Bear Feast in Markets Today a Capitulation? Not Yet
By Aaron L. Task
Senior Writer
12/20/00 8:24 PM ET
SAN FRANCISCO -- The concrete floor Alan Greenspan purportedly put under the
market Dec. 5 is starting to look like a pair of cement shoes. The bell the
chairman was supposed to have rung is turning out to have been a gong,
summoning the executioners. The Dow Jones Industrial Average fell 2.5% today,
while the Nasdaq Composite tumbled 7.1%, its seventh-biggest percentage
decline ever. The Comp's close of 2332.77 is its lowest since March 23, 1999.
Meanwhile, the S&P 500 lost 3.1% to 1264.74, its lowest level since October
1999. The Wilshire 5000 Total Market Index also reached another 52-week low,
losing 3.5%. Market internals told a similarly gruesome tale. Most glaringly,
2.8 billion shares traded over-the-counter, the second-busiest session in
Nasdaq h! istory, while declining stocks bested advancers 4-to-1 and new
52-week lows outpaced new highs by a whopping 932 to 55. Analyst downgrades
of Cisco Ssytems (CSCO:Nasdaq - news), Yahoo! (YHOO:Nasdaq - news), IBM (IBM
:NYSE - news), Hewlett-Packard (HWP:NYSE - news) and Foundry Networks (FDRY
:Nasdaq - news) (among many others), plus rampant concern about economic
slowing, were cited as catalysts for today's losses. But tax-related selling
and "window-dressing" by mutual fund managers, who want to pretend they never
owned the year's biggest losers (i.e., tech stocks), were the paramount
cause, traders said. Traditional "safe havens" such as Treasury bonds,
utilities, drugs and precious metals all rallied smartly, but anyone thinking
today represented a "capitulation" should consider the following (a
repeat/update of points I made earlier in the RealMoney.com Columnist's
Conversation):
The Chicago Board Options Exchange Volatility Index, or VIX, leapt 16.2% to
35.70, but remains well below its 52-week high of 41.53. You'd think it would
at least approach (if not exceed) that level to suggest capitulation.
The CBOE's equity-only put/call ratio rose to 0.67 from 0.66 yesterday. Most
observers say put buying will exceed call buying -- putting the ratio over
1.0 -- when levels of fear associated with capitulation are evident.
The American Association of Individual Investors recently reported 60% of
investors are still bullish, while the most recent survey by Investors'
Intelligence showed 54.1% of newsletter writers are still bullish. There's
"not anywhere near a shot" of today being the capitulation session that
heralds a bottom, said Sam Ginzburg, senior managing director of equity
trading at Gruntal. You'd need "crazy, frantic selling, guys saying get me
out. We haven't had that yet. The Dow is still at [10,319] -- what's
capitulated there?" The Dow violated short-term support at 10,370, its
closing low on Dec. 1. But Kevin Depew, technical analyst at Dorsey, Wright &
Associates in Richmond, Va., said via email, the index would have to fall
below 10,200 to violate its longer-term trend. Below that, it has support
around 9700, and then 9300, Depew said. The Nasdaq, meanwhile, tripped below
perceived support around! 2500, putting it on an apparent collision course
with its next technical support at 2200; it was from around that level that
the index began its ascent in early 1999. Since January 1999, the index has
not been below 2192. Because 2200 looks "too easy to predict" as massive
support, Don Hays of Hays Advisory Group in Nashville, predicts the Comp will
fall below that level. Still Eyeing the BearIn a written report today, Hays
repeated his recent prediction that the index has a "good chance" of dropping
to the 1800-1900 range. In a subsequent conference call, he predicted the S&P
500 could fall as low as 1110-1140, but believes the Dow will hold above its
mid-October lows of 9654. "If I'm correct, yesterday started the process to
get the last piece of the puzzle into place," he said, forecasting another
nine to 12 days of "precipitous declines" that wi! ll "finally bring concern to
a crescendo." The Fed's decision to leave interest rates unchanged, he said,
took away the "last branch" that bullish gurus were clinging to, joining
other recently failed rationales for buying, such as seasonality and election
resolution. "Unless I am very much mistaken, the lemmings are not long for
this world," Hays said, suggesting the American Association's sentiment
survey will drop to 25% bullishness within the next two to three weeks. "The
cliff is drawing very close. After their plunge, we'll have to have a few
months to grow a new herd." Hays suggested the Comp and S&P could enjoy
15%-to-20% gains and the Dow may approach its all-time high in a forthcoming
rally, during which he expects energy (particularly oilfield services and
natural gas), financial, and high-beta (i.e. tech) stocks to outperform. "The
time to increase our equity exposure," currently at 55%, "is not far away timewise, but not yet," he wrote. Critically, Hays believes the market is now
only approaching the end of the second phase of a three-stage bear market,
with the third stage beginning in late spring. The Dow could decline to as
low as 7000 in the third stage he said, while refusing to provide a target
for the Comp, other than saying it will fall below 1800. Looking further out,
Hays predicted the Fed will cut rates at least twice in the next four to six
months and ultimately lower thefed funds rate to 2% within the next 12-to-18
months, with the long bond's yield sliding to 4%. "'Here comes the savior
again,'" investors will say about Alan Greenspan, Hays said with obvious
sarcasm. Such Fed actions are "not necessarily going to turn the economy
around until we get public and corporate debt down, and that can't be solved
with lower rates," he added. "It! takes time." Not surprisingly, Hays forecast
the U.S. economy is heading toward a recession that will become official by
October 2001 and that Japan's economy is headed for a full-blown depression.
Because of "major problems" ahead in Europe and Japan, he said the dollar
(against which the euro rose to a four-month high today) "will remain the
currency, and it's a mistake to look at the current-account deficit" as a
forbearer of steeper problems for the U.S. I guess that's something to take
solace with. P.S.Hays, whose managed accounts are up 19% year to date, did
have a bit of strut in his talk today, which is somewhat understandable,
given his earlier warnings were mainly dismissed and the bullish gurus
continue to get the accolades. But to the emailer who described me as "the
messenger from hell" (and others so inclined), rest assured I take n! o
pleasure (perverse or otherwise) in reporting on Hays' predictions, or those
of other anti-bulls. It's my job to make you think, challenge consensus
opinions and -- ultimately/hopefully -- help make (or save) you money. By
quoting Hays (most notably) and being generally skeptical in recent months,
I've lived up to my end of the bargain. Finally, for those compelled to
attack: How do you feel about the pundits, gurus and press outlets that
continually and repeatedly called "bottom" this year, specifically since
September? |
