A trio of
unsavory characters tried to put a damper on spirits during Thursday's
trading. For the better part of the day they succeeded, but then
just in the nick of time the tables began to turn, spirits began to rise,
and the major averages began to rally after one of the miscreants departed
for the day and a hawk in shining dove armor rode into town speaking words
that soothed and uplifted.
The day's trio of villains were of
course IBM, Philip Morris, and the bond market. The hawk in shining
dove armor none other than Fed Governor Edward Kelley. If not for
the presence of IBM and Philip Morris, the Dow would have gained 33
points, and the day might have been much brighter. On the flip side,
if not for a late day speech by Edward Kelley, the day might have been
As the last hour of trading began today,
spirits were once again sinking towards their lows of the day. By
the end of the day's final hour, a remarkable transformation had occurred:
the mood was brighter, losses had narrowed, and in the case of the NASDAQ
and CBOE Internet Index, losses had turned to gains.
The down trodden bond market's close and
the departure of pessimistic bond traders for home perhaps played a small
part in the last hour recovery by stocks as it temporarily removed one of
the day's voices of gloom, freeing the stock market from the tedious task
of watching bonds sink to new lows, but the real credit for the last hour
rally must be given to Fed Governor Edward Kelley.
In times of interest rate uncertainty, a
few little words can move markets, and today was no exception. After
Kelley hinted that the Fed will not make a move based solely on excessive
stock market valuations, spirits revived. Although the words gave
solace to those who had erroneously come to believe that there existed a
magic target price which would prompt Fed action, the speech actually
contained no great new revelations.
What should be remembered, however, is
that while the Fed will not act to put a lid on "irrational
exuberance" in the stock market, it will act to put a lid on the
economic excesses and imbalances that result from that "irrational
exuberance", as has been the case this year.
While Kelley's speech met with a
favorable reception, neither the speech nor today's latest tidbits of
economic data did little to increase or decrease the odds of a November
tightening by the Fed.
Today's economic data was a mixed bag.
Initial jobless claims came in at a stronger than expected 298,000 and the
four-week moving average moved above 300,000 for the first time since this
summer, but the numbers are still suffering the aftereffects of Hurricane
Floyd related distortions, and the numbers thus need to be taken with a
grain of salt.
The Philadelphia Fed survey also proved
to be a mixed bag, but one tilted toward the negative side of the
street. The general conditions index fell, but the prices paid
component hit a four year high, and the prices received component rose,
indicating an increase in pricing power by manufacturers.
The bond market took note of the renewed
signs of rising inflationary pressures contained in the report, giving up
early day gains, with 30-year yields ending the day at 6.35%.
Despite the last hour recovery by the
stock market, the current level of bond yields, Fed policy uncertainty,
and the increasing deterioration of market internals will continue to
throw a wet blanket on any market rallies.
Troubling during recent weeks has been
the contrast between the performance of the broader market during days
when the major averages rallied strongly and its performance during days
when the major averages suffered steep declines. Advancing issues
barely nudged out declining issues during Wednesday's rally, while
decliners easily trounced advancers during Thursday's IBM led decline, a
pattern that has become increasingly common.
Equally troubling are other market
internals: the advance/decline line hit yet another new multi-year low
today, the cumulative four-week new high/new low index sank to its lowest
level since June 1997. The number of stocks that are in their own
personal bear markets has also shown a steep jump in recent weeks: 62.9%
of stocks are now trading below their 200 day moving averages, 71.7% of
stocks are now in intermediate term downtrends.
With nearly two-thirds of stocks in long
term downtrends, the present market can only be described as a stealth
bear market, the market's internal deterioration hidden by a narrow basket
of stocks that have kept the major averages within striking distance of
their summer highs until recently.
At this point, among the major averages,
only the NASDAQ remains above its 200 day moving average as a handful of
stocks continue to hold it aloft, a condition which we do not expect to
continue. Divergences have a way of working themselves out, and in the
present unfavorable interest rate environment, it is likely to be the
narrow strata of high P/E (or, in may cases, no P/E) stocks that have held
the NASDAQ near record levels that bear the brunt of any further market
A stealth bear market, the weakness of
the dollar, and an unfavorable interest rate environment continue to be major
reasons to avoid the U.S. stock market until uncertainty has run its
course. With the risk/reward ratio decidedly more favorable in
several global economies where the economic cycle is still in its infancy,
the profit potential is greater elsewhere. At this point, we
continue to favor markets in South Korea, Indonesia, Malaysia, Singapore,
and select Latin American markets. We would avoid the UK, Germany,
Italy, Spain, and Hong Kong. Japan remains a hold as long as the
Nikkei is unable to move above resistance at 18400-18500.
rubber band far enough and eventually one of two things will happen: it
will break, or it will snap back with a vengeance.
Today, the rubber band snapped back with
Better than expected earnings and an
upbeat forecast from Microsoft lit a fire under the tech sector today,
pushing the NASDAQ to its third largest point gain ever, with the index
finishing up 99.95 on the day. Box maker IBM surged, leading the Dow
Industrials to a gain of 187.43 on the day.
Today's Microsoft led rally pushed all
sectors of the tech world higher, with the AMEX Computer Technology Index
rising 4.71%, the PHLX Semiconductor Index tacking on a gain of 2.48%, the
PHLX Computer Box Maker Index soaring 5.33%, and the Interactive Week
Internet Index jumping 4.06%.
Sentiment also enjoyed a noticeable
rebound today, with investors convinced that the time to buy on the dip
had arrived, that stellar tech sector earnings were poised to lead the
market higher, that a bottom was in place. Interest rate jitters
were pushed to the background as optimism began to bubble forth.
The question remains, was today's
optimism warranted, or were today's sharp rallies in the major averages
just a severe case of bear market fakeout drawing in the unsuspecting
before the next leg down.
If the inter- and intra-market
divergences apparent today, and events after the bell, are any guide, the
unsuspecting bought into what can only be described kindly as a sucker's
Stellar performances by the major
averages masked a resurgence in intramarket divergences. Today's
rally was a narrow based rally, led by financial issues, paper and energy issues, the
crowd pleasing large cap techs, and the Internet stocks. Outside of
the large caps, the rally became a little less spectacular, with the
Russell 2000 gaining 0.73% on the day and the S&P SmallCap 600 inching
up by 0.4%.
For Dow Theorists, the day was anything
but "stellar" as the Dow Utilities posted a fractional loss and
the Dow Transports slid 51.77 to a new 1999 low. Market internals
were also nothing to write home about, with advancers beating decliners by
a narrow margin of 16.2 to 13.7 on the NYSE, and new lows swamping new
highs 329 to 20. All in all, beyond the major averages, today's
market contained nothing to suggest a new leg up was in store.
While the intramarket divergences were a
minor sore spot, the intermarket divergences stood out like a throbbing
sore thumb. The bond market failed to take part in today's rally, despite
a lower than expected reading from the latest trade gap figures. The
trade gap in August narrowed to $24.1 billion from July's record $24.8
billion. The consensus estimate had been for the trade deficit to
hit $25 billion.
The bond market failed to rally on the
better than expected numbers because beyond the headline figure, the trade
numbers told a different story, a story that only reinforced the view that
further Fed action will be required.
Imports and Exports both hit new records
in August, with exports surging 3.7% as the global economic recovery
continued to gain momentum, and imports rising 2% as domestic consumer led
demand remained on an upward trajectory. While surging exports are
good news for American manufacturers, they are bad news for anyone who is
looking for signs of a slowing economy, or for an easing of labor market
tightness. Third quarter GDP will likely come in stronger than
expected, with growth rising to 4.5%-5% in the quarter. The import
figures once again reinforce the fact that this year's rise in interest
rates has been ineffective in slowing down consumer spending, and that
more severe action will be required to curb demand growth.
While stock market internals, the bond
market, and today's reading on the trade deficit took some of the glow off
the gains enjoyed by the major averages, the release of earnings by IBM
after the bell has thrown a bucket of cold water on the market's new found
IBM met expectations, but warned of a
Y2K related fourth quarter slowdown. The news turned what was
perceived as a good day sour, with IBM giving back all of today's gains in
after hours trading, and the futures market throttling into reverse, with
the S&P 500 futures losing 7.4 and the NASDAQ 100 futures tumbling
28. A mere meeting of the whisper number by AOL, and a lower than
expected growth forecast from Amgen only added to the after hours down
The stock market enjoyed a bounce today,
and a temporary respite from the jitters, but with interest rate
uncertainty set to continue, and Y2K jitters now surging to the forefront,
a retest of the 10,000 level on the Dow is in order.
Finally, on the subject of this week's
two high profile IPO's, perhaps a little story is in order. In the
mid '70's someone made a lot of money on pet rocks, but times and fads
change, and there are no longer profits to be made by investing in pet
rocks...and therein lies the danger of investing in the latest hot flavor
of the day....short term gains, long term heartache.
On a day
with one of the heaviest earnings release calendars this quarter, the word
spread like wildfire, "Expectations were met, but the results fell
short of the whisper number!". With those words, an ecstatic
sigh of relief went through the crowd as early morning fears were quickly
cast aside and thoughts turned from escaping the carnage to entering the
The eagerly anticipated release that
caused the early morning stir? The Consumer Price Index.
This morning's release of September CPI
data met the consensus estimate of a 0.4% rise in the headline figure and
a 0.3% rise in Core CPI, but came in far better than the doomsday scenario
"whisper number" which had emerged in the wake of last Friday's
PPI report. While today's CPI was distorted to the upside by
one-time increases in tobacco and autos, the numbers did show a slight
upward bias in trend, not enough by themselves to prompt the Fed to act,
but still something that bears watching.
Today's numbers, as has become the
custom in the age of 10 second sound bytes, were viewed by many in a
vacuum, with many onlookers believing that today's CPI data deceased the
chances of a Fed rate hike at the November FOMC meeting....we wish that
it were that easy.
While today's numbers once again
indicated that inflation remains tame on the consumer level, the numbers
are but one piece of the larger puzzle. Inflationary pressures have
begun to emerge on the producer front, largely due to this year's trend
reversal in commodity prices, and a distinct upward bias has become
apparent on the wage front as employers compete for an ever shrinking pool
of available qualified workers. Many companies have also started to
regain pricing power. Add to this mix strong consumer demand and a
recovering global economy, and the threat of inflation emerging still
remains very much alive.
Today's CPI figures merely showed us
that inflation has yet to work itself all the way through the pipeline to
the consumer level. The numbers indicate that the Fed still remains
ahead of the curve, that at this stage it hasn't been forced into a
position of being reactive rather than pre-emptive. The numbers do
not indicate, however, that the Fed's job is done.
We would continue to look to forward
looking economic data (rather than the backward looking CPI), in
particular readings on consumer demand and consumer confidence, when
trying to assess the future interest rate scenario. With global
growth on the rebound, foreign economic figures must also be factored into
Despite today's relatively benign
reading on inflation at the consumer level, the larger picture still
points to further rate hikes on the horizon, a fact which was not lost on
the bond market today as yields on 30-year treasury bonds shot up to
Relief, deeply oversold conditions, and
a bit of vacuum economics reading, allowed the stock market to put its
rate hike jitters on the backburner for the larger part of the day until
intensified selling in the bond market forced uncertainty to the forefront
Technically, we were looking for two
things today: the Dow to take back the ground lost on Friday and close
above Friday's open, and the bond market to enjoy a relief rally.
During the first half of the day the Dow
met our challenge, comfortably moving above the 10286 level we were
looking for and coming within 10 points of the next resistance at 10345 as
it shot out of the gate to a 219 point gain. The bond market never
enjoyed its day in the relief rally sun, managing at best a 2 basis point gain
before crumbling during the afternoon on fears of an impending European
Central Bank rate hike. The stock market's relief rally was stopped
dead in its tracks by the sharp selloff in bonds, with the Dow struggling
to keep its nose above the 10200 level at day's end. At the end of
the day, we didn't' get what we were looking for, and the phrase
"technically ugly" echoed off the walls.
Better than expected earnings from
Microsoft after the bell have lifted the Globex NASDAQ 100 futures to a
23.5 point gain at 5 p.m., but today's late day bond crumble and
tomorrow's release of the latest episode of As the Trade Deficit Grows
have stacked the odds against a sustainable rally developing from
Microsoft's better than expected news.
The day ended as it began, with the Dow
and S&P in short, intermediate, and long term downtrends. With
uncertainty set to continue its dominance over the coming weeks, now is
not the time to buck the prevailing trends, Microsoft earnings or
the eve of the twelfth anniversary of the death of portfolio insurance as
a viable concept, the world shivers and market participants from New York
to London, from Kuala Lumpur to Sao Paulo, tread carefully on fragile
eggshells, all the time wondering if history will repeat itself, if the
death of an era is at hand, if the days of buy on the dip are gone.
Summer has given way to Fall,
pre-earnings season bullishness has ceded the stage to rate jitter
paranoia, and thoughts of new record highs have been replaced by pensive
talk of bottoms being put in place. The world of irrational
complacency has been turned upside down, but talk of an end to the carnage
remains premature because something is missing: the necessary ingredient
needed to stem the selloff has yet to arrive.
That necessary ingredient is panic in
all the right places, specifically panic among retail investors.
Granted, recent action in the bond market suggests that panic has made an
appearance in the bond pit, and Friday's closing CBOE equity put/call ratio
of 0.91 suggests a touch of paranoia has arrived in the equity market, but
these instances of panic have largely been localized among professionals
and it is not the professional who holds the winning card needed to end
the reign of uncertainty.
The individual investor, specifically
the buy and hold long term investor, holds the winning card needed to put
a bottom in place. The average "mom & pop" investor
remains relatively unscathed by the winds of fear that have swept across
the financial landscape, and herein lies the danger for the market.
Historically during market declines it is necessary for panic to spread to
the average investor before a bottom can be put in place, and this time is
no different, but the stakes have been raised. The fear this time
around must be great enough to psychologically give a slap on the wrist to
the hand reaching into the cookie jar of unquenchable consumer spending,
but it must not be so great as to send the highly leveraged patient into
If the past is any guide, the odds are
stacked against this market decline ending in an orderly fashion with
little pain. Typically, when sentiment overswings on the upside,
reaching an extreme level, the path to normal levels of sentiment is not
reached without the pendulum first swinging farther than expected to the
A slowdown in consumer spending, rather
than the latest reading on CPI or PPI, holds the key to ending interest
rate uncertainty and the market's malaise, but with fear still confined to
the outskirts of Main Street the necessary slowdown could be a while in
Today's 96 point rally by the Dow
Industrials and 6.72 point bounce in the S&P 500, and the outcome of
tomorrow's CPI report, thus need to be taken with a grain of salt because
the consumer has yet to call a bottom.
On the subject of the Dow, and
specifically the financials which pulled it higher today, the rally must
be viewed in the context of what it is: a one day countertrend move.
Despite their rally today, the financials remain a major cause for
concern, a major source of divergence that suggests a major top is in
place. The NYSE Financial index peaked in July 1998 and today's
rally left the index still on the south side of a critical long term
support Fibonacci fan line at 469, a support which has held for 5 years
with only two brief interweek forays beneath the line in July 1997 and
October 1998, as today's market
chart shows. A failure by the index to climb back above support would
have bearish implications for the entire market.
Like today's countertrend Dow rally,
tomorrow's CPI numbers will also have to be viewed in the context of the
larger picture, a picture that now shows inflationary pressures emerging
at the producer level and consumer demand undiminished by rising
rates. While a better than expected CPI reading would spark a relief
rally, the CPI is unlikely to have little bearing on the Fed's next
move. As we have said before, if the Fed waits for inflationary
pressures to show up in the CPI report before it acts, it will have
fallen behind the curve.
Any relief rally could be short lived
however, because Wednesday will bring the latest reading on the ever
widening trade deficit, a number that could put serious pressure on an
already weakening dollar.
Button-up, it promises to be a bumpy
ride going forward.
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Last modified: April 02, 2001
Published By Tulips and Bears