Looking for Proof That Wednesday Was for Real
By Aaron L. Task
Senior Writer / TheSreet.com
05/13/2002 02:33 PM EDT
Last Wednesday's rally may not have changed the market's overall trend or the outlook of most investors. But short-term traders certainly took notice of the big one-day swing, and their change of heart was on display midday Monday.
Of late, the Dow Jones Industrial Average was up 1.3%, the S&P 500 was higher by 1.3%, and the Nasdaq Composite was up 2%.
A key to the rally, and evidence of the changed mindset, was Applied Materials (AMAT:Nasdaq - news - commentary - research - analysis), lately up 6.4%.
"After getting reamed last week by Cisco's (CSCO:Nasdaq - news - commentary - research - analysis) upbeat talk, even without commensurate supporting fundamentals, the shorts aren't going to walk into a machine gun nest on this one," said one source. "The momentum guys [the source characterized himself as such] are piling on here and will push this one a bit higher."
The bad news, for those long, is that if this continues, the onus will be on Applied Materials to deliver better-than-expected results and a rosy outlook when it reports Tuesday evening. Compare that with the prevailing mood prior to Cisco's results last week, when most participants were braced for something horrid, then rejoiced when it didn't occur.
The good news, for those long, is that if this (and by that I mean the overall market advance) continues, today might turn out to be a "confirmation session" that indicates last Wednesday's rally was significant after all.
The theory of confirmation sessions states, essentially, that a "reversal day," in this case Wednesday, confirms a true market reversal only if it is followed by a session of more than 1% gains on greater-than-average volume within 10 trading days thereafter.
Thus far, major averages were cooperating on the percentage basis although trading volume remains somewhat muted. At 2 p.m. EDT, 708.4 million shares had been exchanged on the New York Stock Exchange vs. average daily volume in 2002 of 1.36 billion and 987 million in over-the-counter trading vs. the average daily of 1.81 billion.
The notion of such confirming rallies stems from the work pioneered in the 1920s by Richard D. Wyckoff, founder of the Wyckoff Stock Market Institute in Phoenix. Current market participants use different criteria, but the underlying theory is the same.
For example, William O'Neil, chairman of Investors Business Daily and president of William O'Neil & Co. in Los Angeles, likes to see a move of at least 1.5% for at least one major stock proxy, in conjunction with higher-than-average volume. Todd Ault of Ault & Glazer, who mentioned the need for a confirmation session here on Friday, wants to see more than 2% gains by the averages, in conjunction with higher volume.
Regardless of the participant, volume seems to be the key ingredient missing from today's session, which otherwise was suggesting that something has changed.
Thinks that Make You Go Hmm
Last week I mused about the suspicions of some market participants that the Federal Reserve, either directly or through intermediaries, contributed to Wednesday's big rally. Thus my interest was piqued when I read the following in today's issue of H.D. Brous & Co.'s CrossCurrents, which is penned by Alan Newman: "About the only reason we are not unreservedly bearish here is that ... it has become increasingly apparent the Fed just might be exercising its power to support the market."
In a follow-up conversation, Newman said he had no proof of such activities and actually refuted speculation that the Fed played a role in Wednesday's advance, which he attributed to "the effect of so many hedge funds that feel constrained to cover at the slightest uptick."
Rather, he was referring to revelations in the minutes of the FOMC's January meeting, in which the Fed discussed "unconventional" steps it could take in a zero or very low interest rate environment.
"I do think there's reason to believe the Fed will be there in a moment of crises, which means to me it's probably going to drag out the bear market for a long time," Newman said. "I don't think you can [mess] with the markets that way because sooner or later it comes back to bite you."
Echoing the old moral hazard argument, the newsletter writer suggested "the notion of a 'Greenspan put' is very likely why investors went of the deep end with stocks in the mania because they felt they'd always be bailed out."
Certainly, mainstream Fed watchers deny there is anything akin to a "Greenspan put." "My feeling is people who think about the Fed as intervening here or there really don't understand what the objectives of the Fed are or how it works," said Mickey Levy, chief economist at Banc of America Securities.
The Fed's discussion in January was about what "policy levers" they could employ if the economy were to "collapse" and interest rates headed toward zero, Levy said. Such a "liquidity trap" scenario "has nothing at all to do with the current scenario."
Still, perception is 90% of reality, and a growing number of market participants believe the Fed has before and will likely again attempt to support (i.e., manipulate) the market at given junctures. Whether that's good, bad or indifferent depends on your perspective. But the Fed's inability to stem a two-plus-year decline for major averages with the overt action of 11 rate cuts is telling, and might undermine traders' faith in the central bank's ability to aid equities for long with covert action -- assuming such activities occur.
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Aaron L. Task writes daily for TheStreet.com. |
