Bears still on the prowl...

[titus-uk]

By Vince Heaney on ftmarketwatch.com

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Nasdaq bear trend still intact
9 percent one-day rise insufficient to turn trend

By Vince Heaney, FTMarketWatch 10:09:00 AM BST Apr 6, 2001

LONDON (FTMW) - Unfortunately one swallow doesn't make a summer.
The Nasdaq Composite [US:COMP] rallied almost 9 percent on Thursday as bullish sentiment flooded back into the market after improved news from U.S. PC maker Dell Computer [USELL]. See New York market report


However, the sharp rally has only taken the Nasdaq back to levels that prevailed at the beginning of the week. Monday's close was 1,782.97, while Thursday's close was 1,785.73. In between, the market hit a low of 1,619.58.

The extreme volatility in the market at present is a striking illustration of investor nervousness: One day the financial world is about to end and fear is the driving force; the next day bullish sentiment returns with a vengeance and investors' fears of missing out fuel the rise.

Volatility of this nature is often found at turning points in markets, but do the charts back up the idea of a market bottom?

No bottom yet

The short answer is no.

At the risk of sounding like a broken record let's revisit the bear trend chart indicators. Go to the interactive Nasdaq chart with 10, 20 and 30 day moving averages, relative strength indicator (RSI) and slow stochastics added.

The 9 percent rise on Thursday has only taken the current price back to just below the 10-day moving average. The market is still below the moving average envelope and the band itself is trending down.

The market is making fresh lows, the most recent being on Wednesday. The pattern of lower lows and lower highs on the bounces is still intact.

Redrawing the trendline from the start of February, which marked the beginning of the current leg of the downmove, gives overhead resistance at 1,800 on Friday. The market has yet to break through this downward sloping trendline.

The RSI is still trading below the 50 level - the indicator of medium-term market health. The market has yet to break back up through the double bottoms formed at 1,794 in late March.

Downside trendline break still valid

In the bigger picture the market closed below the monthly trendline drawn under the October 1990 and October 1998 lows at the end of March. Previous support on a chart, once broken, becomes overhead resistance. The Nasdaq would have to rally above 2,050 to challenge resistance that was confirmed as recently as last Friday by the monthly close. See monthly chart

The slow stochastics give the picture behind the sharp rally. The market had reached an oversold position - below 20 on the slow stochastics. The indicator has turned higher, crossed over and is moving up.

Previous rallies during the downtrend have shown that the oversold condition in the market can be removed without seriously challenging the longer-term chart picture.

Caveat emptor

Analyst's comments after the sharp rise back up the caution that is suggested by the chart.

"We've been down this road before - snappy rallies from deep oversold levels [with] stocks that were down the most, springing up the most," remarked Bryan Piskorowski, market analyst at Prudential Securities in the U.S.

What the market needs to see is sustainability. The key to sustainability will be evidence that the Federal Reserve's interest rate cuts are starting to have a positive impact on the economy. Investors are looking to Friday afternoon's closely watched U.S. payroll report for signs of improvement.

"We have a technical bounce on short covering and a sense that the recent selling was overdone. But we need to see these gains hold and see some follow-through. It's all dependent on improvements in the economy -- Friday's employment report is a key factor for the market," echoed Jay Suskind, director of trading at Ryan Beck & Co. in the U.S.

The conclusion remains the same. Wait for the market to do something positive before re-entering on the buy side. The Nasdaq needs to close above the double tops at 1,975 formed in mid-March before it will have broken the cycle of lower lows and lower highs.

Until then the bear trend is intact and caveat emptor - buyer beware - should be your watchword.


I think the message reinforced by today, is not to get carried away!

Mark

 

[shelman]

Two weeks on and things look so different, or do they? maybe it's just another false dawn. The Nas certainly meets the criteria set out out in V Heaneys' third from last paragraph.
I still hold my longer term view and found this of interest:-

http://www.fool.co.uk/news/foolseyeview/2001/fev010417c.htm?ref=emailweeklytext

Steve

 

[Riz]

It's best to point out that the same Vince Heaney of FTMarketWatch now sees a chart breakout on the Nasdaq...his article makes interesting reading:

Nasdaq confirms chart breakout

Tech index rallies 35 percent in 10 trading sessions

By Vince Heaney, FTMarketWatch
Last Update: 6:56 AM ET Apr 20, 2001

LONDON (FTMW) - The Nasdaq Composite added a further five percent rise on Thursday to the eight percent gains seen on Wednesday, confirming this week's bullish chart breakout.

The gain in the Nasdaq (COMP) from the April 4 lows is now a remarkable 35 percent. The sharp rally is supported by both technical and fundamental factors, but is it time to buy?

Upbeat chart picture

Go to the interactive Nasdaq chart with 10, 20 and 30-day exponential moving averages, relative strength indicator (RSI) and slow stochastics added.

Wednesday's price action gapped higher on the open, above the previous high of 1,979.75 set on March 27, breaking the cycle of lower lows and lower highs. The Nasdaq has now made its first higher high since the beginning of February. Thursday's gains showed that the move was not a one-day wonder. See previous commentary

The market has broken through the top of the moving average envelope and accelerated away from that former resistance area. The envelope itself has become compressed and is starting to turn higher.

The RSI has broken above the 50 level, which acts as an indicator of medium-term market health.

Fundamental confirmation

The impressive chart moves have been accompanied by the fourth 50 basis point rate cut by the U.S. Federal Reserve this year, bringing the cumulative ease to 200 basis points year-to-date.

The Fed move gave a fundamental confirmation lending credence to the chart breakout. Let's face it, if the chart broke higher and the Fed raised rates most of us would be left scratching our heads this morning as to what was going on.

Surprise Fed rate moves between meetings are always met with a degree of scepticism in some quarters. Does the Fed know something terrible that we don't that will hit the market? Is the Fed running to catch up because it is behind the curve on monetary policy?

Retaining the surprise in monetary policy when dealing with markets that price in every minor change in expectations is never easy, but the Fed is doing a pretty good job of it.

"Easing with the stock market's wind at their back is calculated to catch maximum momentum from the financial markets, while making the most of the element of surprise," writes Neil Soss, senior U.S. economist with CSFB in a client note

'It's a very explicit Greenspan put option that creates limited downside for U.S. equities.'

Mike Young, European equity strategist with Goldman Sachs in London is clear on what the Fed move means for the equity markets.

"The Fed chairman has said he is now concerned that the decline in the market may have an adverse impact on the economy - and that's from the man who gave us irrational exuberance. It's a very explicit Greenspan put option that creates limited downside for U.S. equities," he told FTMarketWatch.

Uncertainty

The jury is still out on whether the recovery will prove durable.

"I believe in the rally," Paul O'Connor, a proprietary trader at CSFB, told FTMarketWatch. "We are at the darkest hour in terms of the fundamentals and the Fed has done the right thing. It was a total surprise and has had the right result."

Carsten Gerlinger, who helps manage about €1 billion in stocks at DG Bank Luxembourg, said: "There is still a lot uncertainty in the market, in order to sound the all-clear, we need to see more sustained gains - so far, it's been nothing but a bear market rally."

Give your opinion on the latest rally in the FTMarketWatch poll

Forecasting a turn is always tricky, but what can be said is that the chart has broken the bear trend in place for the past three months. The onus is now on the bears to show that they can regain control.

That is not to say the market will rally in a straight line - and it is already 35 percent off the lows. The difference from a week ago is that the chart suggests pullbacks should be viewed as a buying entry point.

Buy now or wait?

In the last chart commentary I made a case for a pullback from Wednesday's highs and using that as an opportunity to buy. In the short term the market has shown it has got more legs than I gave it credit for.

The market has exceeded the 38.2 percent retracement of the February to April downtrend. But the rally from the April lows still exhibits a five-wave pattern. The trouble with fifth waves is that they often take the market further than you think. See more on Fibonacci/Elliot Wave theory

I'm too cautious a trader to buy the Nasdaq at the end of a five-wave pattern that has produced a 35 percent run up in 10 days.

I do believe dips are now a buying opportunity and not the start of a renewed slump, but I still want to see the dip before I buy.

Riz

 

[darth trader]

I have been avoiding tech stocks until there is stronger evidence of an upward move - eg. a fall back to 1700 and then a move ip.

Your thread has prompted me to look at the technical situation on stocks like ARM and MONI that have performed well over the last week or so.

I notice that the negative volume index for these stock temporarily turned up but turned down again earlier this week.

It looks to me as if the bears are back.

 

[titus-uk]

Technically and emotionally, I expect some type of retacement. The "break to catch breath" on friday gives weight to this. So, the important thing is that a higher high has been made. So if a retracement goes to a higher low, then the break in the bear trend will be confirmed.

Made a nice profit last week (haven't been able to say that for a while), being 100% in cash by midday friday. I hope that the above scenario is concerned, and that any further dips do present the buying opportunities we seek.

All the best

Mark

 

[Riz]

The way I see it, it's still bottom basing for major indices involving a process not a certain point or level and bounces both up and down that might last till the last quarter of the year...only recently the up bounces started getting bigger then the down ones which used to be the other way round...

This of course provides good trading opportunities but not good long-term investing opportunities yet...

Here is another article, non-chart this time providing interesting reading:

Onlooker: An injection of bullishness

By Philip Coggan - Apr 20 2001 18:41:25


The UK stock market had a double dose of good news from overseas this week. But each silver lining had a potential cloud.

The US Federal Reserve's half percentage point interest rate cut on Wednesday came as a surprise to just about everybody - and sparked a sudden surge in the FTSE 100 index.

The Fed seems determined to save the US from recession. If it is successful, that will help the UK in two ways. First, as the world's largest economy, the US is the key determinant of global growth. Second, the fortunes of many UK companies are tied up with their US subsidiaries or with their exports to the US.

Furthermore, the Fed statement referred specifically to the effect of lower equity prices in slowing the US economy. In other words, other things being equal, lower equity prices will encourage the Fed to cut rates again. That can only encourage the bulls on Wall Street, and any rebound in US share prices normally extends to London.

That all depends, of course, on the Fed's strategy working. Interest-rate cuts take time to feed through to the economy. But, in any case, this may be a different type of slowdown - one caused not by weak demand but by an excess of supply, prompted by the surge in business investment in the late 1990s.

In such circumstances, profitability will be weak until the excess capacity is destroyed. Either some companies will go bust or others will shed parts of their businesses - hence the wave of lay-offs in the technology and mobile-telecoms sectors. Rate cuts may not make much difference to this process.

The other piece of good news came from the US technology sector. US companies have mostly been beating (much reduced) forecasts with their first-quarter figures; a source of modest rejoicing. Much more influential was a statement from chip-maker Intel that a recovery might be in sight.

Technology shares have fallen so far so fast that it was natural for investors to seize on any excuse for a rally. But the news from tech companies seems to be mixed - some of the best names in the industry such as Microsoft, SAP and IBM may be over the worst, but that could still mean pain for the fringe players.

As if to prove the point, Anglo-Dutch IT services group CMG warned on Thursday of a loss in its wireless division. Shares in the FTSE 100 company fell 19 per cent on the day.

Despite big falls in share prices over the past year, TMT (technology, media and telecom) shares still trade on pretty aggressive ratings. Telecoms are on a historic price-earnings ratio of 73, software companies on a multiple of 65 and media groups on a p/e of 57.

That seems rather odd when you consider how profits growth estimates in the sector have been slashed over the past year. In late 1999, the argument for giving TMT stocks high ratings was that they could produce above average profits growth for as far as the eye could see. That is clearly no longer the case for the sectors as a whole - they have proved to be highly exposed to the economic cycle. Cyclical stocks, after all, tend to trade on a lower rating than the rest of the market.


--------------------------------------------------------------------------------

While the equity market has been recovering over the past couple of weeks, it has been quite a different story in the gilts market. As the graph shows, the yield on the benchmark 10-year issue has shot up by nearly half a point since March 22 (yields are inversely related to prices). A similar pattern has been seen in the US Treasury bond market, where the long bond fell two points on Thursday.

Two things seem to be happening. The first is that investors now seem to feel that global recession will be avoided. Government bonds tend to be popular with investors in times of hardship, since they offer a high level of security.

The yield curve - the relationship between short and long interest rates - tends to be quite an accurate economic predictor. In the US, the curve has moved from being inverted (short rates above long) to being upward-sloping in the last few months. An inverted curve tends to be a herald of recession.

In the UK, the curve is slightly inverted, but much less so than it was. And the yield on long gilts may be artificially depressed at the moment because of the shortage of such bonds - thanks to the government's budget surplus. So, the direction of change in the curve, rather than the shape of the curve may be the key; the markets do not think the UK will have a recession.

The other significant part about the recent fall in bond prices is that shares and bonds have been moving in different directions. Traditionally, bonds and equities have tended to move in the same direction, probably because of the effect of inflation (higher inflation prompts investors to demand higher yields from both assets).

But ever since the middle of 1998, bonds and shares have parted company. First, the Asian and Long-Term Capital Management crises caused investors to favour bonds over shares. Then dotcom mania saw shares win out. Last year bonds streaked ahead. And now the tables have turned again.

This parting of the ways means there is now a very good case for owning both shares and bonds. In the past, bonds were a poor relation, beating shares only in recessions. Now, adding gilts to your portfolio looks like ideal diversification; reducing the volatility of your performance.
.......................


We also need one still bearish quality article to make this thread well-balanced...

Riz

 

[Riz]

And here is the most bearish one...keep reading it's week end after all

Riz

THE FED PANICKING
Alarm ringing on the "Titanic"

An eminently Successful Analyst recently opined, "Rate Cuts will not save the stock market."

Yesterday CNBC interviewed Charles Minter, analyst and Portfolio Manager of the Comstock Capital Value Fund, which has enjoyed excellent performance during the present Bear market.

Per Mr. Minter, "Fed rate cuts in the past never saved any bear market – and it won't this time." To support his assertion he cites what happened in the Great Crash of 1929 and what is occurring today in Japan.

Minter said the US Fed repeatedly slashed rates from 6% down to 1.5% in the Great Crash era. But this action did not prevent the Dow from plunging 89% from its 1929 peak to its 1932 trough. Moreover, the Bank of Japan have cut rates incessantly since its 1989 Nikkei peak. Nonetheless, the Tokyo stock index is off 66% from its all-time high. Furthermore, Japanese rates can no longer be cut as they are now zero.

Ergo, rate cuts are no long-term solution to an emerging bear market.

Portfolio manager Minter went on to give his rationale on why he believes the stock market is still headed for a bad fall. He cited the following historic data:

The S&P Index P/E ratios of the worst two bear markets were:

At peaks
1929….21 times
1973….19 times

At Troughs
1932….8.5 times
1974….8.0 times

The S&P500 P/E in March 2000 reached a record high of 32. However, Minter expects the S&P500 P/E ratio to decline from its present level of 25:1 to around 10 times. He further commented that earnings would most likely NOT hold up. But if they did – and the P/E toughed at 10, the S&P500 index will have been battered down another 60% from today's value. This indicates a S&P500 nadir of 500. Not surprisingly, Minter's bear market target concurs with David Tice's estimate of a market bottom. (David Tice is president and portfolio manager of The Prudent Bear Fund - BEARX).

In essence we are seeing nothing more than a traditional BEAR MARKET RALLY…often violent.

RATE CUTS INEFFECTIVE

As all know the Fed just made a surprise cut of 50 basis points (bp) in Fed Funds rate yesterday. This is flabbergasting on a few counts.

Firstly, the cut was unscheduled and BEFORE the FOMC meeting.

Secondly, it is DOUBLE Greenspan's conservative and customary 25 bp cut.

The above sounds the alarm that there is indeed something very drastically wrong with the US economy. Greenspan obviously was motivated to sound the Alarm on the Titanic. To be sure Alan Greenspan "sees" the looming financial iceberg, and consequently wants to avert a total disaster...or at least to soften the blow.

What to make of the Fed rate cut?

Well, we need to remember the Japanese have been cutting interest rates since late 1989 - the year the Nikkei peaked at 39000. And during the last 12 years the BOJ has repeatedly cut rates until just recently, when rates bottomed at ZERO. Japanese rate cuts are NO LONGER POSSIBLE.

Despite relentlessly reducing interest rates, the Nikkei has inexorably fallen 66% during the last 12 years. Whereas a rate cut usually experiences an initial knee-jerk reaction, the market decline continues.

So will it be in Wall Street...Gabby Abby or no Gabby Abby.

BEAR MARKET RALLIES - REVISITED

To be able to appreciate the power of a Bear Market Rally (oft called a Suckers' Rally), we need to review similar occurrences in history. Let's see what happened in the two greatest stock market Bear Markets in the last 71 years – namely the GREAT CRASH of 1929 and the 1973/74 Wall Street Debacle.

GREAT CRASH of 1929

The chart below demonstrates the power of a Bear Market Rally (Suckers' Rally) in the GREAT CRASH of 1929. Following are the observations which may be gleaned therefrom.

Wall Street (Dow) peaked in October 1929, when across the board stock took a battering – quickly declining 48% in less than two months . However, starting in Novemeber1929 a Bear Market Rally (Suckers' Rally) ensued. The sucker's rebound rose the Dow from 198 to about 298 in the next five months – an increase of 50%. But then the inevitable occurred. Smart money sold heavily to the innocent and hapless investors, causing the Dow to again plummet.

The rest is history. The Dow relentlessly fell 83% from its Bear Market Rally (Suckers' Rally) high during the next 24 months without respite.

1973/74 Wall Street Debacle

Although much milder in intensity, there were two Bear Market Rallies (Suckers' Rallies) during the 1973/74 Wall Street Debacle (see chart below showing the drop of the S&P500 Index).

In late 1973 the S&P500 experienced its first Bear Market Rally (Suckers' Rally). The Index rose 12% before continuing on its journey south. From the peak of the first Suckers' Rally to the final 1974 trough, stocks plummeted 46%.

Then once again in late 1973 through early 1974 suckers were drawn in by rising prices. This Bear Market Rally (Suckers' Rally) rose 12% again, before doing an abrupt about-face. From the peak of the second Suckers' Rally to the final 1974 trough, stocks plummeted 40%.

In all the S&P500's slid a total of 50% in the 1973/74 debacle.

The moral of this history lesson is painfully simple. In ALL secular Bear markets there will be one or more Bear Market Rallies (Suckers' Rallies). They can wicked in intensity and last few months.

Indubitably, we are today in such a Bear Market Rally (Suckers' Rally). But in my considered opinion it will be short-lived.

There is also one other thing that is crystal clear. No Secular Bear Market ever ended when the S&P500's P/E ratio was 25. Au Contraire. Bear Markets bottom when the P/E is close to 6 to 8 times. CONSEQUENTLY, this bear is just resting after nearly 12 consecutive months of hard work (i.e. NASDAQ falling). Technically, it is called a period of consolidation within the framework of a Secular Bear Market.

Indeed, the Fed's panicked rate slashing
is the Alarm ringing on the USS "Titanic"

H. Teetmyer

20 April 2001

 

[titus-uk]

Excellent stuff Riz - thanks for gleaning this information for us.

What it shows is that the greatest enemy is complacency. The one thing that I am sure we have all learned on this board esp. over the last year, is how careful quick action makes money esp. on these rallies, whilst complacency loses it. The bears are on the prowl after a week of hibernation. This week will be a good week to short. (unfortunately this does not aply to me, as I am only just learning about going long!) Defensives may also look good.

For those still tempted to go long, all I will say is 2 words:

Remember January!

Hopefully we will successfully retest the lows. If not then any confidence inspired by this rally, marginally higher than expected earnings (albeit heavily revised ones) etc. will evaporate, and there will be a nasty sell-off - maybe worse than anything we ave experienced so far....


Watchful waiting is the key.....

Mark

 

[shelman]

Yep, this is just about the way i see it. Hope you're right about it being a good shorters week Mark. This was the very reason i sold MONI and ARM, stocks i consider to be good long termers at the right entry price. I know it's not shorting in the true sense but the results are the same.
Good luck
Steve

 

[titus-uk]

Continuing the theme:
From thestreet.com


Today's Market: Nasdaq Sheds 4.8% as Chips Lead About-Face
By Diane Hess
Staff Reporter

With the release of more mixed earnings news and an analyst downgrade on the chip sector, investors poured cold water on last week's white-hot rally today. For the second session in a row, the major stock market indices finished down. The Nasdaq Composite Index fell 104.1 points, or 4.8%, to 2059.30, while the Dow Jones Industrial Average lost 47.62 points, or 0.5% to 10532.23.

"We were expecting a selloff on the Nasdaq today," said Peter Coolidge, managing director of trading at Brean Murray Foster Securities. "Whether this is a pause in the rally or a repeat of what happened in January remains to be seen." Back in January, the Fed shocked the market with an intermeeting rate cut, sparking an aggressive rally that was met by a steep selloff.

In the wake of the Federal Reserve's surprise interest-rate cut last Wednesday, the market averages registered staggering gains. But on Friday, investors began to take their winnings off the table. The Nasdaq ended the week up 10.3%, as investors renewed faith in tech stocks, and the Dow rose 4.5% along with it.

Picking up where they left off Friday, investors again skimmed off the top. Over the past few months, aggressive rallies have been followed by vicious selloffs, leading some market experts to worry about the magnitude of the past week's run-up. The fact that the recent pullback has not been too extreme has encouraged them.

"I'm not concerned," said Matt Johnson, head of Nasdaq trading at Lehman Brothers. "We're up more than 30% on the Nasdaq, since the index hit bottom. So a 5%giveback isn't bad." Trading volume was low today, indicating a lack of conviction behind the selloff. What's more, "people are buying into the weakness," Johnson said, "which suggests that they haven't changed their views on the marketplace."

Semiconductor stocks -- the key beneficiaries of last week's rally -- were the chief targets of today's move down on the Nasdaq. This morning, Merrill Lynch analyst Joe Osha downgraded Intel (INTC:Nasdaq - news) and a three other chip stocks to near-term neutral from near-term accumulate.

The other stocks on his list were Applied Micro Circuits (AMCC:Nasdaq - news), PMC-Sierra (PMCS:Nasdaq - news) and Vitesse Semiconductor (VTSS:Nasdaq - news).

"There is no identifiable evidence that the semiconductor recovery is closer at hand," Osha wrote in his research report today. The analyst noted that, at a price-to-earnings multiple of 50, Intel is still expensive. Shares of Intel closed down 6.5% to $30.32 today.

Whether the chip sector is on its way to a recovery has been a topic of great debate among Wall Street analysts. Less than two weeks ago, Salomon Smith Barney analyst Jonathan Joseph called a bottom in the sector, only to be countered by Lehman Brothers analyst Dan Niles. On the heels of Osha's note today, the Philadelphia Stock Exchange Semiconductor Index was off 5.3%.

As investors rotated out of the riskier positions they re-inhabited last week, shares of large-cap tech issues dragged on the market. Juniper Networks (JNPR:Nasdaq - news), Microsoft (MSFT:Nasdaq - news) and Cisco (CSCO:Nasdaq - news) all finished lower.

Shares of Oracle (ORCL:Nasdaq - news) plunged 10.5% to $17.68 after Lehman downgraded the stock to buy from strong buy, noting that the present quarter could be weak. The investment firm also said that Oracle's valuation, at 17.8 times earnings, is well above historical norms. In recent weeks, investors have picked up some Nasdaq stocks based on the belief that they couldn't get much cheaper. Now, they are beginning to think again about fundamentals such as price-to-earnings multiples.

In the meantime, safety stocks registered gains today. Looking at the sectors driving today's action, drug and tobacco stocks rose at the expense of retail and financial issues. Philip Morris (MO:NYSE - news), Pfizer (PFE:NYSE - news) and Procter & Gamble (PG:NYSE - news) all finished up on the day.

Oil stocks got a boost from the news that ExxonMobil (XOM:NYSE - news) reported earnings that rose sharply on strong oil and natural gas prices. Shares of Exxon closed up 3.3% to $88.

As stocks fell today, bonds rebounded off of last week's selloff. In late-afternoon trading, the two-year note gained 6/32 to 100 6/32, moving the yield down to 4.134%. The benchmark 10-year note rose 24/32 to 98 17/32, yielding 5.192%, while the 30-year Treasury bond was up 29/32, to 94 29/32, moving the yield down to 5.732%.

 

[titus-uk]

And also from thestreet.com

Too Much of a Good Thing Could Be Just That
By Doug Kass
Special to TheStreet.com
Originally posted at 11:41 AM ET 4/20/01 on RealMoney.com


In my initial column here on March 26, I adopted a more bullish stance than I have maintained at any time in several years.

I concluded with this:

A decade ago, Warren Buffett advised investors to "Be fearful when others are greedy, and greedy when others are fearful." It may now be time to be greedy.

I gave 15 reasons for my upbeat position -- some fundamental, some psychological, some visceral. Frankly, the decision to turn more bullish was based on the cumulative result of all these indicators. It was not grounded on any earth-shattering incremental information.

I originally thought that the extreme sentiment we saw during late March was consistent with market bottoms in the past -- but that it would take time to remedy. I opined that a gradual rise in stock prices would take place, especially in the technology-laden Nasdaq (where I saw the greatest opportunities).

I viewed my call as an intermediate-term investment call, not a trading call.

While I was accurate in my forecast of a market bottom, and the subsequent rally, I had no idea that the advance in stock prices would be so remarkable both in magnitude and timing.

The upswing has been especially pronounced in technology. Indeed, two of the largest-ever daily percentage gains were recorded in April. And as we all know, the Nasdaq 100 (QQQ:Amex - news) tracking stock QQQs has risen from a low of $33 to nearly $50 as of Thursday's close.

The winged upsurge has been accompanied by additional data points that should encourage equity investors. For example, better-than-expected profits for Microsoft (MSFT:Nasdaq - news), IBM (IBM:NYSE - news), Computer Associates (CA:NYSE - news), Apple (APPL:Nasdaq - news), eBay (EBAY:Nasdaq - news), and a number of other high-profile stocks (in other industries) seemed to have allayed the dire market sentiment that existed only three weeks ago.

And, of course, a surprise Federal Reserve interest-rate cut two days ago further raised investor confidence that we would see a soft landing.
The Downside

Unfortunately, or fortunately (depending on your point of view), the swift rise in stocks has also raised concerns. And as Todd Harrison says, at each and every juncture, market and company fundamentals must be weighed against the changing price levels.

When I weigh the radically altered price levels, I now feel that my exuberance for the market (especially technology) should be tempered. Consider the following concerns:

Fed rate cuts. A steady dose of monetary ease has produced higher interest-rate yield, and a positively sloped yield curve, because investors no longer see a hard landing, but have begun to anticipate a soft landing. That is the message of the Federal Reserve. As a consequence, long-dated bonds now yield 5.85%, providing a tolerably high-risk-free rate of return.

Inflation. Though measures of consumer price inflation remain subdued, the true cost of living is rising: Higher energy prices are boosting utility prices, apartment rentals and the cost of hotel rooms. This area must continue to be monitored.

Short-covering. While difficult to quantify, short-covering and option expiration have probably played an important role in the recent market advance. I am hearing nightmare stories of hedge funds positioned incorrectly for the market's upsurge (read: short). Think about this. Juniper Networks (JNPR:Nasdaq - news) lowered its earnings guidance two weeks ago, and the shares stand at about $35. You figure, despite the share price decline, there is more risk, so you sell (naked) the April $40 calls for $4, thinking that it's "free money." And then the stock begins its climb -- and it rises and rises. Today, the stock is $70, and those calls trade at more than $30. Throughout the period of price ascent, you are scurrying to buy Juniper's stock in order to escape monumental losses. Ergo, an important portion of the rally may have been fueled by short-covering, and that's artificial.

Weakened personal computer and cellular industries. Investors have been buoyed by the promise of improving second-half business conditions in technology -- like the personal computer and cell phone areas. While second-half comparisons are easy (business tailed off at that time last year), fundamental issues like saturation remain a concern for me. As confirmation, during the Microsoft conference call, the company reduced its personal computer shipment forecast. Moreover, I have long taken issue with the rosy Street forecasts of the cellular industry. Thursday evening's announcements at Nokia (NOK:NYSE ADR - news) and Ericcson (ERICY:Nasdaq - news) confirm my uneasiness regarding the cellular phone industry's outlook. These two areas are the linchpins to technology, and are not on sound footing.

Mediocre earnings outlook. While earnings results for many leading technology companies have been in line with consensus, many are not. About half of the companies have reported first-quarter earnings. Thus far, profits are about 8% lower than year-ago levels, but slightly higher than consensus forecasts. Nortel (NT:NYSE - news), Cisco (CSCO:Nasdaq - news) and Sun Microsystems (SUNW:Nasdaq - news) are some of the larger companies that have disappointed. Many more will. I am increasingly concerned about the weakening economic conditions abroad, which could weigh heavily on a number of technology firms with European stakes. That, too must be closely monitored. And at today's elevated prices, it is a risk that cannot be ignored.

Buyer's panic. In the recent "buyer's panic", institutional cash positions have likely been taken down in April's rally. Though likely still higher than a year ago, I suspect mutual fund cash is now closer to 5.5% than the 6.0% level two months ago. Maybe much lower.

A weakening U.S. dollar. The dollar has begun to erode against other currencies. This week the eurodollar achieved a 90-cent handle against the dollar, and the yen has risen by 3% against our currency. If the dollar has peaked, and it takes a southernly route, inflation may no longer be contained. Considering the state of the U.S. overall balance of payments, I am monitoring this development closely.

Wall Street analysts. After the parabolic move of April, a slew of analysts and strategists have upgraded stocks and raised recommended investment positions this week. These are the same groups that never saw the tech train wreck last year, so why should they see "the light at the end of the tunnel" so clearly?

The technicals. Take a look at Gary B. Smith's technical analysis of the Nasdaq in his Thursday column. It is telling. That index is still in a downtrend, and is trading right near the top of a well-defined channel.

Speculation is beginning to run amok in technology -- again. And investors have become complacent.

The last point is particularly worrisome.

Fear, which was palpable only a short time ago, has been replaced by the type of speculation eerily reminiscent of 1999. For example, consider the nearly 100% rise -- over the last few days -- in communication-chip and networking stocks like Juniper Networks (JNPR:Nasdaq - news), Ciena (CIEN:Nasdaq - news), PMC-Sierra (PMCS:Nasdaq - news), Vitesse Semiconductor (VTSS:Nasdaq - news), Broadcom, (BRCM:Nasdaq - news) and Applied Micro Circuits (AMCC:Nasdaq - news). This extension in price has taken place in the face of deteriorating fundamentals (as ace analyst/writer Herb Greenberg reminds me daily). Component inventory is increasing at customers like Nortel, Motorola (MOT:NYSE - news) and Nokia. The absence of visibility has become a familiar refrain. Three weeks ago -- and at substantially lower prices I was willing to accept the risk, at materially higher prices, I am not.

I am even concerned with the market's perceptible reaction to Microsoft's earnings. After the $7-per-share rise on Thursday, the company's price earnings multiple has soared by nearly 70% this year, and Microsoft's trades at a lofty 36 times fiscal 2002 earnings-per-share estimates -- while expectations are for relatively modest 8% growth in profits year-over-year.

In conclusion, I still believe we have made an important bottom in the stock market. But, the stunning advance of April has moved equities closer to a level of equilibrium.

Mae West once said that "too much of a good thing can be wonderful." However, within the context of the stock market, I have to reject Mae's notion!

I am no longer "in love" with technology stocks. I have sold my QQQ position. I remain "in like" with areas of the broader stock market, other than technology.

But more on that later.


all the best - and be careful chaps

Mark

 

[Riz]

Here is another one suggesting last week was a suckers rally...Was it? Well we'll have a better say by the end of the week I'd say...

Riz

Investor-spotting: It's a sport

New poll gauges sentiment of fickle investors

By Thom Calandra, FT MarketWatch.com
Last Update: 3:22 AM ET Apr 24, 2001

LONDON - The stock market is a field of dreams, and that is why most of us are suckers for a rally.

Yet when the dust clears from the equity hurricane that has hit all of the world's markets in the past year, how many will be able to say they got it right?

A new, and informal, FTMarketWatch poll of European and American investors shows they are evenly split on their sentiments toward the stock market.

The ongoing reader poll, which began April 20, asks whether investors are ready to go back into the stock market. Take the poll.

Early results of the London-based poll, which began April 20, show 49 percent answering, "Yes, I am buying now or will shortly. Some 47 percent say, "No, this is a bear market sucker rally."

Only 4 percent say, "No way -- I got burned and I'm never coming back."

The results so far bode well for those who believe that the tens of billions of dollars sitting on the sidelines, in bank accounts or money market certificates, eventually will come streaming back into equities.

Polls, to be sure, are notoriously fickle. This one is no different. We could, for example, ask readers whether the foot-and-mouth epidemic sweeping Britain will prevent them from visiting the countryside this summer, and a majority probably would say yes, then decide in July to take a trip to Devon or Cornwall or Wales.

Still, professionals look to such gauges of consumer sentiment as a tip-off to what the future holds.

TrimTabs.com, a California company, monitors about 90 U.S. mutual fund families for fund buying and sales. Equity funds the past two weeks received a net $14 billion from investors, the company said.



That's better than March, when individuals withdrew a net $20 billion from equity mutual funds, a record high, according to TrimTabs.

TrimTabs in early April pointed out that mutual fund redemptions by investors, even after one-day rallies, appeared to contradict the buy-on-the-dip pattern that fueled the 1990s bull market.

Yet the service, highly regarded for keeping a daily pulse of market liquidity, noted that American taxpayers, meeting their mid-April payment deadlines, might have influenced the outflows. This week the service sounded an upbeat note. "Sideline cash is still huge," TrimTabs said. "We expect that real economic data will continue to show that the economic downturn bottomed during the first quarter of this year."

In Europe, equity mutual funds are also in a wait-and-see pattern.

Most liquidity trackers agree that for equities to make a meaningful recovery, individual investors will need to resume their stubborn belief that stocks can only rise, like the sun over a field of dreams.



If they lose that belief, in a poll and in real life, the wealth effect will become a defect that erodes stock markets around the world.

My own view is that the leading stock indexes in New York and London - the Standard & Poor's 500 Index (SPX) , London's FTSE-100 Index (1805550) and the Nasdaq Composite (COMP) - are nowhere near their respective bottoms. Events this summer, be they in Latin American credit markets, in the currency market or on the balance sheets of the world's debt-laden telecom companies, will amount to a full-frontal assault on financial markets.

Rallies like the ones we saw last week in New York and London were born and bred for suckers. As the saying goes, fool me once, shame on you. Fool me twice, shame on me.

 

[shelman]

Whichever way this works out, i can only say that the suckers are the ones who believe what they read in the papers etc.
This so called 'fools' rally may indeed fail but how many have missed out on the opportunities of the last few weeks because they were frightened by financial media experts such as T C.
MONI was a perfect example for me this week hence my closing of the short in the competition early on.
I can't wait for monday.
Steve

 

[titus-uk]

Is this the end of the downtrend?

Naz down week on week, but not such a bad thing after the amazing rally at the end of last week.

There seems to be some breadth in this rally. It also starts to be a little more solid, without the fervent hoping of rate cuts. Similarly, the inventory correction in the US appears to be resolving.

For the first time in a while, I feel cautiously optimistic. This is because there appears to be a sense of realistic thinking out there. I am basically feeling able to trust TA. Lets face it, just because something was oversold did not mean it couldn't fall another 20-30%! And resistance levels meant nothing!

I still think this is a rally that will do some retracing. But I am optimistic that the lower lows have passed, and that we will form a platform on which to progress.

In truth, I have never known a normal market, as I only started in April last year!!

Apart from dipping a toe in a week ago (nice 20%!) have been out as exams are here...but as these are on tuesday next week, hopefully this will make good timing indeed!!

Cheers
Mark

 

[darth trader]

Mark,
yes the rally is stronger than I expected and the bulls are made of sterner stuff than of late.

However I would feel happier if the market (nas comp)retraced to 1650 and ralied again. This would give a better base to build on for the future.

There are some tech stocks out there that are looking exhausted - eg. FIB there has been increasing high volume for the last few days with little price action - up or down.

Others eg VOD still suffer from large stock overhangs despite talk of aquisitions.

Best has been the software sector eg. CED.

Only time will tell, however a good test for bull/bear markets is the 200d ma. We miss that by a long chalk for now.

In my opinion we are still in a bear market and when it eventurlly turns you can bet that the bears will have one last stand before they retire.

Darth.

 

[titus-uk]

You are right there Darth.

I have not been able to find time to keep up with individual stocks, only news on the market as a whole.

I feel that getting in tomorrow would mean I would be chasing stocks at a rather late stage. Rather, I think we must use the dips as buying opportunities. After all, it is most unlikely that there will be a linear progression of prices upwards; rather I hope we will have the healthiest scenario of higher lows/highs.

However, I think it unlikely that we will go any lower than 1650 on the Naz, so hopefully the "bear trend" is finally at an end.

Mark