Y2K, Argentina, China, interest rates, downgrades, just another normal day in the markets!
Come on guys, I leave the office for the Omega World Seminar for five days and when I come back this is what I get, -400 points! I just hope you took my recent cautions to heart about no profit taking on the +1300 point Dow. Looks like it is time to pay the piper. The reasons given are only excuses. When the market is tired it only take one news event to make people start focusing on the reasons to be out of the market instead of in the market.
Speaking of excuses there is no shortage today. Of all things to pop up now, Y2K. For two days now the Y2K warnings have been in all the headlines. Do you think this is a new problem? Of course not. They have been there every week, the media just started focusing on them again now. At our recent seminar series I spoke briefly about a possible market depression from Y2K and my first target for Y2K selling was May/Jun. While I have no clue whether Y2K will actually cause real problems on 1/1/2000, I am concerned that the "perception" of possible Y2K problems will cause investors to take money out of the market. I believe this will happen after next quarters earnings and continue into the year end. What I said at the seminar was that very cautious investors would probably start selling down their holdings after the earnings period just ended. Why hold through the summer doldrums only to get caught in the rush to sell after the next earnings period? The market was at new highs and undoubtedly traders were thinking, "as long as it keeps going up, I will hold". Once the market started rolling over Y2K became only one of the excuses to sell.
Argentina has now erupted as the new scapegoat in Latin America. Concerns about them switching to dollars has now rekindled the entire Latin American economic question. Brazil stocks tumbled -5% after allegations that President Cardoso may have handled the TBR breakup in a way that favored certain political groups.
China has now been blamed for stealing secrets for every major U.S. nuclear weapon and rocket design. The Cox report called it the biggest security breach ever and warned we could be under threat of Chinese missiles within two years. Another cold war anyone?
Interest rates continue to weigh heavily on the financial sector and the consumer confidence index posted its seventh monthly rise. Worries that the recently announced Fed bias toward raising rates would come true sooner rather than later has started taking it's toll on the markets. The First Union profit warning did not help the outlook for financial stocks. Coming on the heels of the multiple bank downgrades on Monday it greased the skids for bank stocks.
The highly anticipated BarnesandNoble.com IPO was met with a lukewarm reception and only gained single digits after the open. This set the stage for an Internet sell off of major proportions. Analysts were tripping all over each other to proclaim the bursting of the Internet bubble. The rush was on to dump the Internets in every category. It should be noted that the recent trend for Internet stocks is for a +75% to +100% rise and then a pullback of -35%. This cycle has repeated itself several times. HOWEVER, the pattern could break at any time and this could be it. Currently Internet stocks have dropped -25% to 35% from their recent highs. According to the pattern we should bounce soon. But with the current strongly negative outlook we would strongly advise not betting on it. Remember, the trend is your friend and until you see a new positive trend we recommend playing the downside until it actually does reverse.
The Dow cyclicals, which have done so well lately, could not hold up against the bearish sentiment and finally gave way to selling in the afternoon. When real selling starts nothing is sacred.
So what happened to the +11,000 bull market?
The Fed put the on brakes and the passengers hit the windshield. Those wearing seatbelts (stops) walked away from the crash only slightly bruised. All kidding aside, I have cautioned you repeatedly over the last two weeks that the market was up over +1300 points with no profit taking and the reason for the rally, earnings, was over. Without any positive earnings news the market is left to focus on things like Brazil, China, Fed rates, and of course the earnings warnings.
Advances are getting killed by decliners 6:3 and down volume is more than twice up volume. New lows (70) far out paced new highs (27). Just looking at the market internals should scare an average person out of the market. However, sometimes that is the best time to be getting ready to enter the market. Just when things are darkest the market tends to reverse. It is a contrarian fact that the herd is normally wrong. The herd today is running from the market and creating new buying opportunities. TrimTabs.com reported that in the last two days over $3 bln dollars was withdrawn from mutual funds. Ouch! Obviously if this trend continued the market would eventually collapse. The benefit of this trend however is stocks are cheaper. Another more powerful trend is the vast army of new point-click-buy investors. Every day the market drops we get closer to the psychological buy targets of every investor. If you missed adding Intel at $50 last November then you are only $2 away from another chance. It was over $70 in February. CMGI too high at $330 in April then you might think it is a buy at $190 today, $140 off its recent high. If you sold Dell at $55 in February you can add it back at $34 today. How much is a stock worth that has a 45% growth rate? How about MSFT at $76, -25% off its recent high of $95?
Do you see my point? Even though the Dow has been on a record run, their are many stocks that are approaching levels where fund managers and individual investors can't pass up the opportunity. Of course no one wants to catch a falling knife and we could still go down from here. Ralph Acompora gave a keynote address at Omega World on Friday. He was calling for a continuation of the current "Mega Market" and numbers in the next few years of 17,000 for the Dow. His global view is nothing short of amazing and I hope he is right. (A side note: He also said he expected the market to drop in Nov/Dec due to Y2K concerns. I have never heard him state this publicly before.) On CNBC today he said the market could still go down another -200 to -500 points. Lets see -500 = Dow 10,000 again.
While I doubt we will actually see Dow 10K again anytime this month we could get close before the oversold indicators start screaming buy again. There is nothing wrong in the world economy. The Fed knew this would happen if they changed the bias. This is a normal market correction process. Our task is to wait for the right moment to re-enter the market and profit from the next upward move. Nothing goes up or down in a straight line. There are many changes in direction along the way. Right now all the indicators are all pointing down but there could be a silver lining starting to show through the clouds. We have dropped -600 points from the recent Dow high. A -5.3% drop. If we dropped -10% then we could hit 10,020. I don't think it will happen this week. My normal bullish bias is leaning to buyers coming off the sidelines any minute now. The greed factor is too strong for most to resist and it could continue to drive the market over all the potholes mentioned above.
You can see by these charts that the Dow is showing definite signs of rolling over and could see 10,000 easy but I doubt it. The Nasdaq however has tested the mid 2300 range several times only to recover sharply.
I am out of the market and I strongly advise you to do the same. No one has a crystal ball and no one can pick a bottom. If you must play, BE EXTREMELY CAREFUL! We are listing several Internet stock puts as new plays tonight. However, as everyone knows, the Internet stocks can turn on a dime and gain $20 before lunch. Please do not play these if there is any glimmer of strength in the market or the Internet sector. Like I said, CMGI would appear to be a screaming buy at $190 but that doesn't mean it can't go to $150 first. The keyword here is "appear". One of these Internet corrections will eventually be the downfall of everything Internet and many investors will be hurt bad. Let me remind you that even with the drops from the last few days that Ebay is still up +1060% for the year, AMZN +646% and INKT +473%. That is a lot of profit for a lot of people and everyone has a threshold of pain. Based on the charts above I would be a Dow buyer on any rebound from 10,300 or below and a Nasdaq buyer on any rebound from the 2300 to 2350 range. Both are setting up for technical bounces at those ranges but there may not be any follow through. A one or two day relief rally is almost a given but then the true market strength will be tested. I would plan on trading the rally but then be ready to exit again quickly if there is no follow through. Selling June calls on the second day of any rally could be a good move. Just be sure you are covered on any further rise.
Good Luck, and please sell too soon.