-market speculation back in early December of 1996. At that time, the S&P 500 was trading at 768. Now we are nearly double that figure.
Greenspan's ideal goal would be a slow decline. But history argues differently. When true moves begin in earnest to the downside, they tend to go further and faster than most people believe possible. And that's what we have to be on our toes for, if this has been a reaction rally after a bearish break in the spring.
The semiconductor index ($SOX.X), which has been one of the leading indices in the market, was down approximately 5% on Friday and 14% this week alone. The index shows rapid turning on the weekly chart after testing the long tail bar from March, and it failed, closing poorly. It looks like the music is grinding down.
The failure by the S&P to generate piggyback follow-through off Wednesday's 1-2-3 buy setup suggests that while buy-and-holders may be complacent on Cloud 9, the jesters on the trading desks are tearing up the tape. As the first rock-'n-roll presidency draws to a close, the first rock-'n-roll market in history looks all shook up.
Conclusion: As I said in my TradingMarkets commentary before the open on July 20, when it comes to the market, it's "What have you done for me lately?" (Sorry, Janet!) The big funds are now selling on earnings news; margin levels are back to record highs; and with the public again doubled-up on overpriced stocks, we need to guard against our own complacency.
Is this market slide merely profit-taking? Or is it a bit of collective, subconscious Gann influence from the 10-year and two-year highs? Remember also that in mid-July four years ago, there was a major pivot as the Nasdaq found low from a cascade that started on May 24-25. Has the recent seven-week Nasdaq rally been a mirror image, a Fibonacci 1,440 degrees later in time? Just happenstance, right? Yeah, right! But it's OK, it's all just part of our rock-'n-roll fantasy. Just make sure it's your mama calling, and not the fat lady singing.
P.S. I'm going on vacation for a week, so I'll talk to you when I get back. Jesse Ventura is kind enough to house-sit for me.
Looking to the sectors:
The semis ($SOX.X) are in a vulnerable position. Therefore, focus on the strongest stocks in the sector on the long side, such as Sanmina (SANM) and Micron Technologies (MU). On the short side, focus on weak stocks, such as Varian Semiconductor (VSEA) and Novellus Systems (NVLS).
Telecom ($XTC.X) was mixed. Focus here on the stronger stocks, such as Ciena (CIEN) and Brocade Communications (BRCD).
The networkers and fiber stocks were very strong. Focus on Sonus Networks (SONS), Extreme Networks (EXTR), and Tut Systems (TUTS).
The Nets ($IIX.X) still appear to be mounting a comeback. Remain selective, though, focusing on the stronger issues, such as Phone.com (PHCM) and Ariba (ARBA).
Biotechs ($BTK.X) appear to be in a pullback and held up nicely for the week. Focus here on Amgen (AMGN), Lexicon Genetics (LEXG), and Human Genome Sciences (HGSI).
Major drugs ($DRG.X) sold off once again. Remain selective, and focus on the strongest issues, such as Allergan (AGN) and Vertex Pharmaceuticals (VRTX).
Software ($CWX.X) failed in its rally out of a consolidation. Watch only the strongest issues, such as Rational Software (RATL).
Oil service ($OSX.X) looks weak, and the major oils ($XOI.X) look weaker. Look for shorting opportunities in major oils such as Chevron (CHV) and service companies such as Tidewater (TDW). |
