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Market Wrap

New Lows, Investor Woes

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      07-01-2002          High     Low     Volume Advance/Decline
DJIA     9109.38 -133.47  9327.10  9106.89  1.42 bln   1134/2098
NASDAQ   1403.50 - 59.41  1459.84  1402.51  2.97 bln   1125/2396
S&P 100   478.94 - 11.16   492.39   478.34   Totals    2259/4494
S&P 500   967.50 - 21.17   994.46   967.43             
RUS 2000  446.67 - 14.92   461.55   446.03
DJ TRANS 2697.03 - 31.79  2734.12  2691.87
VIX        30.58 +  1.45    30.70    28.63
VXN        58.02 +  0.07    58.76    56.55
TRIN        2.19
PUT/CALL    0.85

New Lows, Investor Woes
By Buzz Lynn
Click here to email Buzz

A strange thing happened on the way to the OIN web page last week. I opined in last Monday's Wrap that this bear market could last years and not a single, solitary soul wrote to admonish me for my bearish outlook. Amazing. Could this market be completely oversold and in NEED of a rally just to get some bullish relief so it can then resume its downward course? Perhaps. But for right now, the market continues its slow bleed.

Need evidence? Look no further than today's close at or near the lows of the day. That's a typical occurrence in a weak market. Bulls simple lack the conviction to move this markets higher. It's really a supply and demand issue. All the supply of stock available is no longer demanded by and investing public. And who could blame them? The Dollar continues to lose ground to the Euro and the Yen, thus making it awfully tempting to repatriate their investments within their own countries. As a foreign investor, you not only lost money in the U.S markets, but you also lost another 10% so far in currency conversion out of Dollars - double whammy. If you are one of those people, you had all the more incentive to sell the U.S. and buy at home over the last few months.

And as long as Uncle Sam keeps interest rates low, there is no incentive to bring those investment dollars back to U.S. shores. In short, the markets are bleeding because the Dollar is bleeding.

Oh sure, but now that the window dressing associated with the end of the quarter and half has passed, shouldn't we see some semblance of a return to "normalcy"? The answer is yes, if you understand that this is a bear market, and that "normal" means lower prices.

Speaking of prices, did anybody notice that the NASDAQ closed at its lowest level since 1997? Tech has been toast, is toast, and will be toast as far as the eye can see. Why? Because few that I'm aware of actually earn a profit. And those that do are overpriced compared to rates available from the bond market.

To be fair, MSFT still makes a ton of money, but sports a P/E of 46, the equivalent of a 2.17% return. Their business isn't growing enough to convince me (and many others) that I ought to buy more of it. CSCO's P/E is a whopping 87.2, which equates to a 1.15% return - also a flat business at best. QCOM? P/E is a big, fat goose egg - ZERO. ORCL - compared to the others, price much more reasonable at 23 times earnings, but still expensive with shrinking revenues and a complete tule fog when it comes to earnings. Despite doing well in its business, DELL's P/E of 55 makes it no great bargain either at a 1.82% return on capital. INTC trades at 69 times earnings, a 1.45% earnings return on capital. I can't even put WCOME (formerly WCOM) up for comparison anymore since it began trading again today at $0.07.

[Note: Volume today was an eyeball popping 3 bln shares on the NASDAQ. Half of it - yes, over 1.5 bln shares - was in WCOME. Don't look at just the volume; see from where it came.]

The thing is that none of these, except INTC at 0.46%, pays a dividend. So what'll it be? A return of 1-2% in stocks (if the share price holds up and the stock paid a dividend from earnings) or a U.S Treasury Note at 4.8%? DUH. . .think I'll take the sure thing. Looks like most of the market agrees except those holding on to the tech-investor dogma. And they'll hang on out of fear of taking a loss, a loss that increases with each passing day. Only when those companies are earning money and can afford to pay a dividend will the prices be reasonable. I know. . .heresy. But the nation could only overbuild so many railroads, and utility lines (or grow tulips) in past bubbles before those companies were forced to make money or go out of business. Even yester-decade's growth stocks then had to get real earnings to stay alive and provide a dividend to get respect. Earnings and dividends made them real businesses rather than pieces of speculative paper.

OK, support levels are now broken on the NASDAQ and Dow, and only 1 measly point above the September closing low on the S&P. Yet oscillators are oversold on all charts except the daily, which has rolled over in mid-ascent. What next? Charts please. . .

Dow Industrial chart - INDU (weekly/daily/60):

I'm not going to spend a whole bunch of time on these tonight. But I do want to point out that the 50-dma (magenta line on the daily) is right at the 200-dma (gray line) and headed south. The weekly chart is oversold and moving lower, the daily chart has rolled over in mid-ascent and the 60-min is buried. That's really bearish for the coming weeks. However, with so much oversold, I would not be surprised to see a re-test of 9000 and have it hold from which a mild relief rally could ensue. The daily chart might make that tough though.

NASDAQ chart - COMPX (weekly/daily/60):

NASDAQ - toast. No love, no respect, no support. What little support there was fell today as the NASDAQ closed at it lowest level since 1997. While daily stochastic rolled over, the others became even more oversold.

S&P 500 chart - SPX (weekly/daily/60):

Similar story here except that the SPX, despite closing at a new low for the year, remains above its September closing low support of 965 at 967.50. Nonetheless, the rolling daily stochastic doesn't lend much hope of support. Yet, the others are buried and begging for mercy.

VIX too isn't really giving a full story. While 30.58 is showing plenty of fear, it hasn't gone much past 40 or even approached 50 in recent days. Nobody throwing in the towel - just a slow bleed.

So what for tomorrow? Charts don't offer much of a clue. However, I suspect that with Independence Day on Thursday, Wednesday is going to be pretty slow, as will be Friday too. That leaves only tomorrow as the last really full trading day of the week. Yet, economic news (Initial Claims) could stir the pot on Wednesday, as could payroll and unemployment on Friday. Still, without the prospect of much volume (except more WCOME), price are likely to bounce around for some quick but limited action. I see it much the same as last week when I noted then:

"With sentiment still negative as measured by daily and 60-min stochastics [only it's weekly and 60 now], coupled with a VIX at 29.97, I think there will be further tests of support to come this week. And with every test, hopeful bulls will jump the gun to buy the very bottom to which the bears will respond by shorting the rally. If that sounds like a week of solid volatility with big potential for swings, you're right! Just what a trader wants! But for the buy and hold crowd, the day to buy is not yet here. But when it comes, there may be even a few weeks to perhaps months of profit potential as the weekly stochastic emerges to begin another up-cycle from oversold. Again, it won't be permanent, but merely a bull rally within a primary bear market."

Trade 'em but don't fall in love. Yup, cornbread and beans again.

See you at the bell!

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