Tom, here is what he says today:
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TECHNICAL REGISTER: Friday, November 06, 1998
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THE TECHNICAL REGISTER
By Mr. Chartist
November 6, 1998
IRRATIONAL EXUBERANCE!
Virtually all U.S. sectors and major indices continued their steamroller drive
to regain all points lost since the first week of August. The markets are
clearly in high gear as they've recovered all ground, over the past five weeks,
which it took them to achieve in the first 13 weeks of this year. Wall Street is
betting that the FOMC will lower interest rates based upon Mr. Greenspan's
commentary that suggests nothing of the sort. The suspiciously leaked October
jobs report, posted on the Internet in much the same way ABC News accidentally
posted the November 3rd election results the night before the first vote was
cast, supported the premise that the U.S. economy was slowing down. With five
European countries having now cut their interest rates, Wall Street concluded
the U.S. would follow suit.
The logic goes like this: On October 15th, Greenspan added another quarter-point
rate cut, worried about a "fear-induced psychological response" to the events in
Russia. At the time, he said the sudden flight to safety had crimped bank
lending and that only time would tell how much it could slow the U.S. economy.
Since then, data has shown that the U.S. economy continues to grow, at the
annual rate of 3.3%, from July through September. And the financial markets
aren't as likely to need the kickstart of an interest rate cut, as they were in
early October. Thursday's surprising rally (see technical analysis below) came
from a "goldilocks" interpretation of the Greenspan speech, something that
followed a moderate confusion over the October jobs report (see technical
analysis below).
Part of the reason for the quarter-point cut, on October 15th, stemmed from Wall
Street's disappointment that the first quarter-point cut wasn't adequate. We
covered this in a late September issue of The Technical Register and warned that
the markets would be disappointed (they were!). The second part of the reason,
which has not been as extensively reported, lay with the bailout of Long-Term
Capital Management (LTCM), which the Wall Street Journal and others had dubbed
the "Friends of Alan (Greenspan)" hedge fund. LTCM had heavily invested in the
Russian currency and Russian government bonds, for which there were no bids.
Deftly, the LTCM story has been wound down in the major media. We got the second
half of the rate cut and the financial markets have steamed ahead.
The errant hope of expecting yet another interest rate cut from the gentleman,
who coined the phrase "irrational exuberance," is one which may bring a stunning
volatility to these markets within the next 2 weeks, possibly sooner.
We continue to maintain our objectivity, political and financial and otherwise,
about this rally. We were the first to predict that the Republicans might have
blown their mid-term congressional elections, immediately following the October
budget agreement. While we strongly rely on specific technical analysis to reach
investment decisions, we are always looking for anomalies that fail to make
sense. Over the past week, U.S. banks and mortgage companies have issued loud
and frequent warnings to their lending associates warning them to lock in the
current rates because higher rates are soon expected. If this is the case, then
why should Wall Street continue to depend on an interest-rate cut to maintain
this breakneck momentum of a rally?
TECHNICAL ANALYSIS
At 11:15 a.m., the DJIA tested its low of the day at 8715.17. Just
before that, reports surfaced that the October jobs data was lower than
anticipated, a report that was not due for release until 8:30 a.m. Friday
morning. One hour later, the DJIA again tested negative territory after a brief
rally. On cue Mr. Greenspan's televised commentary was beamed into a Boca Raton
investment conference and the rally exploded to the upside.
In its current mode, the DJIA has an On Balance Volume (OBV) indicator
blasting at a 70-degree angle. The %K line in the Slow Stochastics set is now at
99.31. The RSI declined to 82.42. After dipping, the Momentum indicator turned
up today. The 10-day, 18-day, 27-day and 48-day exponential moving averages have
all crossed and are uptrending (very bearish in the long-term). Thursday's
market action brought the DJIA within a hair of the upper Bollinger Band and 333
points above its 10-day EMA. This is very bullish news - almost too bullish, too
fast. We continue to expect a correction within our forecast period. The DJIA
will probably touch or trade through DJIA 9000 again, before such a correction.
There are no candlesticks yet indicating a correction in the DJIA.
If you thought the above numbers were screaming overbought, then
consider the NASDAQ figures. The OBV is racing at an 80-degree angle, the Slow
Stochastic lines are reading 99.38 and 97.83, respectively, and the RSI declined
to 89.69 on Thursday. The NASDAQ is now trading at more than 3% above its 10-EMA
line and all EMA lines (except the 48-day EMA) are appropriately crossed and
uptrending. While the DJIA blew through the August 2nd hump, as if there were no
obstacle in its path, the NASDAQ stumbled with less certainty and less fervor
than the DJIA. The NASDAQ has yet to cover the August 2nd weekly resistance
level.
As we warned you, the tech stocks, and particularly the Internet stocks,
were vulnerable at this point in the rally. Refer back to the Thursday report.
INTERESTING STATISTIC
On November 3rd, the U.S. mid-term elections brought out the worst
turnout since 1942. More than 119 million Americans did not, or refused to,
vote. That Minnesota ushered in a protest vote large enough to bring the first
pro-wrestler into a governor's mansion bespeaks loudly that Americans are fed up
with mainstream politicians and establishment politics. Expect a backlash during
1999 and especially in the Year 2000 elections. |
