Humbly report, All, MARKET COMMENT
From: cbs.marketwatch.com
To review, it was mentioned in this space July 30 that "the number of
stocks building new bases is scant. A base, or sideways consolidation
area, is a necessary prelude to a major advance.
"This latter point, along with the biggest divergence between the
blue-chips and NYSE cumulative advance-decline line since the Aug.
10, 1989-to-July 17, 1990 period, is enough to know that the market
is simply not ready for a sustainable intermediate-term advance at
present. More of a corrective process is necessary before the seeds
can be sown for the next legitimate ascent." (See July 30 Marder on the
Markets column).
From July 30 to August 27's low, the Dow proceeded to stumble 862.76
points, or 9.6 percent. During this period, the Nasdaq Composite
swooned 12.8 percent.
As for the present, there are more distractions for investors to think
about than at any time in recent memory: the threat of Russian anarchy
and the safety of its nuclear arsenal as that nation's citizens come to
grips with sharply higher prices due to the ruble's devaluation; Japan's
unwillingness to decisively reform a financial system molded by
centuries of fraternal
culture; the great big sucking sound of China's economy slowing down;
Hong Kong's face-off with hedge funds intent on forcing it to de-peg
its currency from the U.S. dollar; the economies of Canada and Mexico
in a firm deceleration mode; the earnings slowdown in Corporate
America; historically-rich equity valuations that ostensibly don't have
much room for
error; Monicagate; a yield curve that is getting flatter and flatter;
another round of Asian currency devaluations; the upward creep in unit
labor costs amid a tight job market; the descent of South American
economies; what's Saddam think he's trying to do?...and the list goes
on.
The stock market is a discounting mechanism. As such, it factors into
current prices everything that is known presently as well as
everything that is expected to occur six to nine months or more down
the road.
This explains why the major averages tend to form bottoms when the
news appears bleakest. Last October's market trough is one recent
example, as is the prior low of April 14, 1997.
Studying the fundamentals (earnings, interest rates, inflation,
economic growth, etc.) at the exclusion of the tape itself would have
kept one on the sidelines just after most market bottoms, causing one
to miss out on the best buying opportunities.
It is absolutely crucial, then, for the intermediate-term participant,
who seeks to exploit market moves of several months, to allow the
market to tell its own story.
In most cases, it is best to wait until the major averages follow
through on their first rally after hitting a low. The follow-through day
should consist of a substantial advance in price, accompanied by
increased volume. The breadth of the day's advance needn't be
particularly good, since major averages often turn up in advance of the
broader market. This occurs as market participants err on the side of
caution by sticking to safe, blue-chip issues before it becomes obvious
that a bona fide advance is underway.
Occasionally, a selloff occurs with such extreme violence that the
odds tilt strongly in favor of that big, nasty day being the actual
bottom. Oct. 28, 1997 is one example. In such a case, the
intermediate-term participant might wish to commit some of his cash
reserves to the market before waiting for the actual follow-through
day.
A second critical thing to study as the averages attempt to bottom is
the action of the leading stocks. What industry groups are leading?
Are they defensive groups like the foods, beverages, tobaccos, and
drugs? Or are they younger, more dynamic growth issues in the
computer software group?
The presence of more speculative growth stocks assuming the
market's leadership at the outset of a fresh advance is exceedingly
healthy. Technically, a key thing to recognize is the formation of
bases, or sideways consolidation areas lasting at least several weeks.
Often, following a market low, there will be a period of a few months
in which one growth stock after another breaks out of bases en route
to big gains.
This occurred in early 1991, early 1995, early 1996, and the spring of
1997. Each of these intermediate moves in the major averages was
significant.
The April 1997 bottom
As one example of a bottom, when the Dow hit a fresh closing low on
April 11, 1997, it was not possible to know whether or not this was
indeed a legitimate intermediate-term bottom.
The market rallied for a few days, which it usually does following a
low. These days are ignored under the follow-through day concept,
conceived by William O'Neil, which historically has an approximate 80
percent success rate at calling bottoms.
However, on the seventh day following this bottom (April 22), the Dow
staged a follow-through day.
That was the first hint that the market had already seen its low.
However, at the time, leadership was spotty, and most growth stocks
acted dull.
It was not until a week later, April 29, that a second follow-through
day was put in. This was followed by four days of explosive tape
action, as a plethora of small- and medium-sized growth stocks
crashed out of bases on big volume. The rest was history as the Dow
ran up practically nonstop for three more months.
The current situation
During the last three weeks, and following the Aug. 5 low in major
averages, two things told the astute market watcher that a bottom
was not yet at hand. First, the Dow failed to follow through to the
upside: There was no follow-through day.
Second, and perhaps more important in this case, there were precious
few stocks forming bases, save for a few Internet names like Yahoo!
and a handful of senior technology issues like Dell, Cisco, Compaq, and
EMC.
As of this writing at the close of trading on Aug. 27, 1998, the market
needs to once again prove itself by following through on any initial
rally attempt. This means ignoring the first few days of a bounceback
and focusing on the market's action in the ensuing sessions.
However, for the long-term buy-and-hold investor who may have cash
reserves waiting to put to use, a number of growth stocks are
currently trading at or below their forward growth rates, and
represent buying opportunities. In the cyclical sector, meanwhile, the
market pullback has also created bargains in some bellwether energy
and technology shares.
But for the intermediate-term player, given the market's discounting
mechanism, it is inadvisable to try and get caught up in the dizzying
swirl of fundamental events around the globe.
For the market, in its inimitable manner, will have its own, far more
important story to tell in the weeks and months ahead.
The best way to interpret this is to analyze the action of the major
averages as well as the behavior of the market's leading stocks.
Cheers,
Svejk
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