Yes, But Did He Say, "FORSEEABLE Future"?
Looks like investors have begun to sit up and take notice of the business conditions surrounding the world's major corporations. Greenspan's comments last Friday highlighted by Jim Brown over the weekend - rising mortgage rates, auto sales black hole for 2002, bottomed energy prices, increased consumer debt, rising unemployment - apparently had a chance to sink in. When Greenspan said, "significant risks in the near term", that was all it took to un-nerve the markets, and carried through today.
Le me point out that the Fed has a notoriously bad record of gauging business strength or weakness and has always prefaced their comments with "in the foreseeable future", "going forward", or "in the near term". Straight up question: has this Fed ever been correct about the foreseeable future, in the near term, going forward? Hmmm - let us think. . .no. Neither the Fed nor anyone else has even the slightest ability to predict the economic turnaround that is (oops, was) sure to come in late 2001, the first half of 2002, the second half of 2002, or even late 2003. So when you hear the words, "in the near term", you can be sure the Fed has no idea what's coming and is reacting to the economy the same as a race car driver reacts to the road using his rearview mirror in hopes that he'll find his way to the finish line. The future is never foreseeable for the Fed.
Back to the subject - The Fed's Friday comments carried through further today as investors become increasingly nervous about valuations. The hope is that earnings are going to have to rise fast (beginning tomorrow with Intel [INTC]) or prices will have to fall to solve the valuation puzzle. Those fellow traders among us that were former Skybox subscribes know where I stand on that issue. I've been harping a long time that stocks are overvalued, that current economic conditions would not support values, and that a consensus of bullish analysts are typically wrong. If the charts are any indication, long-term investors in tech stocks may be about to get another lesson on the value of going short, protective puts, and/or stop losses.
Whether we want to believe it or not, we are in a primary bear trend, which is always marked by negative surprises - Enron collapse, Arthur Anderson document shredding, K-Mart's junk debt status with the possibility of bankruptcy, Ford laying off 35K employees, Merrill Lynch laying off 9K employees, Polaroid (PRD) files for bankruptcy, and an epidemic of Fed heads ever so concentrated around the central theme of "substantial near-term risks to the economy". [Editorial translation: the concept of the market anticipating an economic rebound is turning to vapor.] Anyone of these could easily be ignored (as in the past). However, that they all happen together is not coincidence. That is what happens in a primary bear market and more are sure to come. Accordingly keep your ears open for "accounting irregularities" as more companies are called to the mat for one- time, extra, additional, optional, non-recurring charges purposely excluded in "pro-forma" earnings. Honest people call it by its real name - losing money.
Speaking of which, a great parody of an earning report announcement by Alan T. Saracevic, who writes the "Money Talks" column in the San Francisco Chronicle, appeared over the weekend. I'll save you all the detail, but two quotes lines were so hilarious that they bear repeating. It typifies analysts comments as they gloss over economic reality: Reporting the results of a Money Talks Vegas gambling junket as though it were a publicly traded business, "Money Talks is proud to report a pro-forma net profit for the first weekend of 2002, excluding one-time, after- tax charges for incidentals such as lodging, food, binging, and poor gambling strategy". Saracevic added, "We are confident that Wall Street's continued denial of actual expenses and losses will drive our stock to higher levels." At least I thought it was funny!
But to the business of trading the equity markets, they did not perform so well today for those that were bullish. Not too well for those bearish either, as the markets remained range-bound following a gap-down open, although traders that rolled the bearish dice over the weekend got a payoff for their risk. What do the charts say? In a nutshell, for investors, the bear rules. For the traders, the bear has ruled and may continue to do so but could easily be interrupted by fast bullish plays for those engaged in daytrade mode. But even for traders, there is little bullish fruit on the tree until the daily chart oscillators reverse their downtrend, which has just entered oversold on the 5 period stochastic. Take a look.
Dow Industrial chart (INDU):
The Dow closed down another 96 point today to close at 9891 on 1.26 bln NYSE shares traded. Decliners beat advancers 3:2. Weekly and daily chart reflect the bears' success over the past six days. Both stochastic values are pointed down suggesting further weakness. The 200-dma of 10,104 was violated last week and the index has stopped dead at the 50-dma of 9892 which may provide some support especially since the odds of a seventh down day are about the same as tossing coin that comes up heads seven times in a row. It becomes more unlikely with each successive toss. So too with the indexes. Should the 50-dma fail though, 9835 offers lower Bollinger band support with the 50% retracement off May's high of 9768, another point of major support. However, today's close at the low suggest tomorrow's open may continue in the bears' favor.
NASDAQ chart (COMPX):
Similar situation for the NASDAQ - down 31 to 1990 on 1.79 bln shares with decliners outpacing advancers 2:1. Were there more volume, I'd be concerned. Nonetheless, Oscillators are pointed down on longer-term charts while bear flags have formed on 60/30 charts. While anticipation of INTC earnings my help to keep prices from sinking further tomorrow, the final bear flag is waiting to break down. While we wait, the NASDAQ may trade a bit flatter tomorrow as it has not suffered the six negative trading days in a row as the Dow has. 2000 is still pivotal and may become resistance if bears have their way.
S&P 500 chart (SPX):
Surprisingly, the SPX looks more like the COMPX than the Dow. Weekly/daily Stochastic values are in full dive mode. The best stochastic efforts of the 60/30 charts are not enough. The 30 min chart broke its bear flag or perhaps formed an expanding cone depending on how you draw the lines. A bounce is possible following five of six down days and the 50-dma of 1140 may offer support. But every other signal says to look for lower prices. INTC cannot hold up the SPX.
The VIX is beginning to show increased pessimism after touching 22 last week and landing today at over 25. The contrarian in me says that VIX will hang here or move ever so slightly lower just to entice a few more bulls into the party before the horn lopping begins.
As for tomorrow, statistics tell us that the indexes are due for a bounce since nothing falls or rises in a straight line. While there may be bullish fits and starts in tomorrows action, I personally will be targeting the downside on any strength because I'm not buying into the hope that tech earnings (or many others) are making a recovery, especially with INTC who is expected to report a profit of $0.11 after the close tomorrow. Other earnings reports will come from RFMD, WM, JNPR, and EBAY tomorrow. I will step out on a limb and suggest that no amount of spin will mean a thing and that the released figures will offer no cause for optimism for the rest of the year because most will decline to offer solid guidance. Retail sales will also be reported in the morning and my fundamental brain thinks there will be little for bulls to hang their hat upon.
Again, I will be looking at any tops of intraday strength coupled with overbought 60/30 stochastics to be a put buying opportunity.
See you at the bell!