Weekday Commentary from Jim Puplava
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10.23|
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Market WrapUp for the Week
Monday l Tuesday l Wednesday l Thursday l Friday
Tuesday's Stock Market WrapUp
Support Levels Questionable
From a technical perspective the market is oversold. The major indexes have hovered around key support levels and bounced back whenever they touch them. The stock market has been going down so long that it is due for a bounce. Ned Davis Research (www.ndr.com) points out that whenever advancing volume exceeds declining volume by over nine times without a similar downside, the market has tended to rally. NDR says this indicator is stronger when another similar-up day follows it in the market. That indicator hasn’t happened at this point. What we have gotten instead is two consecutive days on the downside. Elliott Wave analysis indicates key support levels for the Dow at 8897, 934 for the S&P 500 and 1336 for the Nasdaq. If these key support levels are penetrated in the short-term, then a larger bear market trend is in place.
However, bear market rallies usually occur when the news is dismal and prospects are grim. It appears that the only trend is downward for stock prices. It is usually at these key junctures that rallies occur. What is still missing right now is the general level of pessimism has not reached a critical level. You hear the word "capitulation" thrown out quite frequently. Capitulation would be a heavy down-day in the markets supported by heavy volume on the downside. Those days don’t seem to happen, and when they do, it is believed there is wide-scale intervention into the markets by the authorities, otherwise known as the Plunge Protection Team.
Holding On To Hope
This isn’t your ordinary market. In fact, there are many things about this market that are extraordinary. Investors, advisors, economists and politicians appear optimistic despite the number of things that have gone wrong in the markets. Investors may have been discouraged by the accounting scandals, frauds and deceit, but overall there is still hope and belief that the authorities, in this case Greenspan & Co. and Washington, will turn things around. Investors are holding on in the hopes of breaking even or recouping some of their losses.
The alternatives to investing in stocks aren’t as attractive with money market yields at 1.3%, t-bills at 1.7%, and CDs at a little over 2%. Most investors are still thinking about returns on capital instead of a return of capital. After nearly two decades of double-digit returns in either the fixed income markets in then 80’s or the stock market in the 90’s, it is hard to get used to annual returns of 2%, much less negative returns. What I believe has happened is faith in the markets is evaporating as a result of the accounting scams of the 1990’s boom. Most investors are holding on, not because they believe in a new bull market, but holding on in the hopes of recouping some of their losses. Maybe they won’t break even, but they hope to recoup some of those losses.
Isn't The Party Over?
I have recently received e-mails and have had interviews with many investors who have lost half, if not more of their investment net worth. Some of this loss is actually profits. Those are the fortunate ones who got in early during the 90’s and stayed invested in stocks. Others got in late and have lost what little profit they had plus a good deal of their original principle. Many who bought into the popular funds and stocks of the technology mania have suffered the most. Some I’ve talked to are in denial, failing to recognize those losses. It is difficult to tell people those boom days aren’t coming back again for a very long time. Most people simply don’t want to hear it. They hold on to hopes that maybe things will improve enough that they can break even and then get out. It is very difficult to tell them that their remaining principle is at even greater risk today than it was back in March of 2000. The second phase of the bear market will be much more devastating on portfolios than the first phase. In other words, the worst is ahead of us and not of behind us. The party is over and "get used to it" is not a message most people want to hear.
I find those who have been through a few bear markets, such as we had during the late 60’s and 70’s, recognize the trend. They are more willing to take steps to protect capital, especially those who remember The Great Depression, or at least understand what happened during that period. Others remain in denial, believing that perhaps a 20-30% drop in the market is all that we will get and the markets will eventually bounce back. This is what investors are told each day in the financial press, cable financial shows, and on financial talk radio. Authority figures in Washington and Wall Street, along with prominent TV anchors tell them times are getting better. If you want to get a glimpse of what I’m talking about, head down to your local Barnes & Noble or Borders book store. Go directly to the financial section of the magazine rack and tell me what you see. Look at the whole gamut of publications from Money, Kiplinger’s, and Worth to Smart Money and you will find one theme only — which mutual funds or stocks to buy now! Very few talk about how to protect capital, short the market, bear market strategies, what to look for in a gold stock, or why having money in low-paying cash instruments such as T-bills is a good idea.
No, dear reader, the theme is still decidedly bullish. Most publications don’t even acknowledge that a bear market exists, much less talk about bear market strategies. Try to find regular coverage of gold or silver stocks or gold mutual funds. Maybe a few say that having as little 5% in gold isn’t such a bad idea. But do they really think having 5% in gold is going to protect a stock portfolio that is heavily-weighted towards stocks at 70%? Or if they recommend a heavy portion of a portfolio to be invested in bonds, they forget the last time we had a dollar crisis back in 1985-87 when we had rising interest rates that led to a stock market crash.
The Three "A"s
Very few analysts, advisors, and anchors even recognize the problem. After all, these are the same people still reporting pro forma profits as real numbers. The standard advice is to "invest for the long-term, there will be a second half recovery, ABC company beat estimates by a penny more, buy on dips, dollar-cost-average, and stock returns are superior over the long run." When was the last time you heard an anchor, analyst, or advisor recommend going short the market, buying gold, oil, Euro-denominated government bonds, water or raw materials? You simply don’t hear it, or if you do, it is rare. Typical of the advice given is a quote from today’s financial press. The money manager interviewed thinks investors should ignore the bad news and quit the fixation on the negative. In this manager’s opinion, now was a good time for investors to buy top quality companies because they are cheaper today than they were a year ago. Notwithstanding, with his keen grasp of the obvious, he failed to mention that with the S&P 500 selling at 41 times trailing earnings, this stock market remains the most grossly overvalued market in stock market history. Dividends are way below normal -- as much as P/E ratios are far above normal. Just because a stock is down 50% doesn’t make it a bargain. It can still drop another 50% and then drop again!
Even though the President took steps today to restore confidence in the financial markets by outlining a 10-point program that will remove the incentives to stop those that cheat and inflict greater punishment on those that do cheat, the President can’t restore value to the financial markets. Only the markets can do that. Trying to prop up the financial markets, and flooding the financial system with money, as so many on Wall Street are recommending, will only make the situation much worse than it already is today. In fact, meddling with the markets could cause grosser distortions that could lead to even bigger problems. The risk of moral hazard has never been greater for those who speculate and take large risks, especially if they are large financial institutions believing they will be bailed out by government. This only encourages greater risk taking, such as we now have in the derivatives market, something that is worth keeping your eyes on.
Today's Market
On Wall Street today a string of bad news coming from the corporate sector caused markets to fall, taking back all of Friday’s gains. Wall Street firms are busy lowering their second quarter estimates for companies that will shortly report their earnings. This way, companies will be able to meet estimates and analysts will look much smarter when earnings are reported. Chip equipment companies were downgraded today. Drug companies continue to get hammered on bad news, either on the earnings front or on news of clinical trials of new drugs, which have been disappointing. Even Pepsi managed to disappoint. The greatest damage was in the tech sector with software and chip stocks taking a big hit. Drug stocks and biotechs continue to sell off. The only positive sector was in precious metals and select defense stocks, along with shares of pipeline companies. Volume was moderate with 1.34 billion shares traded on the NYSE and 1.70 on the Nasdaq. Market breadth was negative by 20 to 13 on the big board and by 20 to 15 on the Nasdaq.
Overseas Markets
European stocks fell as an unexpected decline in German industrial production signaled that manufacturers, such as Siemens and BASF, might not perform as well as some investors expected. The Dow Jones Europe Stoxx 50 Index fell for a second day, falling 1.2% to 3035.91. All eight major European markets were down during today’s trading.
Japan's Nikkei 225 stock average rose to a three-week high after the finance minister suggested the government may sell yen to stop a stronger currency from reducing exporters' profits. Sony Corp. led gains. The Nikkei added 1.8% to 10,960.25, while the Topix index rose 1.6% to 1050.14.
Treasury Markets
Government issues headed sharply higher as stock losses piled up. The 10-year Treasury note rallied 17/32 to yield 4.725% while the 30-year government bond climbed 30/32 to yield 5.415%. No economic data was released Tuesday. Wednesday's lineup includes June import and export prices and the May wholesales trade figures.
© Copyright Jim Puplava, July 9, 2002