Swenlin Weekly Commentary (outstanding)
MARKET REVIEW AND ANALYSIS (As of the close 12/14/01)
REVIEW: After weeks of relentless rallying, the market finally gave some signs that it is ready to favor the bears with a correction. The net change for the major market indexes this week was: DJIA -238 (-2.4%); NYSE Comp -16 (-2.7%); S&P 500 -35 (-3.0%); NASDAQ Comp -68 (-3.4%).
BULL/BEAR MARKET CONTEXT: Bearish. We should consider that we are in a bear market that will last until early-2003, and probably longer. The extreme decline of the Nasdaq implies that this will be a once-in-a-century bear market, taking the stock market to extremes of under valuation, such as Dow yield of 6% and S&P 500 P/E of 10. The driving mechanism behind such a decline would be an economic collapse feeding on the crumbling mountain of consumer and corporate debt that overhangs the economy.
PRICE TREND: Bearish. Price Momentum Oscillators (PMO) have become overbought, have topped, and have generated crossover sell signals. The rising trend line drawn from the September low (the bottom limit of the bearish rising wedge formation we have been watching) has been violated, as expected.
PARTICIPATION: Bearish. The IT Breadth Momentum (ITBM) Oscillators have topped and have declined about half-way between their recent tops and the zero line. During this decline there has not been enough negative volume to "lock-in" the direction on the indicator -- it could bottom with only one day of good breadth.
VOLUME: Bearish. The IT Volume Momentum (ITVM) Oscillator reads the same as the ITBM.
CYCLES: Bearish, maybe. The last 10-Week Cycle, which ended 12/3, had a severe right translation, meaning that the price crest did not occur until the last two weeks of the cycle. This is bullish. The brand new 10-Week Cycle has begun with what appears to be a severe left translation -- after a sharp rally, a subsequent decline has already taken out the low of the previous cycle trough on the NYSE and S&P 500 charts. This is bearish. The Nasdaq and Dow are still holding above those lows, however, so the situation is not unanimous.
SENTIMENT: Mixed. The Rydex Ratio is short-term bullish, and AAII bulls are awfully high, which is bearish.
SEASONALITY: Bullish. We are in a six-month period of bullish seasonality until April 30. The next period of ST favorable seasonality begins December 21 and ends December 24.
FUNDAMENTAL OBSESSIONS: At the beginning of the Nasdaq crash and long into its progress, the question was constantly asked on CNBC, "But where can investors put their money [where they can rack up an easy +20% a year]?" The part in the brackets was added by me, but it was always hanging out there as an unspoken imperative. I would always shout back at the screen, "In a money market account, stupid!" If you are EVER fortunate enough to be making and easy 20% a year on your savings, don't settle back in the hammock and congratulate yourself on how brilliant you are. High return implies high risk, so dig a hole, build a bunker over it, and keep an eye out for whatever is coming to get you, because it IS coming.
Now we find ourselves in an environment where any day I expect the bank and brokerage to start charging ME interest on my cash deposits. Interest rates are so low that annual income from $1,000,000 is about $20,000, and people who have elected not to risk their money in the stock market are being screwed in the noble effort to keep the equity bubble inflated at any cost.
Now almost everybody I see on CNBC reasons that the market has to move higher because people have no choice but buy stocks because cash isn't giving them any return. Let me see if I understand this. I can make a small return on cash with zero risk of losing my principal, or I can risk losing a substantial part of my principal by buying stocks that are so overvalued that only the "greater fool" theory justifies their going higher. These are equal choices? I don't think so. (Greater Fool Theory: I buy stocks that I know are impossibly inflated in the belief that a fool greater than I will eventually buy them from me at a higher price.)
The economic stimulus package appears to be like the Titanic, fatally wounded and slowly sinking beneath the waves after being torpedoed by partisan politics. It is probably not a great loss, because there was not much in the way of stimulus in it. I do not claim to know what will bail out the economy, quite emphatically, I don't think there is anything that will. The issue is still too much debt. You can pass lots of relief legislation, but the people who are unemployed and drowning in debt can't survive on relief payments. Tax cuts will put more money in the hands of consumers, but no amount of tax cutting can erase the mountain of consumer debt, let alone fuel another 1990s growth spurt. Nevertheless, if the stimulus package can be passed in any form, it would be a psychological boost for the market.
GENERAL DISCUSSION: Friday's modest selloff and equally modest upside reversal, can have two causes: (1) Rumors that a scheduled General Tommy Franks briefing would reveal that Bin Laden had been captured or killed, caused the market to recover in celebration; or (2) after several days of decline, the market hit a short-term oversold condition and bounced. Certainly, the technicals were calling for a bounce, and a fundamental trigger never hurts.
To the relief of the bears, of which I am one, the important breakout a little over a week ago failed to hold, and market indexes finally ran out of steam. The decline following the breakout was about the worst we have seen since the September low, but it is still inadequate to establish a strong foothold for the bearish case.
Now our short-term indicators are becoming oversold, and I think the odds are strong that we could see a rally that will challenge recent highs (or try to). Look at the STVOs -- when they reach about -15 and turn up, which most have, a short-term rally is likely. Also, the fact that most market indexes have violated rising trend lines calls for a snapback rally.
By rights we should get a decent correction before the recent highs are taken out, and that is where I will hang my hat, but, let's face it, there has been heavy government and institutional sponsorship behind this rally, and they haven't given much ground to the bears. We have to wonder if they're going to ease off a bit for the time being. Looking at the NYSE Member net buy/sell numbers, there hasn't been much accumulation taking place, so a retrenchment may be in order so that they can acquire more inventory.
BOTTOM LINE: Next Friday we will probably see a lot of market craziness. There is Triple Witching options expiration, plus the rebalancing of the S&P 500, S&P MidCap 400, S&P SmallCap 600, and Nasdaq 100 Indexes. What this means is that Standard & Poors and the Nasdaq will look at the changes in market capitalization for all component stocks of those indexes and establish new weightings for them. Portfolio managers who are trying to track those indexes will have to sell some stocks and buy others in order to keep their portfolios properly balanced.
The short-term technicals are calling for some kind of bounce next week, and the intermediate-term technicals allow plenty of room for a continued decline, once the bounce is over. There is always the chance that the bulls will win in the end, or at least get their way a little bit longer, so now could mark the end of a pullback prior to another attempt to blast through the overhead resistance of major trend lines and 200-DMAs.
That last is for the more aggressive among you. As for myself, I would like to see a real correction before I consider moving into the market on other than a very selective basis.
-- Carl Swenlin |
