Zeev:
Dom Hays remains very bullish. Below are his market comments this morning. Would appreciate any thoughts you might have. He still is touting that 1.3 10-day Arms.
No Heroes On Wall Street
The Eternal Search For Clues
Good morning everyone. It is
absolutely beautiful in Nashville
Tennessee this morning. As I begin this
commentary, around 7:00 o’clock edt, it
comes after about 2 * hours of
early-morning searching. My job is
fantastic, a big game every day, every
week, every month. It is me against
the herd. Sometimes I win, and
sometimes the market fools me and
makes me look pretty dumb. Hopefully,
my longevity is saying that I have won a
few times more than I’ve lost. Maybe it
just means I’m so stubborn that I refuse to give up, but there are a lot of
ways to keep score, and looking at all those, in my own humble
admiration, I believe I’m way ahead.
But I am never over-confident. I have been humbled too many times.
And I know this is not a game you can play one day a month. It’s almost
like you have to maintain the life-line to get the message. And the Stock
Market is always smarter than I am, so I have to use every clue I can
garner. No one clue is absolutely trustworthy. In fact, one clue by itself
can be a huge decoy, and if you don’t take them in context with
everything else that you can find you will be whipsawed to death.
For instance, I am a big believer in charts. But, I also believe that charts
mess up more investors than they help. A pure chartist will tell you that a
chart tells all, and that is all you need. I have found over many years
that at major (or even minor) buy spots, a chart breakdown is the final
camouflage that happens before the stock or market turns back up. The
advance/decline line almost always looks the worst on the bottom day,
and on and on and on.
So effective investment strategy comes from a person who is able to
completely divorce themselves from the news of today, and has
developed a technique to determine the headlines of tomorrow. The
stock market, in other words, is the best indicator to measure the future
headlines. So rather than me trying to guess what the economy is going
to do in the next 6-12 months (I know no-one who is really good at
this—certainly not your friend and mine Alan Greenspan,) and then trying
to fit a stock market scenario on this very nebulous economic projection,
I believe that almost all Strategists get the cart before the horse.
I believe the ONLY way to effectively determine future stock market
action is by looking at the three parameters, psychology, monetary, and
valuation. I believe that NOTHING else works, chart-reading, star-gazing,
or analyst’s projections. So the barbs that are being thrown at analysts in
today’s current sensitized world is not their fault, it is those who have
been led down the primrose path. Of course the Analysts have also been
led down that same primrose path. Their business schools have
convinced them that they can develop that ability. Okay, if that is the
case Dr. Professor, show me one that has done this cycle after cycle after
cycle.
So let’s get off that horse, and stay committed to getting up every
morning, extra early, and searching, searching, searching and more
searching for some hidden clue to give some anti-herd message that the
market is trying to propagate. You have to stay in rhythm. In other
words, if you take one step, swing your hip in one direction, and then all
of a sudden you are being led by some other person’s rhythm, and they
are constantly changing the step on you, you become so disjointed and
out of step that you feel whip-lashed.
Sometimes, I do get out of rhythm, but when I do, rather than trying to
quickly shuffle my feet or opinion to meet every critic’s direction, I wait
until I can slowly catch up to the tune. I’m very slow to adopt a new step,
or a new indicator, or one other person’s “reading of the galaxy.” In
other words, I’m an old fogy, and it is very hard to teach us old fogies
new tricks.
I am saying all this to illustrate yesterday’s action. If you are a chart
reader, you were washed out yesterday on most of your technology
stocks. The indices themselves, interday fell to a lower low. Take a look
at the S&P 500, the NASDAQ 100, and even the Wilshire 5000. I’m telling
you, this interday lower-low was disconcerting, even to me. But I have so
many other benchmarks that are so dependable that were telling me that
this is a temporary deception. As I say, I do avidly look at the charts,
but that downward penetration of the previous lows in those indices that
are so heavily weighted in the “new era” technology stocks, was exactly
what the doctor ordered. About one month ago, when the equity put/call
ratio experienced a couple of days at a very low 39%, I had advised you
in these letters that it wasn’t a bull-killing signal, but was a signal that
the “wall of worry” had developed a few worrisome cracks that needed to
be repaired. So we pruned our portfolio’s every so slightly, pruning back
partial positions from a stock or two that had spiked up by over 50% in
the last few months. In addition, that juncture was used to prune another
few stocks that had totally failed to live up to our expectations.
But by May 31, those cracks had been at least partially repaired, and we
chose the weakness of that time to replant those seeds that we had
pruned back then. Of course, the stock market wasn’t through with us
yet. It moved up almost immediately, but then had to experience one
more bout in the torture chamber. It had to shake the tree one more
time to see how tight we really were holding on in our bullish conviction.
Now look at the indicators. In the last two weeks, something happened
that I would have never expected. In the last two weeks, the Arms index
has exploded once again. No, it didn’t go back above 1.50, but the
10-day average did move above 1.38, and that was a testimonial to the
intense panic selling that was being done. I interpret this clue as this.
Those tech bulls had refused to accept the warnings from the reliable tech
managements who have a history of telling it like it really is. No, I’m not
talking about Intel or I.B.M., but those like the management of Sun
Microsystems and Texas Instruments. They had been saying for the last
six months that their business had hit a wall. But the “hope” was still
prevalent by the tech bulls that it would come back “in the second half.”
Those dismal projections had continued three months ago, but still the
“tech bulls” refused to believe. And then when the market took off in
April, and the tech stocks did bounce pretty good from those extreme low
levels, their hope skyrocketed. After all, Europe was going to do better,
and was insulated from the U.S. woes (yeah, right.) But the last two
weeks evidently burst their balloon.
When the 10-day Arms index moves up above 1.30, it is measuring an
unusual amount of panic. I don’t really use the daily Arms index as a
reliable measure, unless it experiences a couple of days above 2.0, but I
did note yesterday that at one point it was above 2.50, and that was in
the midst of the real damage yesterday morning. In my opinion, the
move above 1.30, in this instance was an extremely bullish confirmation
that a significant buying juncture was at hand. But of course, the stock
market wouldn’t make it so easy, so it has continued to try to shake us
out of our bullish conviction.
Surely, you now believe in the Smart Money Index by now. I know; it is
exasperating sometimes since it leads the market by so many days. It’s
prediction of a new bear market tends to be 70-85 trading days early,
and when the “dumb” money takes over in those last 70-85 days, it often
blast the Dow Jones Industrial Average (and the NASDAQ in today’s world)
straight up. Dumb money buys aggressively with wild abandon, and
chases the market up as the Smart Money persistently bails out.
On the other side of this story, at the most recent bottom, the Smart
Money Index started turning up the same exact time that our Asset
Allocation model started turning bullish in late December of last year as
short-term interest rates began to plunge. In truth, that was a bottom
juncture for most stocks as the study of percentage of stocks above their
200-day moving average will confirm. But the camouflage was not quite
ready to completely lift, and the panic sell-off in February and March of
this year, really threw the “new era” boys and girls for a loop. ; Even with
our very minimal technology weighting, and zero telecommunication
weighting, we all saw our portfolio’s hit in that panic. But as that panic
pushed the indices down, lo and behold, the Smart Money Index was
moving up. For the first time since the fall of 1999, it was making
persistent and dramatic higher highs.
Yes, it has done it again. Yesterday, did you notice? The market
panicked in the first one hour (dumb emotional money, ala the “Maria”
effect.) But then the last one hour (the least emotional time of the
trading day) it made back most of the damage as the smart money
moved in. Those “lower-low” stop losses had already been executed.
Yesterday, 12 of the most active 15 stocks were down—a result of the
panic selling.
I could go on and on. But I still feel very much in rhythm with this
market, as the repaired psychological composite is looking much more
able to withstand the next bullish leg. For instance, the equity put/call
ratio moved up to 71%, and the overall put/call ratio moved to 87%.
This is not an iron-clad guarantee that the “tree” won’t be shook a few
more times in this pre-announcement period, but the odds are heavily, in
my opinion, on the sides of the short-term (and long-term) bulls.
There are so many excellent topics to cover this morning, but I’ve run out
of time. But suffice it to say to look at the weakening commodity prices,
the t-bill rate making a lower low yesterday. It feels good, because the
news is still pretty dismal. Remember, this is a bull market based on
hope, and that hope will be a function of hoping that Greenspan can work
his magic of manipulation once again. |
