Sometimes we need to step back and view things from the top down. A few days spent so far in summery western NY have allowed me to do just that. Many hours spent alone in nature have allowed me time to ponder (what else) future market action. Among other things, of course! Funny how time spent glued to the monitors makes me focus on those five & ten minute charts and speculative accounts while time away makes me think more of the investment side instead. Perhaps a better balance for both is needed.
I have limited technology access where I am and no method in which to capture charts to import here. Also, I'm at arm's length from live market action and it wouldn't be right for me to cover in detail here that which I haven't experienced. In this week of static action that's likely to persist, why don't we widen our spectrum a bit here tonight instead?
I've peeked at the charts very briefly during live market action the past three days and can only imagine Russ Moore & a host of others are tearing hair out over choppy, volatile, range bound action once again. Reviewing the five & ten minute charts have shown excellent day trade plays here and there but scant little else. The past two weeks have been stellar for expiration week trading with potential +50% gains to be had every session if it were. Next Tuesday will be a gem for sure and we'll see what happens in addition to that.
That is certainly a major factor in macro economics, but is it the only one? Are there a few other things we need to be aware of that could fight the Fed and win?
First we need to ask ourselves what caused this market bubble's burst in the first place. In order to do that, we need to ask what built the bubble to begin with. I believe the market sag of late 1998 created an oversold technical bounce in the markets. Alan "The Maestro" (please!) Greenspan panicked over the pending Y2K unknown and flooded the system with money for what seemed to be many valid reasons. The biggest piece to this puzzle was the internet's burgeoning bell-curve of growth that hit an apex in mid-1999 and sailed forth into 2000. All of technology even remotely connected grew far beyond its mean.
When Y2K proved to be a dud, Greenspan realized where the markets were headed, panicked again and began raising interest rates in a feverish fashion. Some say he went too far, especially the final .50-basis point hike last summer. I happen to be one of those who believe this.
First of all, the bubble would have slowly corrected itself. All those dot.coms without a prayer of profit would have died a slower death. Over-built telecoms would have dried up, along with bandwidth suppliers, chip makers, box makers, software suppliers and the entire food chain connected. A modest tightening of money would have created the "soft landing" the Maestro so desired.
But an over-tightening crashed the inflated, artificial business economy instead. If you don't think it was a crash, just flip through some weekly charts of most any symbol and see for yourself. Worse than that, review some 401Ks and IRAs too many of the people we know now hold and decide for yourself.
Those charts and retirement accounts swelled and shriveled for the same reason: an artificially inflated business cycle was reflected by overblown stock prices versus valuation. What may have taken longer to achieve was accomplished by our Fed tromping on its inflation mobile's accelerator even as the vehicle without breaks crested the cliff's edge.
Hence, where we are today.
Secondly, in the minds of most traders today CSCO is still a $50 stock and JDSU is still a $100 stock. Both are merely on deep discount for now before the green light soon flashes and they steak back to historical highs. MO? CAT? Who cares about those? Technology has such a sexy sound; a 21st century allure that makes four-symbol stocks the only ones that matter.
Lest you think that's changed, listen for Q&A sessions such as CNBC's ask the analyst segments. You will hear the same big cap retreads being asked about week after month as all else is shunned.
Part of this is due to the emotional bonding with these stocks and their companies. Recent traders rode them to soaring heights and many still own their tattered shells. Fundamental research turned up nothing but glowing reports from analysts who used every glowing word known to man that implied they were a "buy" forever.
Now that traders are so ingrained with them that they can recite what the CEO's wife does for charity work, how can they abandon all of those emotional ties? Answer is, they can't.
Up And Down
While I for one don't believe we will see "historical" valuations in the major indexes again anytime soon, some sense of reason will prevail. The penchant to place this bear market behind us and resume 1999's "normal" market action is the basic concern many of us still have. We've seen too many nasty plunges already but the markets have not spent any time in a quiet period of basing and shakeout to adjust massive overhead supply.
And overhead supply looms heavy. All that cash on the sidelines we hear about? There are equal trillions of lost dollars stranded in deflated stocks spread across millions of portfolios just waiting for a crack at that. Money will flow into rallying symbols but each subsequent decline could be met with heavy selling as investors storm the exits in fear of missing the chance to get out near "even" one more time.
That is how supply & demand find equilibrium and right now there is tons more expensive equity supply waiting to regain lost value. Perceived value lowers over time, and stranded investors will eventually settle for fewer cents on the dollar in return.
What does this mean? In 1999 there was no overhead supply in techs. Now there is an insurmountable quantity. It must clear the natural laws of balance & order before the markets can stabilize. Expect plenty of large swings to new highs and retest of recent lows in the months & years ahead.
Lump in the summertime lull, dismal outlook for most companies still, a Fed running out of bullets for the bear and indexes grossly extended in near-term overbought leaves me very, very, very doubtful of a rally to new highs straight from here. I'll happily accept being wrong if the major indexes find the guts to do so! Meanwhile, I must prepare my speculation and investments for what seem to be prevailing odds instead.
While I sit here on the front porch of Wendy's parent's house (in the Finger Lakes area of western NY) tapping out these words shared with you I'm surrounded by flora & fauna of all manner. Lilacs, tulips and dandelion are in full bloom. I've watched eastern bluebirds, goldfinches, bluejays cardinals, baltimore orioles, indigo buntings, catbirds, flickers and a dozen other bird species cavorting around as they busily nest. The cycle of life is repeating in rhythmic fashion all around me in timeless, predictable fashion. Is market action driven by human behavior so very different?
I'm guessing not.
Best Trading Wishes,