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world stock market, us stock market
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2/24/01 Investment House Daily
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Investment House Daily Subscribers:
TONIGHT:
- Rally finally starts to emerge, but only after recovering from more bad news.
- Tenuous rally: rallying on predictions of a rate cut is risky business.
- Of indexes, bear markets, and bottoms: as the S&P 500 joins the Nasdaq in bear market status, how bad is this one?
- Big economic week ahead with consumer confidence and Son of Humphrey-Hawkins part 2.
- Subscriber Questions
- Team Trades
MOT and QCOM send market down early, but buyers come in late.
It has been a daily occurrence: another well-known name fesses up to a slowing outlook based on the sharp economic decline. Thursday night it was SUNW's CEO telling the world that the economy was 'stolen overnight.' It may seem that way, but as we said over a year ago, when the Fed starts hiking interest rates, it won't stop until the economy runs away, tail tucked and yelping. Thus, the process of 'stealing' the economy started almost two years ago when the Fed started ratcheting up its campaign against growth, prosperity, and free enterprise. When the fall comes, it comes quickly.
Friday it was MOT and QCOM. Motorola said business was not going to be bad in a few areas, but bad across the board. That is not a total surprise. MOT has amazed us over the past several years at its lack of leadership in technology. It was one of the first on the scene and appeared to have everything going for it. Over time, however, it lost direction and vision, and it was passed over, becoming one of the has-beens of the tech realm. Its failed Iridium venture was the showpiece of MOT's poor vision in its vain attempts to recapture its past leadership role. Thus, its announcement should not have been a real surprise: companies with bad management tend to perform worse than other companies. Still, after several companies (e.g., Nortel) had indicated only certain portions of their business was slowing, MOT's confession that all business was bad hurt investor psychology once again. On top of that QCOM stated its rollout of its new standard was two years behind schedule in Europe. More signs of slowing all over the world, and that did not help the markets.
Rallying on hope of a rate cut?
All major indexes were diving once again with the trigger of yet another gloomy prospect for the future. After a long selling spree in February, however, enough pent up demand had built up to send the buyers back into the market looking for bargains or at least a short term rally. Indeed, as we had said on Wednesday and Thursday, the market had been setting up for an oversold rally attempt, and it finally received a trigger it was looking for when Wayne Angell of Bear Stearns reported at 2:30 ET that he saw a 60% chance of a Fed rate cut next week.
That sent all indexes churning higher and closing well off of their lows with the Nasdaq managing to close in positive territory. Was it really the possibility of a rate cut that sent the markets higher? After all, there have been two aggressive rate cuts already, but the market has still been building in a worsening picture for the economy. Would a third rate cut cure those ills? Probably not in the near term, but investors were looking for a reason to start to buy, and Mr. Angell's prediction was sufficient for the day (we really like Mr. Angell; he is a progressive thinker and a former FOMC member).
Rallying on this kind of news is risky business. First, even though we too have been predicting a near-term rate cut if the indexes started hitting new lows, in the end that is just a prediction. It may not happen, and if it does not, the markets are setting themselves up for disappointment. We may get a rally on into Tuesday, but Greenspan speaks on Wednesday. If he does not deliver and gives his usual statement of late, the markets could end up very disappointed.
Second, while we have been taking positions all along in stocks that look solid as we believe the Fed will win out, we have not been jumping in on any stock regardless of technical position simply on the belief that the Fed is going to continue its rate cutting campaign. With the markets still heading south, there is no doubt the Fed will have to act at some point, but timing the Fed is tough business. We are basing our investing both on a more macro view that the market will perform better when the Fed cuts as well as short term trends. Thus, those stocks that are holding up well now should do even better with further rate cuts and signs of an economy that continues to improve. That will happen whether or not the Fed cuts next week. Those diving into the crushed and mangled tech stocks should be doing so only for the short term gain as opposed to a belief that the bottom has been hit.
Another bottom declared even as the S&P 500 enters into a bear market.
Friday there was a lot of talk of the rebound off the lows and how the sentiment indicators could be interpreted as a bottom. We are not really sure where that information was coming from. The put/call ratio was said to have 'spiked' to 0.75 and the VIX to 35, both labeled as 'bullish.' As we know, 0.75 on the put/call ratio just ain't makin' it (indeed it closed lower at 0.71 than it was on Thursday), and while the VIX indicates a short term rally, it did not hit the highs we saw in October and again in December. With fear not spiking to a cathartic level and volume not racing ahead, there was nothing really to proclaim this a bottom, at least not with any conviction as far as we are concerned.
As William O'Neill of IBD recently said at his 2001 Economic Outlook Summit, there are two ways to correct a market: scare them out or wear them out. We have seen a lot of concern and worry along the way, but as of yet the fear level has never reached high enough to send investors racing for the exits. Indeed, in late December the put/call ratio was above 0.90 for several sessions, but as we saw, that was not enough either. With the Nasdaq bear market getting ever so close to a year in length and the S&P 500 joining its ranks last week. As we have indicated over the past month, this market action appears to be the market is in a 'wear them out' correction. We might get a final push down that clears the remaining sellers out, but with the length of the bear thus far and the damage done, it appears to be more a war of attrition.
Thus, we are highly skeptical that Friday was a 'bottom.' It was more likely just another day that is a part of the bottom that is being put in. Recovery will be over time as well. Indeed, the S&P 500 dipped into bear territory last week when you look at its all-time high and its lows for the week. As of Friday's close, it was down 19.77% from the all-time high of 1552.87 hit intraday on 3-24-00. At its low on Friday (1215.44), the index was easily in official bear territory at 21.7% off of its all-time high. As of Friday the Nasdaq is 55.9% off of its all-time high. On its low it was 58% off of its high.
In comparison, in the 1973-1974 bear market (the worst since the Great Depression), a bear market that dragged on for 21 months, the S&P 500 fell 48% (there was no Nasdaq at that time). The Nasdaq has suffered worse losses in a shorter period of time (11 months). Moreover, remember that a bear market is 'over' when it is determined that a bottom was in fact hit; in other words, much as with a recession, you don't know you are out of one until it is well over.
The 1973-1974 bear market saw three down legs on the S&P 500. The Dow also suffered three down legs in that protracted bear. Reviewing the history of bear markets, they fall roughly into two categories: protracted and short. 1973-1974 was a very protracted bear. In contrast, recent bears have been shorter and shorter up until now: 1987 was four months; 1998 was just three months. In a very general sense, in the longer bears you tend to see three down legs. In the shorter, just two. Those are subject to interpretation by the viewer, so we are always hesitant to proclaim 'rules' regarding these events; there are so many dynamics at play that vary from one to the next.
In this bear market we have the Fed aggressively cutting rates, and in all but one incident (now two), two rate cuts have stopped the slide. With the Nasdaq and S&P 500 undercutting their 52-week lows since the rate cuts, the end to the slide has not occurred. Indeed, the S&P 500 could be argued as having slipped into a bear market even as the Fed cut rates. Another 50 basis point cut could do the trick, but with the majority of economists and analysts saying another 100 to 150 basis points in cuts are needed, no one can now be sure if that third cut will start the markets discounting future economic expansion. While this scenario bolsters our argument that the Fed should announce its target and drop rates to that level, that is not the reality of the situation. Given the length of the bear thus far and the shaky underpinnings of Friday's 'bottom,' we have to be ready for the possibility of a further down leg.
We are seeing signs of that developing with the several distribution days on the Dow and the S&P 500 that helped usher in last week's plunge on those indexes. The Nasdaq has pulled together some better price/volume action, but it suffered another distribution day on Thursday and there continues to be a dearth of great stocks in great patterns to lead the market higher. To us there are just as many or more signs indicating that the market wants to go lower after any short term rally we see this week. If the Fed cuts rates aggressively again this week, that could do the trick that ends the war of attrition. The market will tell us if that is the case with volume, the A/D line and quality stocks leading higher.
For now we are ready to view any rally as an opportunity for short upside plays to bank some gains, and a preparation to play a further downside action with selling calls and buying puts. If the Nasdaq and S&P 500 start to sell on stronger volume immediately after the rally starts to fizzle, we feel that is the precursor to another leg down as sellers use one last rally to bail out of positions. In talking with brokers, there is talk of using one last rally as a chance to clear out positions before another leg down. If we see that starting to develop, we will seriously consider preserving any profit or avoiding an increasing loss on those stock positions we have been taking during the past month on weakness. We have been aggressively writing calls on them and reducing our basis in them, but we have no desire to ride them through another leg down. We would much prefer to put that money to work on downside plays and on those stocks that are continuing to perform well in this tech and big-cap bear market. Then when the bottom comes, and it will with the rate cuts and tax cuts, we will see it when the indexes confirm a rally and the stocks we are following start to break out of bases all over the place. That will be the time to launch in with longer term buying once again.
THE MARKETS
Overall market stats:
VIX: 30.34; +0.57. The VIX hit 35.22 on its high, and that has been a pretty consistent indicator of a short-term rally. No sooner than it hit that level than the market in fact reversed and started back higher. It received a lot of coverage on the financial stations on Friday, and that usually overplay the indicator. Still, we do anticipate a bit more of a run on this reading.
Put/Call ratio: 0.71; -0.07. There was not as much fear in the market as made out early Friday. Indeed, there was not a lot of short covering. That may have been occurring on Thursday when the indexes reversed off of their lows as they did on Friday. In any event, this indicator did not spike to levels that historically indicate a permanent bottom.
NASDAQ:
The index had to ward off bad news from more household names, but in the end the buyers that had been coming back to the index the previous two sessions finally overcame the sellers and rallied the index 94 points to the close. The oversold rally appeared, but it was not overly powerful and on tenuous news. It does qualify as a reversal day, however, so we will watch next week beginning Wednesday to see if the big players continue to move in with more and more volume on rising days.
Stats: Up 17.55 points (+0.8%) to close at 2262.51.
Volume: 2.237 billion shares (-9.5%), lower but still above average volume. Up volume reversed midday and surpassed down volume 1.192 billion shares to 878 million shares. Not a move up on higher volume, but not bad volume for an oversold bounce on a Friday.
A/D and Hi/Lo: Declining issues still led on the session, but continued to weaken at 1.22 to 1 (1.91 to 1 Thursday). At one point decliners were leading advancers 3.13 to 1. New highs continued to drop to 40 (-5) while new lows came in slightly lower at 185 (-4).
The Chart: http://www.investmenthouse.com/cd/$compq.html
The Nasdaq started lower and moved lower all session until it tapped its down trendline once again on its low (2156.29) and started a recovery. That move up was accelerated with the Fed rate cut call later in the session. Volume on the move was not bad but still lower than Thursday's selling. If you want to say the glass is half full, Thursday was the only selling day in February that occurred on higher volume than on Friday's gain. That always leaves the door open to Friday as a reversal day that can be the start of a real bottom, so we will be watching for some big gains Wednesday through Thursday on some heavy volume as a sign institutions are buying in on the move. We will still need to see good stocks start popping out of strong bases, however, something that has been lacking in all rally attempts over the past year.
If the move does continue and there is no rate cut by Wednesday when Greenspan speaks, we feel the market will have set itself up for disappointment and will turn tail again. If there is not rate cut by then, we feel it has enough pent up demand to hit 2400, maybe 2500. Without some catalyst we feel it will roll over then and set the stage for some pretty aggressive selling as investors use the rally to square positions for the possibility of further downside. Not what we like to hear, but not a lot of power in the move thus far. Again, that can change with the right catalyst, but we will have to see it. A rate cut could take it past those levels, and if we do get a cut we will have to keep an eye on the markets and how the institutions react. We will certainly get a continued pop that will benefit positions taken for the short term upside, and we will have to watch volume and price to determine if keep them or close them.
End Part 1 of 3
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world stock market
us stock market
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