To All:
Thought I'd add some musings re White Knuckles
A look at a bunch of index charts reveals a rather precarious situation which suggests that anyone planning to hold had better prepare themselves for the possibility of some more serious declines.
A common thread in all of these charts, and something which John Murphy has highlighted in the case of the DOW in particular, is that their slope ( averages or trend lines) increased significantly since 1994, and in some cases ie the Nasdaq, since the beginning of the decade. A mere decline to the long term uptrend which began in 1982 on the DOW would bring us down to somewhere around 6000, approximately 25% from here. On the NAS it would be 1100-1200, also another 25% or so, and almost 50% from the highs. The NAS 100 has been going up at an incredible rate, take a look and you'll get the idea. The OEX (S&P100) is at 507, it's long term trend line around 300-325. I don't have enough data on the S&P 400, the Russell etc to make meaningful statements about 25 yr trends, but I suspect we'd see similar things. The point here is that we could experience these types of losses without violating the notion that we're still in long term "BULL with Sound Fundamentals"
What is the likelihood that this will happen? I haven't got the slightest idea how to determine these odds but a closer look at some of these same charts on a shorter term basis might give us some clues.
Everyone knows that the DOW and S&P500 broke out to the downside on Thursday. Today failed to provide any relief. The DOW has clearly violated support around 8200, the top of the trading range during round 1 of the Asian flu. The next downside target now becomes 7300-7500. The S&P is in no mans land right now but has support 4-5% lower, not too bad. The DOW transports highlight one of the "technical" problems with many of the indices, which is the fact that prices went up so quickly that it's very hard to find any "support" at all. Take your pick, this little peak or that valley. As I'm sure you're all aware the smaller stocks and their indices are in virtual freefall. The S&P 400 (Qualcomm anyone?) isn't doing much better. Today the big guys started to crack, DELL, CSCO, INTC, WCOM EMC, nothing serious yet, but a crack has definitely appeared. So it's a pretty good bet that unless something changes in the next couple of days, another 5- 10% at best on the MAJOR indices is in the cards..
What happens then? Where does this stop? DO people really have the stomach to withstand these declines, watching their retirement money evaporate? Do they sell into the next rally, so that once again investing on the dip would be a mistake? I suppose one could argue that in many cases, some in which we're all too familiar, these declines have already taken place, how much more can come out of QCOM, GSTRF, LOR, ad nauseum. Well, what if there really is some sort of worldwide de-leveraging going on, and as a result the PE's of all stocks will be ratcheted down to what have historically been the norm? And what if it's true that it's really only the big stocks that are left to go down? The problem with that thesis IMO is that while it may be true, a big fall in the real leaders will cut much more mkt cap out of peoples' accounts than has already taken place, which will most likely cause more selling. This is why I think we are precariously perched. Are YOU a buyer Monday Morning?
What about falling interest rates? Won't that help. Maybe it will, but it might not, just ask Japanese investors. It's surely a good thing for bond investors so why not buy bonds and forget about the stock market for now? Bonds have just broken out. And can the Fed print and then pump the money into the system fast enough to stem the decline? Or is all they have to do is announce on Monday Morning that they're cutting rates 50 basis pts, and everyone will rush in, just like when IBM announced their buyback on Oct 27. That might work, and maybe it'll happen, but I think it's a little early in the game for Greenspan to come to the rescue. Let's not forget that he actually started this "correction", and probably thinks it's about time, which isn't to say he's hoping for a meltdown.
Then there's the CRB which closed today at 195, down 20% in one year, the lowest level in 10 yrs. A close below about 175 would be a violation of levels not seen in 25 yrs, bringing us back towards pre oil embargo levels. Now maybe Mqurice among others is right that this is good news because things are cheap, but I think the rate of the recent decline and it's correlation in time to the Asian meltdown tells us that this is not just the result of technology induced productivity enhancement. I wish I knew what percentage of this decline is caused by dollar appreciation. Anyone have a clue?
The dollar has also been coming under pressure. It's been suggested in the media that this is because foreigners are worried about our mkts so they're fleeing to the Swiss Franc, the DMark, even DOG forbid the lowly Yen. Maybe it's also the Hong Kong Monetary Authority propping up the Hang Seng, the Japanese taking profits on their bonds and investing in Japan which is what some would like them to do, money leaving the US, money leaving the US stock mrkt. The US dollar index had its biggest fall in a long time today. This flight to safety trade only works as long as people have money to spend.
For the record I'll state that I'm short the S&P 500 SPYDER's and am holding no stock. I've tried to buy into the decline a couple of times such as Q at 54 last week but dropped out again as soon as the price went to 53 within 15 minutes of my buy. And don't think that I'm trying to talk my position because that would be absurd. I wanted to be a buyer today but for the reasons outlined above I think things look pretty messy and really believe we're at a crucial point here. If there is a Greenspan move or some other significant change I'll cover and join the party. I wish I could say that I made millions on the way up and didn't care if my portfolio lost 25-50% of its' value because I was sure it would come back in the LONGTERM. I've been skeptical of the market for a while and this has not been a skeptical mkt, so I've felt compelled to trade as opposed to invest. Perhaps the time to invest is soon coming.
So now I've set myself up for a big fall on Monday morning.
With the best intentions,
dave
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