Gary:
Thanks for your response re: the Russell 2000!
You might be interested in the commentary of Don Hays. No E waver, but his market outlook is very close to yours. He expects the biggest small cap bull market in US history (this probably applies to OS as well), BUT ONLY AFTER A MASSIVE DROP IN THE MARKET DURING THE SECOND HALF OF 1999.
Don Hays' Market Update -- April 21, 1999
About Don Hays
Click here for an archive of Don Hays
Commentaries.
If you would like to receive more information or talk with a Financial Consultant, click here to
find our office nearest you.
AOL Users: Please hit RELOAD to make sure you are viewing the latest commentary by Don.
Today's Comments
A little excitement huh? The Market "God's" pulled the carpet out from under the "day trader's" on
Monday, and the Wall Street Journal is reporting that margin calls for that hapless group exploded on that
sharp pull-back--after only one sharp day of weakness.
In these times, the market does everything in its power to suck in the "herd," especially the new investors
who have overcome their timidity with the "sure-thing" that they have found in the search for immediate
riches. In the process, though, it is not just the new investors who get sucked in, the news almost always
throws a bone to even the old-heads, giving numbers that seem to point out that all the prior bad news is
about to go away. The skies all of a sudden brighten, the sunshine is brilliant, the wind stops, everything
is absolutely PERFECT.
But wait a minute. What is that tiny cloud over there on the horizon? It looks pretty black. Hmm, was that
a breeze I felt?
Yes, we believe the warm, fuzzy feeling of the last few weeks, when the world was rejoicing in the
"better-than-expected" 1st quarter earnings and economic activity is about to be chased in from the
sunshine by a return to reality. First quarters have a way of doing that. This year's first quarter especially,
when the traditional early-year bonus payments and tax refunds were helped out by lower gas prices and
record refinancings. In addition, the "buy-ahead" of the Y2K deadline caused consumption of technology
to far exceed the expectations of last fall when the mood was very somber.
As we have been writing about since last September, our Asset Allocation model helped us to revise our
expectations to expect a Dow 10,000 target by April of this year. We projected that the pattern for the first
8 months of 1999 would mimic the first 8 months of 1998. Thank you Asset Allocation model, you've
done it again.
In 1998, the confirmed top for that market came on April 22, 1998, and this year it came on April 12,
1999. Last year, after that 4/22/98 peak the market experienced extreme weakness for a few days. But the
prior momentum had been so hot that instead of the weakness feeding on itself, the "Market God's"
decided that if they rallied it one more time they could sucker in a few more "day-trader's." We believe that
explains yesterday's action as well. The stock market has a definite personality that does whatever
possible to make the greatest majority of investors wrong.
If we are right, the market action in the next two weeks is extremely vulnerable. As we look at the chart of
Intel, IBM, and Merrill Lynch, we see very definite possibilities. To begin with, Intel made its peak
during the first few weeks of January 1999, but then started a very significant weakness, with a very
sharp sell-off the last of February to the 55 area. But then the market's strength helped to buoy spirits
some, moving the stock back up to 67. Uh oh! Now it is treading water again at 55, a significant point.
Bulls could say that the weakness of Monday failed to push it to a new low, which was a strong sign of
support. But if we are correct, the next few days will see that 55 point violated which will be a significant
failure.
IBM's chart is even more instructive. It's stock also peaked out the first couple weeks of January 1999,
and now has supported four times in the 163-165 zone. If that point is penetrated, the next support level
would be 135. It would be our guess that if the penetration does occur, it will be in the midst of a sharp
decline in the entire market similar to Monday's fiasco. But we would suspect that the next one will not
just be a 1-day decline.
And now that brings us to Merrill Lynch. The stock's price action has been phenomenal since last
October, moving from 35 to above 100 in just that 6-month period. But despite that tremendous advance,
if you look at the chart for the last two years you see that despite that huge advance, it has not successfully
made back the losses of July-August, 1998 when the stock dropped from 110 to 35. The market action of
the last few days in Mother Merrill's stock, brought back memories of that prior climactic decline in 1998.
In the most recent four days the stock dropped from 102 to 84. The key point is that historians will look
back, in our opinion, and find that the failure of MER to break above the 1998 peak was very symbolic.
So watch Merrill's Lynch's stock closely. It has support at 80, but if we are right that support will not be
enough to overcome the selling pressure of the next few weeks.
Guess what this type of action would do to the impending Goldman Sachs IPO. Could a second
cancellation of this impending offering be in the cards? Wouldn't that be something for the market writers
to spoof?
What an amazing thing the market's are. They are the best barometer in the world to measure everything
known to mankind. But there are so many different parameters that inter-relate that you have to put all of
them together, and fight the temptation of making decisions based on just one shooting star. And then,
quite often the real final answer to the puzzle camouflages itself so well that fewer and fewer seekers see
the final path to victory. The camouflage continues to cause stronger and stronger self doubts, as the
headlines increasingly chronicle the progress of the shooting stars. This year's puzzle is one of histories
best, as the October 1998-April 1999 advance convinced the herd that all the problems of the world have
been solved. Just as it was about to pull the rug out from under the herd, it put one last piece of bait out
there. It pushed the Hang Seng and Nikkei Dow averages up strongly. It threw in the added crumbs of the
most dramatic bounce out of nowhere for the Cyclical stocks in modern day history. And with great
fanfare, the Dow Jones Industrial Average moved above 10,000. Unless we are totally wrong, the next
four weeks will jerk that rug out, and the final solution will be revealed all of a sudden to those dejected
and defeated puzzle-workers.
Of course, the market is so tremendous, that even for those who are able to stay the course on the right
track to the answer, are never absolutely sure that they will be victorious. In fact, even for those eventual
victors, the confidence level grows the weakest as the herd's confidence grows the strongest. Only the
very toughest survive.
Once again, if we are right, the next few weeks will be some of the most significant in US market history,
and will set the stage for the next great market and economic theme for the next two decades. But as stated
above, even with our confidence, it will be very important to watch all the clues that are given.
Perish the thought oh demons, but if we are wrong the next few weeks should tell us that as well. With
their extreme relative under-valuation, could the small cap stocks withstand a large-cap market decline? We
doubt it, but with our expectation that the small cap growth stocks are setting the stage for their strongest
bull market in US history to emerge in the next two years, we will be watching the action of the
Value-Line arithmetic average closely. It is a much better gauge of the broad market than the action of the
Russell 2000. Once before in my 30-year experience of trying to solve the market's puzzle have I seen the
broad market resist a decline in big-caps. That was in 1977. But even then, the decline in the large-caps
was not nearly as vulnerable from a valuation standpoint as they are now, and the decline was not as
extreme as what we could envision for the large-cap stock indices for the remaining months of this year.
Needless to say, it is important to stay very vigilant.
In the next two weeks, our business related travel is very hectic. On Friday, we will be
out of the country, and more than likely unable to send these comments, but will if
major market action ensues. We really expect a few more days of respite, but if not we
will once again be loading up your mailbox.
back to top
Copyright © 1999 Wheat First Union. All rights reserved.
Disclosure
SECURITIES: NOT FDIC-INSURED/NOT BANK-GUARANTEED/MAY LOSE VALUE
Wheat First Union is a division of First Union Capital Markets Corp. Member New York Stock Exchange and
SIPC, and a separate, non-bank affiliate of First Union Corporation. |
