Mark's Market Commentary ... WHAT TO EXPECT NEXT WEEK
In the intermediate term, we are near or at a market
top. The sentiment roadsigns include the following:
Although there was a light amount of short covering
by the institutions in the S & P and Nasdaq futures,
the net short position by institutions has been in
place for 14 months, evidence that lower prices are
still on the horizon.
The Investors Intelligence Index is now exactly at
the same bullish position recorded at the June 2001
highs.
The MarketVane index (newsletter writers) is at the
highest bullish reading since the September 2000
highs, and higher than the May or June 2001 tops.
Dow Last Hour Indicator has been in a freefall since
December 3, indicating “distribution” by the
institutions, which typically issue “sell at market on
close” orders. The Ameritrade Index, shows that the
retail traders have been accumulating aggressive long
positions the last 4 trading days as the market has
pulled back.
However, in the short term, another blowoff top may
be in store. Here is the evidence:
The NYSE 5-day ARMS reading is near 7.5, near a
record high for the last 3 months. Too much down
volume concentrated in just a few stocks. These
extreme readings also occurred just prior to the
massive Halloween and December 3 jam jobs.
We have a record high open interest spread on the
QQQ futures, revealing a huge amount of put interest
which expires this Friday. Most likely, Da Boyz are
going to have to clean this out. Otherwise, they are
the ones who are going to get cleaned. Everyone
knows that the bookies never lose.
The public/specialist short ratio is at 1.13. Readings
under .85 are necessary to show that the specialists
are getting ready for a big market drop.
The Supermodel (SOX) index and the QQQ appear to
be tracing out a bullish flag formation. If you
measure the flag, it is possible that the QQQ’s could
be pushed up to the 45 area. We had a similar “blow
off top” which punctured a key resistance area in the
5 trading days surrounding the May 22 top.
Those who are short, will need to either cover
immediately and get ready to reload, or make sure
you have enough margin cushion to hang tough for
another week or so. Remember, this thing will fall
back just as fast as it blows off. I remember well,
since I panicked and covered all my shorts at the
intraday high on May 22!! I assure you that the sick
feeling of riding shorts up through a blowoff is easily
exceeded by the sickness of looking back and seeing
that you panicked out your shorts at the exact
peak!!
I could be wrong, and an Argentina meltdown on
Monday combined with Excuse Season opening up
when the Enron/Arthur Andersen fiasco is in full swing
might be a catalyst to initiate the Big Drop.
SQUEEZE WATCH
Genesis Microchip (GNSS) reports on Thursday. Look
for .30 for the 4th quarter. GNSS now trades at 210x
trailing 4 quarter earnings. Approximately 40% of the
stock is short. The company makes the chips that
go in flat panel monitors. I looked on E Bay, and
found that I could buy 17” IBM or Dell flat panels for
$250 all day long at the garage sale. Lets see if
GNSS can continue the EMC-style excessive markup
game on their products. I’m sure that the soon to be
unemployed engineers at the hundred other speciality
semiconductor companies can cook up a cheaper
replacement very soon.
EBAY (Rosie O’Donnell) also reports on Thursday.
This stock is not a supermodel. Its an overbloated,
overhyped Hollywood darling who is overweight with a
P/E of 180. All attempts to push this stock down
(lose weight) have failed. Look for 4th quarter
earnings of .13.
THE ELLIOTT WAVE
Some quotes from the January issue of one of the
Elliott Wave newsletters:
These are the guys who are projecting a supercycle
K-Wave decline in the Dow down to the 4000 area by
2003.
“The S & P has stalled just below the 1175 area,
which has 3 different layers of resistance: 62% price
retracement from May 22 to Sept 21, a 62% time
relationship between the same two periods, and the
200-day MA. Right now a divergence in the 3
tracking stocks is in place, marking the potential of
the major move forthcoming.
However, there are warnings of higher prices. Bear
market rallies can also be complex, and this might be
one of them. The NYSE cumulative advance-decline
line has pushed through to new recovery highs. If
this divergence is providing a signal for higher prices,
then we could see the S & P trade up to 1249 and
the Nasdaq up to 2328 before beginning the next leg
down.”
Now that this bear market rally has carried us to new
recovery highs, typical post mania behavior is now in
gear. The psychology surrounding the rebound
mirrors those which occurred after the post crash
rallies after the 1929 U.S. stock market decline and
the 1989 decline in the Nikkei. To quote a 1991
piece from the San Francisco Chronicle: “Things are
going very well in Japan. The entire policy
establishment is congratulating itself for being the
first regulators in history to deflate an asset bubble
without impacting severely on economic activity”
James Glassman, the author of Dow 36,000, was
asked last week by Business Week if he was wrong in
his forecast. Here is his answer:
“No, I don’t think so at all. The proper test of our
theory would be that, if after two years of flat or
declining prices, and individuals stayed in stocks and
run for the exits, then we would have been proven
right. Today, most people remain fully invested. The
test has occurred, and we won!”
This is a classic example of a mania still intact. They
simply cannot accept the role of human psychology,
which must be understood to grasp that the harder
investors cling to their stocks, the more outlandish
the prospect of Dow 36,000 becomes.
The disconnect between stock prices and the reality
of fast falling fundamentals is what we have been
expecting for a trend change of a very high degree.
“Americans are too deeply invested to walk away”
according to USA Today. Optimism borne of
desperation is the deadliest form there is.
According to the Business Week 2002 market
forecast, the stock analysts universally agree that
now is the best time to invest in the stock market.
Of 55 analysts, 82% are bullish, with an average
stock allocation of 70%. Of the 55 economists, all
but two are convinced that the worst of the
recession is behind us.
No matter how furious the initial leg down, the
mindset of the analysts, economists, and individual
investors remains bullish. In fact, the the AAII
sentiment index crossed over 60% on December 23,
the second time in history. This first time was
January 6, 2000, eight days before the Dow’s all time
high.
The situation in Argentina must be studied closely,
since it is a window into the future as to how the
unwinding depression will play out throughout the
rest of the world. Of course, Wall Street claims that
the problem is contained, since it was a most
anticipated market event, investors were already
prepared for the fallout. This “contained fear” is
most disturbing. It shows yet another area in which
investors and creditors have taken on a complacency
that is completely out of bounds with historic
precedent.
In one blow up after another, we are seeing how the
dangers of complacency are playing out. It took 3
years after the recession started and a 65% collapse
in the MerVal before the rating agencies downgraded
Argentina’s debt. Japan’s debt was downgraded only
after a 72% decline in the Nikkei and 10 years of
recession. And of course, Enron was downgraded
just days before its bankruptcy, and after a 99%
decline in its share price.
Yet investors are impervious to the incompetence of
the rating agencies. Found in a recent article on
December 25 in the Seattle Times: “Investors
Impatient With Corporate Debt, More Base Decisions
on Credit Ratings”. The story says that despite the
recent blowups, rating agencies enjoy and even
bigger following than ever. Major corporations like
Ford are bleeding negative cash flows. However,
yield-thirsty investors disenchanted with Treasuries
are snapping up new corporate and junk issues from
companies like Ford at a record pace. Again, another
example of extraordinary complacency.
Now the Enron story is really heating up, and the
repercussions have just started. Events in Argentina
next week are also likely to start spilling over to the
rest of the world.
Burning ATMs in Argentina. Fed up 401(k) investors
listening to the Enron fiasco may throw in the towel
on their stocks. Da Boyz have to decide if they want
to fight the crowd and pull off one more ramp job.
Monday is going to be interesting.
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