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Strategies & Market Trends : Technology Stocks & Market Talk With Don Wolanchuk -- Ignore unavailable to you. Want to Upgrade?

To: da_cheif™ who wrote (9875)	7/11/2003 6:51:43 PM
From: Hawk	Read Replies (2) \| Respond to of 208176

Are We Listening To The Message Of The Market? Email from loyal viewer of our site. Great reading as usual! Your fundamental analysis is always right on the money I feel-- but in the marketplace, nothing is "real" all the time. Thus it is important to not only follow the fundamentals but also the technicals as well. This bear market rally is much different than the other rallies from a technical perspective...much broader in scope, more volume, more stocks breaking out and leading, more stocks above their 50 and 200-day averages etc etc. Your commentary does not really address this. Thus, I feel this market ought to be bought because this rally I feel has further to go. At least being short is not the proper strategy now in my opinion. A 50% correction of the entire move would not be out ordinary either, especially in the US market. And I would not want to miss that move. So as long as the technical condition of the market remains where it is, pullbacks should be bought. Our Response: We agree that this rally is stronger than any of the previous four, but we also believe the market cannot continue evolve into a new bull market with valuations where they are today. It is unprecedented for a sustained bull market to begin with valuations over 30 times trailing earnings. Major market bottoms have, in the past started from valuations that were at least 60% lower than they are now. You obviously look a lot more closely at the market action than valuations, and I appreciate you warning us to be careful. It turns out that we are also big believers in technical analysis, and because of this, have cut back to some degree on the unlimited risk positions. We have added longer term put positions that have limited liability. Having said that, we believe that the technical situation has deteriorated significantly, and that the rally is in the process of topping. Since early June the S&P 500 has entered a new trading range between 1015 to 962, after breaking above the old trading range of 964 to 768 established between July 2002 and May 2003. We consider it significant that the bottom of the current trading range (962) was virtually the same as the top of the old trading range (964). It is also significant that the Tuesday rally top of 1008 fell short of the 1015 peak, and proceeded to turn down sharply. If it breaks below the 962-964 area that defines the bottom of the new trading range and the top of the old one, we would assume that the bear rally is over and that a new strong down leg has begun. The sentiment measures also bear out our bearish position with extreme optimism by the bulls and complacency in the volatility measurements. Furthermore equity mutual fund cash is only 4.6% of assets, compared to a range of 4%-to-13% since 1966. Over that period no bull market has started with cash under 9.5%. Simply put, there are too few bears left to convert to new bulls. Another problem we have with this market is how close the cycle of deflation chart that we created in the late 1990's is playing out (it is attached). Notice the Bank of England’s surprise reduction of interest rates today and the Australian dollar declining. The typical recession, which ends when the Fed eases, just does not fit the current post-bubble environment. This time, as the cycle moved up at the beginning, the bubble environment caused excess debt and excess capacity and, in turn, reduced pricing power. This recession was caused by excess supply and not the typical demand > supply where the Fed raised rates to control inflation and lowered them when the economy went into recession. In the past the lowered rates encouraged individuals to spend on autos and housing (and corporations invested in plant and equipment). This time consumers never stopped going into debt to buy autos and housing, and therefore the lowering of interest rates has failed to turn the economy around. At the same time vast amounts of excess capacity are discouraging corporations from investing in new plant, and hiring new workers. As you can see the other areas of the chart are also falling into place with competitive devaluations already starting to occur. We are convinced this chart will continue to play out with highly negative consequences for the market. The other problem we have with the market is the fact that the public and foreigners have not yet even started liquidating. In fact, even after the wildest financial mania on record-- the public has added $180 billion to their equity mutual fund positions since the bear market started. We are convinced today that the “mini-bubble” we are in now will end in the same ugly fashion as the financial mania of the late 1990’s. If you want to view just how bearish we were in December of 1999, please refer to the last major report at that time entitled “Feet Don’t Fail Me Now”. We were selling the research at that time for $10,000-$30,000 per customer. It is posted on our home page on the lower right side as you scroll down. Cycle of Deflation comstockfunds.com.