The Bounce Before the Boom?
The Dow Jones Industrial Average descended into bear market
territory on Thursday of this week, only to reject the notion,
rebounding over two hundred points by the close. For a follow up
performance, the Dow managed to close higher still on Friday,
giving many retail investors a false sense of hope as to the true
direction of the market, defining the classic bear trap for those
filled with hope and optimism.
Those who decide that now is the time to jump feet first into the
technology sector will likely find themselves barely able to
tread water in the near-term. The sharks swimming in the murky
NASDAQ waters will undoubtedly use the recent bounce in
semiconductors and biotechnology as yet another chance to get
short.
Why I am so convinced that this protracted market decline is not
over? For one, let's reflect on what has changed in the past two
days. Hmm, let me think. OK, the answer is nothing. Nada. Zippo.
Not one shred of economic evidence has surfaced in the past week
that would give even the slightest clue that we are nearing the
end of the technology spending hiatus, or that profits are on the
upswing in major US companies. Moreover, announcements are coming
in fast and furious from Fortune 500 behemoths regarding job
cutbacks and administrative tactics that are all an effort of
management's intent to stop the slide in their respective stock
prices through alternative methodologies intent on propping up
the bottom line. Sure, we have seen stocks rebound on the
proactive efforts of these companies, but in the end, revenue
drives profits, and companies can only cut so much from their
respective fluff before they hit a staffing threshold that they
can no longer cross without becoming ineffective.
Yet another factor that convinces me that we have yet to see the
bottom is the FUD factor (fear, uncertainty, doubt). Fear is a
very powerful reason to sell, and while many will point to very
high readings in the CBOE Market Volatility index this week as
being a convincing indicator of such, I'm not seeing it yet. It
is evidenced in the typical investor's mindset, even though
mutual fund inflows are receiving record amounts of transfers and
new investments into bond and money market accounts. The groups
of individuals that I work with here at the Premier Investor
Network are, in my opinion, very intelligent investors, capable
of making informed decisions. I am seen as one of the more
bearish (a label I don't like by the way) editors on the staff,
and for the most part since October 2000, have been right in my
calls for the macro market conditions. Sure, more and more people
have become bearish in recent months, but it's HOPE that has kept
the bears in business. People, for the most part, still want to
be long, figuring they will buy now, at the so-called "bottom",
to hit the home run with whatever it might be, Sun Microsystems
at $18 or Cisco Systems at $19.50. Capitulation, a word that has
been overused of late, is driven by FEAR, and even during the
sell-off on Thursday, which was orderly and structured, we did
not see it. Sure, most major newspapers ran front cover stories
on the state of the market and its seesaw week, but you still
hear Bob at the water cooler talking about getting long some
Siebel Systems so he can make a quick buck. Only when you have
people scared for their future, resistant to buy shares of ANY
stock, will we be near the bottom.
When you consider the fact that the Federal Reserve, typically a
methodical, consistent beast, intent on staying the course, has
lowered short term interest rates by 150 basis points in just
under 3 months, you start to get a whiff of the economic state we
find ourselves. Hey, I'm long stocks just like you are, so I
hopefully, I'm way off base here. You certainly don't have to
listen to what I'm saying, but you should be listening to what
the economy and markets are telling you. As even the biggest,
old-line companies are beginning to feel the heat of the
slowdown, the message is becoming much clearer. Unless you are
hearing a different message than I, it's not to go out and buy
stock. Enough of my ranting, on to last week's action.
The Week That Was
For the week, the DJIA fell 318 points, or 3.2%, to 9504, but
stayed above Thursday's intraday low of 9106, when the index was
down some 380 points. The Dow barely avoided closing 20% below
its January 14, 2000, high of 11,722. A bear market is
traditionally defined as a 20% decline from a closing high.
Friday, the Dow finished with a 115-point gain.
The Nasdaq Composite, which has shown extreme resiliency in the
past few sessions, continued to do so on Friday, rising 30
points, finishing at 1928. The index finally managed to advance
after seven straight weekly declines, rising 2% for the week
ended 3/23. The Compx was helped along its northerly journey
mostly by semiconductor issues residing in the Philadelphia
Semiconductor Index, or SOX, which surged by 18% for the week,
and saw every single component higher for the five sessions. The
movement in the sector has sparked optimism that this area of
technology is seeing improvement in order flow, although there is
almost no evidence that this is the case. Again, we go back to
HOPE.
Driving the semiconductor bulls' case was Micron Technology
(NYSE: MU). The largest maker of DRAMs, memory devices used in
personal computers and other tech products, has surged this year,
rising 38% to 48.83 after a nearly nine-point gain last week.
Micron's advance comes on HOPES that DRAM prices have bottomed
after collapsing to around $4 for the 128-megabit variety from
over $15 last summer. The case for Micron's bulls also assumes
that industry-pricing will improve as weaker Asian DRAM producers
exit the market, a foolish thought in my humble opinion. Consider
the fact that Micron now has a market value of nearly $30
billion, more than five times annualized sales, compared with a
low valuation of one times sales at its low in 1998.
The S&P 500 Index fell 0.9% for the week to 1139, now down 13.9%
year-to-date. The Dow is off 11.9% so far in 2001, while the
Nasdaq is off 21.9%. Very nice numbers indeed.
At the NYSE, winners were led by financials including Citigroup
(NYSE:C) and JP Morgan Chase (NYSE:JPM). Consumer-related
technology was also strong, including the likes of Hewlett
Packard (NYSE:HWP) and Compaq Computer (NYSE:CPQ). Dow component
Proctor and Gamble (NYSE:PG) led the losers on the Dow, shedding
$2.55 to $60.20.
Actives are the Nasdaq included the typical list of suspects,
with mixed results coming in from the market's former tech
darlings. Cisco Systems (NASDAQ:CSCO) led the list, posting a
loss of $1.06 or 5.38%. Intel (NASDAQ:INTC), Oracle
(NASDAQ:ORCL), Sun Microsystems (NASDAQ:SUNW) and Microsoft
(NASDAQ:MSFT) all posted gains between 0.4% and 4.75% in the
session. Drug maker Immunex (NASADQ:IMNX) led the decliners,
shedding 38% or $7.25 after the company said it would halt
testing of its arthritis drug Enbrel for treatment of chronic
heart failure.
Volume was decent throughout the session, with 1.4 billion shares
trading on the Big Board, and 2.2 billion shares changing hands
at the Nasdaq. Advancers beat decliners at the Big Board by a
ratio of almost 2-1.
Bonds were weak all day long Friday, with the rotation from fixed
income evidently entering the equity markets. The benchmark 10-
year note lost over 3/8, sending its yield up to 4.801%. The 30-
year bond lost nearly 5/8 to yield 5.305%. The bond market will
have a slew of economic data to digest next week, which will
likely influence the direction of both credit and equity markets.
We have existing and new homes sales data for February on Monday,
durable goods and consumer confidence numbers on Tuesday, and the
Chicago Purchasing Managers report on Friday.
What To Do, What To Do
We could very well see a continued bounce next week, given that
there seems to be more downside risk in the Dow than there is in
the Nasdaq. Portfolio managers are selling their winners, as
evidenced by recent losses in market stalwarts Coca Cola
(NYSE:KO), General Electric (NYSE:GE), and Minnesota Mining
(NYSE:MMM). When you see this, it certainly can be construed as a
signal of the bottoming process. As outflows have reach record
proportions, funds are raising cash in their blue chips to
prepare for what could be continuation of the mass exodus we have
seen in the equity markets of late. If you are a trader, then by
all means, play the trend. For now anyway, it looks to be up,
though its duration is suspect. More likely than not, it is
simply a bump higher before the next leg down, but of course this
is only my opinion. Remember, that the worst may not be over, as
evidenced by a lack of buying in big cap technology. As the
economic slowdown becomes more and more of a global event,
pressure is sure to build, and along with it will come more
uncertainty. If there is one thing the bulls dislike, it is
uncertainty. A lack of buyers will definitively bring back out
the shorts in force, even though the risk in their game is
becoming greater and greater. The quick and nimble can survive in
here, but don't lose sight of the trading channel in which we reside.
from the Stockbottom.com newsletter |
