TECHNICALLY the US stock market defied gravity AGAIN this week as it
trades beneath the top of a nine-month trading channel at severely
overbought status and with the indicators of extremes signaling an
intermediate term top close at hand. The problem is those indicators have
been toppy for the past 5 weeks or so and still this market has
demonstrated strong internals and little selling pressure thus far. The
major averages particularly the Nasdaq are at price extremes relative to
the 50d moving average. Sentiment readings
( http://www.vtoreport.com/sentiment/sentiment.htm ) and volatility
indices ( http://www.vtoreport.com/sentiment/vixvxn.htm ) are
clearly indicating levels seen at prior important tops. The commercial
traders have not hedged their long positions with the large SPX contracts
however ( http://www.vtoreport.com/sentiment/cot.htm ).
The chart patterns are suggesting that one of two situations is
developing which may not be clarified until after options expiry is over
next Friday (typically the markets trade within a range determined by
peak open interest in puts and calls for the major indices). If one
subscribes to the contracting triangle pattern on SPX, the wave counts
within that triangle suggest a pending break to the bottom of the major
range or even lower is possible after this current rally leg is complete
next week. The more recent bearish ascending wedge patterns on Nasdaq and
SPX support at least a moderate correction to the base of those wedges.
The weakness in leadership sectors such as SOX is a potential concern.
However certain charts can be interpreted in a more bullish context such
as Nasdaq where a break above current resistance levels and a retest of
new support (about 1522) would be very bullish.
The USD fell 1.8% this week alone to 94.99 and has a target of 80 to
correct its structural overvaluation meaning it has corrected about 60%
of its overvaluation based upon economic projections relative to other
world currency valuations
( http://www.morganstanley.com/GEFdata/digests/20030509-fri.html ).
Gold and crude oil are in bullmarkets--the inverse of the USD direction.
Crude closed at $27.72 per barrel today and gold at 348.60. The bond
market has been strong as well. The direction of these markets is
classically negative for the stock market. One must keep in mind that
the commercial traders are extremely hedged or short on the bond market
which is contrarian bearish for the bond market---same for gold though
there are some who believe the position on gold is related to
commercials hedging owned gold positions and not a proxy for a bullish or
bearish stance.
FUNDAMENTALLY excluding a transportation spending related pop in 4Q,
nonresidental fixed investment (capital spending) has been contracting
for 10 quarters now as capacity utilization is very low and gives
industry no reason to borrow more for expanding when they are more
interested in paring down their excess capacity. It is clear that
corporate America is more concerned about protecting capital than
increasing capital spending. There are early signs the consumer is also
paring down further borrowing particularly as the job market further
contracts. Ultimately this is good. The banking system is awash in record
reserves. Bottom line is the FED can increase available liquidity but
cannot force companies and consumers to keep borrowing more. This is
the first time in US history for such a lack of economic response to
monetary policy for such an extended period. The WallStreet talk of the
'reflation trade' is sellside hype in my opinion as the FED has been
trying to reflate for three years now. However, the FED is providing a
very accommodative landscape for future recovery when the fundamental
issues 'reset'. There are those who would like to believe this is just
another economic downcycle like the rest. I think the evidence points to a
much more serious/longerterm situation based upon the inadequacies of two
of the world's largest economies (Japan and Europe) while the US is trying
to correct its consumption binge financed by the rest of the world. This
confluence of global factors has never before occurred.
The stock market admittedly has some very bullish qualities right now. The
market over the short to intermediate term does NOT have to follow
economic fundamentals. Hidden by the larger indices are plenty of very
bullish stocks---companies actually selling at low PE ratios and with
established growth in spite of the overvalued bluechips. Fairly soon we
should see just how strong this market is by guaging the buying pressure
during a significant retracement to some lower support. The largest
negatives for the indices right now are valuation, lack of insight into
future growth, seasonality, and shortterm their overbought status.
Positive factors include good breadth and improving volume on recent
rallies and the underlying broad market action in mid and small caps which
are more appropriately valued and many of which are growing earnings
despite the negatives.
addendum info:
John Challenger, keeper of much more accurate statistics than the government on jobs and the unemployment rate, says the real unemployment rate is 12.3%, not the paltry 6% the government says it is, since many job seekers lose their benefits and, though still as unemployed as before, drop silently and conveniently off the bean counters' spreadsheets.
INSIDERS are not only NOT buying shares in their companies, they are
selling shares at the highest rate since last November, as this page at
Thomson Financial Network graphically shows. The ratio of sells to buys in
May so far is 12.07. It was 11.7 in November 2002 — the month preceding
the December 2 top in the stock market. The highest — and most bearish —sell/buy ratio occurs in the large-cap sector (23.23). This confirms the technical picture of a weak large-cap market. Mid- and small-cap sectors are more reasonable at 5.06 and 4.75, but they're still on the bearish side.
Avery B Brinkley JR MD
"The point at which a competitor is pursuing the best possible strategy, given the strategies of the other participants" - John F. Nash
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