What happened to the Bush bounce? What happened to the Santa Claus rally? What happened to the January Effect (which is always front-run in December)? What happened to the Herd who proclaimed that, because a few stocks went up last week on bad news, the market had discounted the worst?
A mere week ago, with sword held high, bulls came out of the woodwork, bravely proclaiming that the bear had been conquered, and that The Bottom was in. Even some papa bears bet some of their porridge on The Turn and The Follow-Through. "Denial in October turned to concern in November, and we are now flirting with capitulation going into the end of the year."
A week ago Friday, it appeared that the bulls might have been correct. After all, democracy works: The election dispute was resolved with battalions of lawyers instead of battalions with bullets. Moreover, Al G (no, the other one!) rode in on his stallion to let us all know that the economy was slowing. You think!
The Nasdaq celebrated with a 300-point rally, trading to a high of 2,929 and closing at 2,917. So, it was a better-than-average likelihood that the high would be challenged this week, turning up the weekly trend line in the process.
The Nasdaq finished a seven-day rally off the lows, with a near-high-tick close, 100-point rally on Monday. Not only did the weekly chart turn up at the psychological 3,000 level, but the Nasdaq also kissed the Time Trend Turn at 3,026, rising to — you guessed it — just 3 points higher, at 3,208.75. Like criminals, markets sometimes just can't resist revisiting the scenes of their crimes.
In a morning commentary early this week, I warned that the 3,026 level was the do-or-die point. At the same time that the Nasdaq was kissing off the 3,000 level, the S&P cash was hitting resistance at its declining 50-day moving average. The S&P also turned its weekly chart up in the vicinity of the 50-day moving average, and then proceeded to crumple. For a short setup, it doesn't get much better than that!
When a weak market tries to stand on its tiptoes, you want to look to sell and sell short. Conversely, when a proven, persistently strong market goes into a crouch, you want to look to go long.
So although the bulls had proclaimed the bear conquered, their arrogance had lost its sheen by Friday's close. Earnings warnings, earnings warnings, and more earnings warnings joined forces with the unwinding of triple-witch options expiration, a persistent snowstorm of tax selling, and index rebalancing to offset last week's "buy signals." As you know, a failed signal is often the most powerful signal.
With the S&P cash showing an outside week down, its lowest weekly close of the year, and an inverted cup-with-handle pattern, as well as a head-and-shoulders pattern, there is the suggestion that as the Nasdaq goes, so will go everything else. This is well demonstrated by the fact that defensive stocks, such as Clorox (CLX), have tumbled from 48 (on Nov. 22) to near 28 (on Friday).
The purity of safety in defensive plays is beginning to reek. The big-picture pattern on the S&P cash suggests that we are at an inflection point. The sinking sands of the Nasdaq may have taken seed in the S&P.
Up to now, the plundered techs have been counterbalanced by a relatively stable S&P/Dow. The listed stocks have so far resisted crash behavior, but they may now succumb to year-end crosscurrents and herd psychology, as it becomes apparent that Santa may have a lump of coal for their stockings, instead of a diamond. After all, the bear has conquered five years of irrational exuberance. And this will be the first year in a decade that the big three indices suffer a substantial down year.
This realization is washing across the public at large. The problem is that this time, there are more Americans invested in the markets than ever before. Moreover, a greater percentage of household assets are devoted to equities than ever before. Also, there has never been greater leverage and debt in our system than there is currently. The beginning of the end of the unwinding may be upon us. As always, follow-through will be the key.
Denial in October turned to concern in November, and we are now flirting with capitulation going into the end of the year. We may be close to a low in time, but as you know, the fastest moves, both up and down, are the end moves.
Although the Dow is only 30 stocks, the Nasdaq as an index is so heavily weighted that it, too, is only a handful of stocks. That weighting, which made for a virtuous circle on the way up, has proven to be a vicious circle during the unwinding. The once-proud four horsemen of the Nasdaq — Intel (INTC), Cisco (CSCO), Dell (DELL), and the once-mighty Microsoft (MSFT) — are now only headless horsemen leading the Nasdaq lower. On Thursday night, Microsoft warned, for the first time in 10 years; the last time, we had a recession.
These jewels of tech have lost their sheen. Of course, the yearly chart on Microsoft turned down on a breakaway gap during the week of April 28, foreshadowing the tarnish to come on these armor-plated gladiators of tech.
Going into next week, the Electoral College meets on Dec. 18. But the real power behind the throne — Mr. Greenspan — will be the focus, because the Fed meets on Dec. 19. Does everyone recall that during President Clinton's first State of the Union Address, Mr. Greenspan was seated next to Hillary? Bill Clinton was the political conquistador of a generation.
With the most deadlocked political landscape ever, the Man Who Conquered Exuberance, the man who was a hero of the bull market, will have his feet held to the fire as calls mount up for a dramatic cut in interest rates. However, a story in The Washington Post suggests that no such move is forthcoming soon, because the Fed may still be concerned about inflation. When is the last time a market bubble burst and the Fed stood pat?
Moreover, a study of market history shows that the market usually goes lower after the first rate cut, much in the same way that the market continued to go higher despite a series of rate hikes. A Santa Claus for years, the Fed chief may be in need of some company this Xmas. Can you say "pushing on a string"?
Conclusion: Although I have been looking to find something in the way of bullish signals, this week ended on a decidedly cheerless note. So the price pattern on the S&P is gloomy, and the NYSE collapsed back below its 50-day and 200-day moving averages from a third lower high — a cascade pattern (remember the third lower high on the semiconductor index ($SOX.X)?) that I warned of at the end of August.
However, there is a potential strong technical positive divergence developing in the behavior of new 52-week highs. Since the 1998 market lows, a series of higher lows has formed with lower highs, creating a long triangle. An upside break above this two-year base occurred as the market rallied into early September. (By "the market," I mean the NYSE and the S&P.)
The September/October decline left an additional higher low. The most recent rally made an even higher high. The caveat here is that should the market's second shoe drop, and if the S&P/NYSE plays catch-up to the Nasdaq, this divergence would likely still exist. Remember that time is more important than price, and that pattern is more important than divergences. Divergences can exist for periods of time; successful intermediate-term speculators know that for entry price is a more important trigger. |
