Good, but not quite good enough
Commentary: Don't get sucked in, again, just yet
By Tomi Kilgore
CBS.MarketWatch.com
Last Update: 12:03 AM ET Oct. 21, 2002
NEW YORK (CBS.MW) -- Diehard bulls have finally gotten the rally they've been waiting for. But don't get sucked in just yet, because now comes the hard part.
While there are signs that indicate the current surge in the stock market is different than the one that failed miserably just a couple months earlier, the questions that have haunted investors for the past two and half years still remain.
Is there enough left for fresh bulls to still make money or will they be trampled like they were so many times in the past? Or, is there enough different about the current rally, one of the strongest in history, to reward bears for being skeptical, again?
Granted, it may be very difficult to stand idly by while others are fighting what may be a historical battle right under our noses, but be patient. Whatever the outcome, the winner will be able to celebrate for a long time, so there is no reason to rush into anything.
Besides, the first signs of an answer may be only a few points, or a couple of weeks away.
What's the difference?
Jon Najarian at PTI Securities and Futures in Chicago said the current rally "definitely feels different." He noted that in July, the gains were based on "oversold" technical conditions, while the current rally has been supported by positive earnings reports from a number of bellwether companies.
Najarian also pointed to what was happening in the bond market (see recent Bond Report). There was a rise in Treasury yields that coincided with the stock market rally off the July low, but it lasted just a few days, while the equity rally lasted about a month.
The magnitude of the current rise in yields is much greater. Enough, Najarian noted, to cause a "flow of money out of Treasurys, and into stocks."
Bridgewater Associates is one money manager that has made the shift, but only on a relative basis. The firm figures there is a 40 percent chance the U.S. will suffer from a Japanese-style depression and a 60 percent chance there will be a "normal" recovery.
"Given today's pricing of stocks and bonds, the forty percent would have to hit in order for stocks not to outperform bonds over the next ten years," Bridgewater said in a recent research note. "Sixty-forty is pretty good odds in this game, so we've put on some small stock longs and some U.S. Treasury shorts."
Of course, "outperformance" doesn't always translate into profits. Considering that is the name of the game for many investment funds, perhaps that is all that is needed to stabilize the market.
But just like the previous equity rally was based on technicals, there has been little evidence that the economy has picked up steam enough to warrant the current move out of bonds. In fact, there have been economic data (see list of Economic Reports) and comments from analysts, suggest economic activity dropped off dramatically in September.
The question of whether this is a new trend or a temporary lull resulting from the anniversary-effect of the Sept. 11 terrorist attacks won't be answered until Nov. 1, when the Institute of Supply Management and the U.S. Labor Department give investors their first glimpse at October economic activity.
That's a long time for bulls to stay in limbo, given they are still uncertain about banking on a bottom. The longer the bulls have to wait for reinforcement, the more likely gravity (in the form of the long-term downtrend) will win out.
The cushion the bulls need?
Gains above some prominent technical levels may give bulls the cushion they need to hold out for the next couple of weeks.
The first is the 61.8 percent retracement level, which sits at 8,359.04 for the Dow, 1,305.18 for the Nasdaq and 889.99 for the S&P 500.
A 13th-century mathematician had found that a numerical ratio, 0.618, was prevalent in natural systems. Technical analysts have since adopted that "Golden ratio" to mean that any retracement that goes beyond 61.8 percent of the prior move is no longer a retracement -- it's the start of a new trend (see previous column).
Broken Fibos don't mean that a long-term bottom has been made. But it does suggest that the old trend may be losing some control -- it's no longer dominant enough to go undefeated.
It may be no coincidence that all three major indexes topped out just shy of their Fibos on Friday, with the Dow pausing at 8,331.56, the Nasdaq at 1,288.08 and the S&P 500 at 886.68.
What may be important to note is that, at last Friday's closing levels (8,322.40, 1,287.86 and 884.39, respectively), all three indexes are within an intraday spike of the mark. It would not be surprising to see the three indexes hold hands and surpass their Fibos (or fail) at the same time -- a market move becomes more believable when everyone is on board.
The next level to watch is the indexes' previous highs of 9,077.01, 1,426.76 and 965.00, respectively, which just happened to all be reached on Aug. 22.
A move above these levels is another subtle hint that the bears are losing their grip. It also fulfills one necessary condition of an uptrend -- higher highs.
That would not be sufficient to call a bottom either, however, because uptrends also require higher lows. And the lows the indexes hit on Oct. 10 (7,197.49 for the Dow, 1,108.49 for the Nasdaq and 768.63 for the S&P 500) were all below their previous "bottoms" hit on July 24.
Fool me twice....
Meanwhile, Donald Straszheim, president of Straszheim Global Advisors, noted that there have been four prior "false bottoms" - when an index rallies 10 percent or more off a low, only to fail and make a subsequent lower low -- in the Dow industrials ($INDU: news, chart, profile) and eight in the Nasdaq Composite ($COMPQ: news, chart, profile).
Therefore, Straszheim is skeptical that the current rally is any different that the prior ones. He suggested investors exercise "extreme" caution as the economy appears to have slowed, pricing remains difficult, capital spending continues to be sluggish and earnings have been "shaky" at best.
So while the recent rally has been good, and a little different, it's still not good enough to erase 2 1/2 years of declines.
Hilliard Lyons technical analyst Richard Dickson agrees. He doesn't see any "near-term" signs that the market will retest the July lows, but....
"Longer term, we have not yet moved to the bullish camp as we did not see any indications of a longer term (bear market) bottom during the move to the most recent market low," Dickson said in a note to clients. "Consequently, while the market could enjoy a rally of 20 to 25 percent or more, we do not see this move higher as the first step in a new bull market but as a counter trend move in a continuing bear."
That may be enough for a trader, but not for a buy-and-hold investor.
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Tomi Kilgore is a reporter for CBS.MarketWatch.com. |
