Don Hayes Market Comments....
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Today's Comments
As noted in our previous report, Humpty Dumpty is teetering on the wall, but not yet
experiencing its "great" fall. The teetering continues this morning, in almost all the
many factors that we try to look at in our search for clues.
The new "Street" theme is that the economy is strengthening, as measured by all
those government statistics that measure past performance. With a strong Christmas
season, many of the manufacturing statistics are showing some improvement.
Investors are switching from Internet stocks to Auto stocks, trading Amazon.com for
General Motors.slow. This type of sector rotation is not unusual late in a bull-market
cycle, as investors finally get turned off by the spiraling valuations, and try to nibble on
something out there that looks reasonable. More times than not, however, this does
not prove successful. But there is always that one time that it might, so what clues
should we watch for?
To begin with let's keep watching the price action of Intel and IBM's stocks for clues
as to whether this is a simple correction leading to another boom, or the beginning of
the end for these stocks. With our asset allocation model now in a full defensive
stance, as of last Monday, we opt for the latter, but will continue to check for
verification. If Intel's stock price should move back up to close above 133, that would
be a first step. A move above 141 would be a more definitive sign that technology
stocks are still alive for another run. IBM's stock looks better than Intel's here, as it has
made a slightly higher low in the latest week's market decline. A move above 179
would be a good sign that this giant is still ticking.
But those are minor clues. With the pundits now seeing an economic resurgence in
their future, we saw the price of scrap steel make another amazing new low in price on
Wednesday, falling to $79 a ton. If you read these comments very much, you know
how much we depend on the price of scrap steel as one of the most reliable
economic indicators to tell us the real supply and demand characteristics of the
economy. This latest decline is another nail in the bull's coffin in our opinion, as these
pundits once again see revived economic strength in such places as Japan. The
most recent news from Japan that they are encouraging a weaker yen, and dropping
interest rates to .08% has really got the bull's juices flowing again. Hope springs
eternal--for the umpteenth time. Again count us skeptical. We still believe the Nikkei
Dow will hit 10,000 before it hits 19,000, and even with the new jawboning being done
by their politicians, their stock index has not been able to climb above the easy
short-term target of 14,500. Sounds like a sinking ship to me but keep your eyes on
that index for clues. A drop in the Nikkei Dow below 13,368 will be a bad omen for
Japan, China, and the rest of the teetering economies.
We also would watch the Dow Jones Transportation index very close. This index
tends to be very economically sensitive. Its action in recent weeks has been sending
some hope that the economy is going to see further strength, but that hope is still very
faint. The Transports have been tracing out a triangular pattern, with the closing lows
of 3063 and then a more recent one at 3096. If those lows are violated, that would be
sending negative vibes, but a close in this economically-sensitive index above 3248
would be giving hope for more economic progress.
Yesterday's 100-point up-move in the Dow Industrials erased the previous day's
100-point down-move. All the Dow family--Industrials, Transports, and Utilities closed
slightly higher than the close of two days ago. But they were in a class by themselves,
as virtually every other index, from the S & P 500 all the way down to the Russell 2000
failed to erase that sharp sell-off on Wednesday. The advance/decline line on the
NASDAQ was down yesterday, as the Russell 2000 just barely nudged up. The
advance/decline line on the New York Stock Exchange and the NASDAQ are almost
exactly equal to the crash level reached in early October, 1998, virtually erasing all
those dramatic gains since then.
We still believe that a massive bear market began in April 1998 for most of the world's
stocks. If you use the Value-Line Arithmetic average to measure the typical investor's
portfolio, as we do, you see a peak in that index of 998.64 on April 22, 1998, which
finally dropped to 714.17 on that October 8, 1998's plunge. We now see that index
rallied up to 953.04 on January 11, 1999, and on Wednesday made its lowest close
since then at 874.79. As you can see, it is still 12.4% under its record high of last year.
We do not expect a rally even above its January 11, 1999 high, and before this is over
look for a significant decline under the October 714 low. Our asset allocation model
was turning very cautious at that April 1998 peak, and then reversed itself to bullish on
September 8, 1998 to catch the low buying range. And as you know, it has started
turning defensive again. Let the buyer beware.
With the market so over-sold, there is a chance that it could have a reflex rally here,
but we would be very surprised if it reverses any of the intermediate-term resistance
levels. So far as explained in great, boring detail above, the markets and commodity
prices are verifying our message, but once again, stay tuned.
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