Friday comments by Don Hays. MUST READING.
Conditioned Reflexes Still Refuse to Die
Bonds--How Seet It Is
In the haste of the moment yesterday morning, I really thought it was the beginning
of the end. In other words, the way the futures were, and the sharp sell-off on the
opening seemed to be building up to a crescendo that typifies the last days of a
phase in a bear market. But as the day progressed, and as I really stepped back
and looked a little deeper into the crevices, I don't think we are quite there yet. I'm
sorry. I would love to get aggressive here on the buy side. The "concern" is definitely
picking up, and that word that I was almost afraid to talk about three months ago
(recession) is now being bantered around by many of the economists. It is not being
talked about with a normal decibel count yet, but if I am right, in the next 5 weeks it
will turn into RECESSION with large caps and bolded. We're not too far from the end
of the damage from the second phase of this bear market in my opinion, but all the
pieces are simply not there yet. I am now guessing that it will be the last week of this
year, or close to it.
The one piece that blows me away in its reluctance to recognize the danger in this
market is the sentiment of the public investor. Now remember that they did not even
find the stock market until late 1997 when the Fed started to print money and give it
away to anyone that wanted a cheap loan regardless of their credit risk. But that new
adventure built up almost exactly like a pyramid scheme. The more new money came
into the game just served to jump those "dream" stocks up dramatically, and that
brought another family of lemmings along. And when Greenspan primed the pump
again in the fall of 1998, and then unbelievably again in the fall of 1999, oh how the lemmings were strutting their stuff.
And the financial news shows on the tube certainly fed the illusion, as they trotted out the "star" analysts who were touting
the "new era" and bowed at their feet singing their success. Queen Abby reached sainthood status, and every time she
made a presentation they would put her on with that glow around her head from on high. Of course, President Clinton trotted
out on the front lawn at each new "good" economic report that was also being exaggerated by the free money, and it
became embedded that this country had reached a perpetual state of prosperity. With Regis, B.a.a.r.r.rbra Streisand,
baseball players, jockeys and to top it off professional wrestlers being profiled because of their great investment success, it
became the "IN" thing to do. And it was so.o.o.o.o easy. Remember "conditioned reflexes." We're not that different from any
animal that if you feed them each time they come, they will keep coming even after the food stops for a good long while.
So in this "concern" phase, the animals are not willing to admit that the food dish is empty. When Abby calls, and I don't
remember his name, but that guy that is pictured on stilts, and the other bulls of the past that are still prominently being
displayed, the animals respond. The thing that worried me the most yesterday morning was the calls that I received from
people that wanted to buy. That is not what happens on the bottom day. And the latest advisory service sentiment surveys
showing the conditioned reflexes still expecting to find the bowl full of food was another shocker. For instance, the Investors
Intelligence survey bullish sentiment remained at 55.1%. And now, hold onto your hat. I would have never expected it, but
after one week's slight decline in their bullishness, the American Association of Individual Investors bullish sentiment soared
back up to 60%, with bearish sentiment only 17%. Based on historical standards, that is a clear-cut sell signal.
There are more reasons to believe that even though close, we are not there yet. As you know, I think the 10-day moving
average of the Arms index is one of the best technical indicators to measure the euphoria or panic in the market. And in a
serious decline, in almost all cases it takes a level of 1.30 on the 10-day moving average to furnish the first try at stopping the
carnage. I had mentioned last week that it did move up to 1.2, and even though that is close, it is not enough. In past years,
this type of "close but not quite" signal has been a temptation to jump the gun that usually saw severe losses in the weeks
ahead. With the confirmation of the sentiment surveys noted above, I believe this will also be one of those times. Yesterday's
Arms index (for just one day) only moved up to 1.35, and the 10-day moving average is 1.179-so here we are close but no
prize. Now let me show you two charts. The first one is the McClellan oscillator for the NASDAQ.
There are two things to note on this chart. I talk about the McClellan oscillator a lot, and rarely mention the faint red line that
is a 21-day moving average of the advance/decline line. I found out a long time ago that this index is also very good on
serious declines to locate major oversold levels that will tend to stop the damage. Traditionally, for the NASDAQ, a level of
-10,000 on the 21-day oscillator will stop most declines. But about the time that all the lemmings finally discover this, the
market will crash through that level and then it typically takes a level of -18,000 to -20,000. As you can see, the carnage of
the last three months has already burned those lemmings once, but they can't help themselves as they still envision the bowl
still being full when they are called. The McClellan oscillator plays the same game with the lemmings. And I suspect that it will
also have to drop to one of those climactic levels of -350 this time. Remember, we normally have this chart updated each day
by the market opening on our website www.haysmarketfocus.com if you want to keep in touch.
Okay, get ready, now let me show you the Nikkei Dow's chart that only includes the first two phases of its bear market that
began in January of 1990. I hope you have been reading these comments for the last six months. I included it the first time
during that sharp March-April 2000 slaughter on the NASDAQ, and remarked that I believed this was the closest historical
pattern that we could find to "guess" of the NASDAQ's future carnage. I then added it a few weeks ago the first time that
they trotted out Queen Abby and Uncle Tom and Cousin Joe to encourage the lemmings. That was what I considered only
the same condition as at point 14 as shown on that plot of the Nikkei Dow.
I hate to say it my friends, but instead of being in that last precipitous decline that ended the carnage in early October, I
suspect instead that the last six days might be nothing more than the first sharp decline after point 14. You be the judge, but
see if you are not still amazed at the remarkable similarity, and the last few days would simply mirror the first decline after the
Nikkei Dow broke that low of the first phase of the bear market (point 8.)
Don't you think all this fits together? If this is correct, we would see the market throw one more big temptation to the
lemmings. Maybe it will even throw them a few dog biscuits to reacquaint them to how the food did taste when they used to
seduce them to the dish. If the pattern continues to be so amazingly similar, that would mean that in about four more weeks
the trap door would be sprung, and those poor animals will be led out to their final slaughter-final for the next 4-6 months that
is. If you measure that final slaughter on the Nikkei Dow, you will see that the last gasp of the ensuing sell-off declined 16%
under the low level of the point where I believe the NASDAQ is now. The NASDAQ's decline so far has been even more
severe than that Nikkei Dow's decline, so if anything I would guess that the next six weeks will produce more than an
additional 16% risk under yesterday's interday low of 2520, which would equate to 2116. As you know, I think the risk could
be as much as to the 1800-1900 level.
But remember, the least accurate thing that I can give you is targets. The bottom will be reached when the fat lady sings, and
when she starts bellowing the animals will know that they have been had.
Before I leave you, I hope you are watching the government bond market. It is as good as the stock market is stinking. The
very strict discipline that I use to manage accounts has reduced the equity position down to 37%, even lower than the 55%
that the minimum equity constraint my long-term investor category of investors can ever reach. I'm eager to bump it back up
there, but right now, until some evidence occurs to convince me otherwise, I'm going to wait until the bearish train stops
before I do. Meanwhile, with 25% in long-term t-bonds, and 38% in high quality money market funds, the accounts are almost
snoozing trough this carnage. I am seeing the first signs that the Fed will be lowering interest rates in the weeks ahead, but
please don't jump the gun. The first ease of the Federal Reserve is far from a bullish signal. It is a signal that they recognize
for the first time that the economy is weak, and that is nothing but a prelude to bad earnings forecasts and usually the
earnings win out until the Fed really gets scared. That will come later. So relax for a few more weeks. A good buying juncture
is out there, but you don't have to be hero here. Instead, if you make a mistake, make it by being too cautious, not too
bullish. |
