From Don Hays this morning sans the charts. Again today/monday is pivotal
The Sixth Massive Panic Attack
And So Far, the Bull is Still Alive
I hope we can stuff the charts that I want to show you this morning through the channels. This period is so amazing to me, like many, many others in my experiences, that no matter which side of the aisle you stand on—either bullish or bearish, you can make your case that you are right. But I also notice that the bull’s emotional resolve is gradually being eaten away. For two weeks in a row the American Association of Individual Investors have been able to only garner 35% of their survey to the bullish camp. You can see on that AAII survey chart in the section of our psychological section on our website that the bullish sentiment has been right down there with the other lows of the last 7 years. My best conduit of how cocky each camp (bullish or bearish) is by reading those e-mails I get from those that are offering me their wise (and otherwise) counsel. Of course, the most accurate way to measure these attacks of panic or greed is to study the action of the technical indicators that very effectively measure the sentiment of the traders.
By my reckoning, there have been six very significant signals given in the last nine months as the bull market has been able to survive despite the worst economic news in the last decade. And that has occurred with the biggest bubble in the history of the U.S. stock market seeing the technology stock earnings getting lambasted, with the management and analysts following those companies giving little hope of any upcoming improvement. The bears are being fed a constant dose of news to feed their side of the argument, and the bulls are being bombarded with such devastating news and earnings reports that they are having a difficult time sticking to their bullish resolve.
But despite the cockiness of the bears, don’t you find it so strange that there have now been four major attacks in the last 8 weeks, with all the ammunition that could possibly be thrown at the stocks, and despite this massive barrage, the bull has not been pushed back? The line is still holding.
I realize that the Value-Line Arithmetic index is being affected in a positive way by the fact that the index rebalances every one of its 1700 stocks each day to an equal weighting. This means that value investing is rewarded over momentum. In other words the hot stocks get a little sold theoretically every day, and the cold stocks get a little theoretically added. I could use any index to prove the case, but I believe that the Value-Line Arithmetic index, much like the advance/decline lines, or the net new highs made on the different exchanges, come the closest of telling the evolution of this bull market. So if you want to use another index you can, but I think you will find the examples I am about to give will work pretty well for any of them.
So clear your head, take away all your biases, and let’s look at the six different junctures that I have put arrows on during these last nine months. In some ways I should go back for eleven months, because it is obvious from looking at the above chart, or the chart that shows the percentage of stocks that are trading above their 200-day moving average, that a bottom in many stocks was made in that first October 2000 sell-off. But the market was not really ready to move up yet. It is my logic that it only had one leg of support. In that wicked October sell-off the wall of worry began to be rebuilt in a very solid way—not all of it, but certainly the fear that had been missing during the denial phase of the bear market during March and April of last year began to be reinforced as the third quarter earnings started to shoot holes in those optimistic appraisals. But bull markets cannot be supported with just one leg of support. So the rally was very tepid, and in late December as the very somber pre-announcement season threw another dose of cold water on that optimism, not only was the psychological leg super-reinforced with another dose of extreme fear, but for the very first time short-term interest rates began to plunge. Now the psychological indicators were joined by our monetary composite. Traditionally, when you have these two legs of support working together, the bull market is reinstated. So let’s start with point A on the chart. Immediately after that point on the chart, for the first time in a long time the 10-day Arms index moved up above the 1.3 line. We also witnessed the equity put/call ratio move up above 90%, and the 3-39 week equity put/call ratio (both charts on website) moved up to 18%, measuring an intense panic attack. The combination of all this moved our bearish asset allocation into its first bullish posture since mid-1999.
As you can see the Value-Line Arithmetic index experienced a huge rally immediately subsequent to that panic attack at point A. But in late January, it became obvious that the optimism was returning too soon, and extremely brutal to the new era stocks. By the end of March it had decimated the hopes of those new-era bulls. The NASDAQ and S&P 500 were slaughtered, and as you can see this equally weighted index came back to almost the same exact spot that it had hit back in December 2000. Point B was really the huge panic attack up to this point. As you can remember, our bullish case that had a few cracks appearing by that late March panic, was refortified with gusto as the 10-day Arms index moved above the 1.50 level. This “sign of the bull” had always in its historical record meant that the panic was so extreme that the path of least resistance was up. So we started screaming that the bull market was reawakened. Once again, almost immediate gratification occurred as the bull market did surge, and the biggest increase percentage wise was by the NASDAQ technology stocks. Not coincidentally that March panic occurred in the dismal pre-announcement season similar to the panic in the previous December. At point B, not only did the 10-day Arms index move up above 1.5, but the equity put/call ratio soared above the 90% on several different occasions. If you look back in history, you just don’t find that level of panic. This was a genuinely historic selling panic.
Of course, with my bullish stance, I would have preferred that the panics would be over and done with, but it became obvious by mid-May, even to this bull, that the wall of worry was developing a few cracks and needed a repair if the bullish action was going to be allowed to continue.
But I never expected such intensity, and so many persistent waves of panic in the next three months. Not just one, but this one that we are experiencing now makes the fourth massive wave of panic. Look at the many charts on our website that show this. For instance, at point C on the Value-Line chart shown above, the equity put/call ratio moved to 87%, and on June 19, 2001 the 10-day Arms index moved up to 1.47 another wave right on the threshold of 1.50 signal. Let me be absolutely truthful, I thought that would clear the air once again, but no, a little rally, and then another wave of fear with the economic news abysmal. At point D, the equity put/call ratio once again above 90% on one of those climactic days, and the 10-day Arms index moved up to 1.36. That wave actually lasted pretty much for the next two weeks as there were multiple days when the fear attacks were released between the low at point D and the low at point E. But now, here we are at one more juncture—point F. In the last few days, we have had two days when the Arms index was above 2.0--the 10-day average is now back to 1.398, and the equity put/call ratio is above 72%.
For all these times in the last 8 weeks, the major indices have been caught under their 200-day, and 50-day moving averages. The S&P 500 had been, until this latest effort so far, been making slightly lower lows. The NASDAQ, after moving up to its first higher high since mid-May, bumped its head on the 50-day moving average and came back once again to test the low points that have been fashioning themselves out in the last 8 weeks.
We all are impacted by the same thing that drives the equity put/call ratio. We all are impacted by the same forces that drive the Arms index to those high levels. And each time that we are impacted, without an equalizing buffer of a little optimism to refresh the spirits, our emotions lose a little of their resolve.
But guess what, despite these horrendous waves of fear, and panic selling, the good guys have been able to hold their own. The bears don’t have much longer, they have been on the field for so long, and haven’t been able to move the ball. They have hit the line, first down, once again, second down, then the third down and one last time. Then guess who gets the ball? They should have punted.
I am being a little presumptuous, of course. They still have the ball, they are right now hitting the line. They could possibly break through, but my asset allocation model that is the best handicapper that I have ever seen is telling me that the bulls are going to win this game.
I don’t think any other indicator tells the real story as much as these next two charts of the net new 52-week highs on both the NYSE and the NASDAQ. If we can’t get this stuffed through the tube, and the charts are not shown below, you can access them on our website. They show that the worst damage is certainly not now, and in fact was way back there in that October-March period.
It is really hard to keep your perspective in these markets. If you listen to the loudest voices, they are the ones whose confidence has just been reinforced by the recent trends of emotions. So remember, the loudest, the cockiest are voices of the herd, and you know how herd think can kill you.
Have a great weekend my friends. |
