What happens next?

[traderx]

On Thursday 22nd March 2001, Wall Street amazed the world! At one point the Dow was down 380 points. Every time RSI on DOW got to around 82 it came off then plummeted further. It seemed as though the downward spiral was unstopable. Then a miracle occurred, or was it an act of God? Dow started to climb and kept on climbing, regaining 280 lost points. If the market had stayed open another hour the index would have entered positive territory. I am confused. Of course it is worth mentioning that NAZ bounced that day, supported no doubt by the DOW turn around.

Here is my take on it. I strongly believe this was a selling climax at least in the short term, which will see a rally of some sort, but for how long? TO THE NEXT MAJOR PROFIT WARNING - I WONDER?

The significance of what happened on Thursday 22nd March 2001 should not be underestimated. I also strongly believe this was a pre-determined point on the index at which powerful Wall Street Traders had agreed to take it down to the agreed level, SELL, SELL SELL action.....then suddenly it was BUY, BUY, BUY.....and up she goes. After the low point it mattered not a jot what RSI was, it stayed in the mid 90s and the index just soared like a bird.

I think there was a reason for this market dynamic. The people who matter in this market, the professional money are getting badly hurt, if you do not agree, then listen to the fund managers who are typically 40% down on the year.

The professionals know, if this contagion is allowed to continue the American public will no longer invest their hard earned dollars in the market. THIS COULD NOT BE ALLOWED TO CONTINUE and the boys on Wall Street know that only they have the financial power to change it.

However, the only way to stop the rot is to shake traders out of there short positions, in other words, TO SCARE THE HELL OUT OF SHORT HOLDERS. I firmly believed that was the intention of some big hitters on Wall Street on thursday. I could almost hear the short holders at $1000 dollar per point screaming, GET ME OUT OF THIS POSITION AT ANY PRICE, FOR GOD SAKE GET ME OUT!!! Then of course they are left with the long covering positions and market finds support.

I think the dangers of allowing the DOW to continue to break one support after another was too serious. It is one thing to sell off the NAZ, that could be justified with TECH TROUBLES but a very different ball game to destroy the DOW.

YOU DON'T KILL OFF THE GOOSE THAT LAYS THE GOLDEN EGG.

The second reason for this change in sentiment is the FED interest rate cuts which are beginning to impact.

Your thoughts on my take? Coming back to my original question - WHAT HAPPENS NEXT?


Tx

 

[Max Damage]

I agree entirely and hope it is right as I went long on NIS at 49p on Fri morn

 

[titus-uk]

I think that what you say is exactly right. Sound logic from the man once more.....

A bounce will happen....a break in the trend - we shall see. (After losing a fair wad on Balti yesterday, feeling a little sceptical at the mo!)

Mark

 

[traderx]

You have my utmost sympathy Mark, who would have thought BLM from £140 - the darling of the stock market to a quid. I know it was split but even so............

I thought £1.50 was a give away, now I didn't have the bottle to buy it at 97p on Friday. I think investors are losing faith in the management team. It is supposed to be cash positive by year end, I don't know if this changes the picture. Another good stock down the drain. Where will it all end?

Tx

 

[shelman]

Baltimore
Internet security firm Baltimore lost 46p to close at 104.5p following news of a grim trading statement, reports the Financial Times. The Daily Express adds that the company let slip its disappointment in a meeting with analysts. At first Baltimore tried to pass it off, but when its share price went into freefall, it was forced to issue a statement admitting to ‘challenging trading conditions’ and a delay in booking sales. This botch job has provoked regulators to launch an investigation, reports The Independent.

 

[shelman]

A significant number of stock market pundits are beginning to call the bottom for equities after yesteray's dramatic falls were followed by a late rally on Wall Street. With share prices across world markets following through with sharp gains today, some equity strategists are urging investors to get back on the gravy train.

In topsy-turvy trading, the FTSE followed Wall Street as high as 5,438 and as low as 5,315, before closing up 88 points at 5,402. The techMark rose as high as 1,953 before closing up 72 points at 1,937. On Wall Street the Dow rallied early, then slipped back into losses, and was last trading up 40 points at 9,429.

Steve Russell, UK equity strategist at HSBC, believes the UK market could fall a further 10% - back to the level seen in the Asian crisis - but is advising his clients to take advantage of the buying opportunities offered by the recent fall-out.

He believes that we are approaching the last stage of the bear market. "The signs of excessive pessimism are now clear, as are several of the other necessary conditions for the bottom of the market: further rate cuts, a positive sloping US yield curve, valuations at levels last seen in the 1991 recession and 1998 Asian crisis, plus an acceptance by companies of how bad the 2001 outlook is, as evidenced by yesterday’s industrial profit warnings."

Russell expects the coming quarter will mark the turning point for UK equities and lead to a a 20-30% recovery in the second half. He believes the time is right to start selling defensives and move into bombed out telecoms, banks and consumer cyclicals.

While there is almost certainly further bad news to come - with a spate of industrial profit warnings expected along with very weak US data - Russell believes the market is reaching the stage when all the bad news is in the price.

Khuram Chaudry, UK equity strategist at Merrill Lynch securities, agrees that there will not be a fast turnround in the share markets, but remains positive on the general economic situation in the UK. He was also positive on interest rate policy in the US and is confident that further cuts would have the desired effect.

But he prefers defensive stocks including retail, leisure, construction and transport. He took a neutral stance on technology, media and telecom stocks but said: "Earnings are beginning to bottom out." He believes that providing content for 3G applications could boost media shares in the long term.

Graham Secker at Morgan Stanley Dean Witter is more cautious. He expects the market will bottom out in the middle of the second quarter, but says he is looking to see the European Central Bank cut rates further and for more positive economic data and corporate earnings out of the US.

Secker expects the stock market will “trundle along the bottom” for some time as the US goes through two negative quarters, with a recovery likely in Q3. Despite the trouble in US, he believes the UK economy will grow 2.1% this year, with a 1% guaranteed by Government spending.

He also prefers defensive sectors such as oil and utilities and pharmaceuticals, which he believes will offer best value in the coming months. He added: “We’ve been taking profits on the banks, they’ve had a good run.”


Thought this was appropriate , Tx.

Steve

 

[darth trader]

another view:

Stock Market Bottom? Not a Chance!
It seems that every new down leg of the bear market brings with it fervent cries that this is the bottom, that this is indeed the real thing. However, the market, as bear markets always do, pays no heed to the proclamations and continues relentlessly downward towards where bears always head during this season of the stock market cycle: hibernation at oversold and undervalued market levels.

As market pundits and Wall Street analysts clamor for the attention of the financial media spotlight by issuing all manner of bullish assessments in hopes of feeding investors' starving appetites for hope, most continue to overlook an astonishingly obvious fact: bull markets have never begun from historically overpriced levels of stock valuations.

Despite unceasing justifications for why "this time it's different" and why historical valuations are no longer relevant, the S&P 500 remains far above its average (since 1926) P/E ratio of 16 while the NASDAQ, having suffered from pummeled earnings data, remains in the stratosphere. Those valuations are not likely to inspire the kind of capital inflows required to create and sustain a bull market.

Historically, when the stock market's P/E has risen above 22, the annual return for stocks over the next decade has averaged between 4-5%, depending on how it's measured. Considering that the S&P 500's P/E held above 22 for quite a few years, it will require some particularly nasty negative returns to pull the average down towards the historical post-bull median of 4-5%. Combine that with the fact that the 1990s witnessed stock market gains of well above the long-term average of 10-11% per annum, and you can see again that only years of seriously sub-par returns will restore the historical record.

But even if the stock market has seen its lows for this cycle, to suggest that stocks are now a buy would require total ignorance of logic, reason and history. As even the most casual perusal of the historical record will clearly demonstrate, bear markets do not turn on a dime and develop into new bull markets. Rather, stock prices stay depressed for extended periods of time as investors lick their wounds. The reason? Simple human psychology.

Like the hung-over fraternity boy swearing off beer forever following a particularly nasty bender, it takes a while for investors to grow desensitized, to forget the smell of crushing investment losses. And that first "drink" isn't generally taken with gusto, exuberance and enthusiasm. One must work his way up, in cautious fits and starts, to the next full-blown bender.

The bull move from 1949-1966 followed years of retracement and sub-par returns after the 1929 crash. Twenty years and a P/E ratio of 8 were some of the ingredients required to cook up the next major bull market soufflé. Similarly, the peak of that move was followed by 15 years of back and forth action and no steady or meaningful annual return on investments. The P/E on the S&P 500 sank to below 7 before the explosive 1982-2000 bull market was launched.

Clearly, major bull markets do not begin until the preceding bear market has run its course and returned stocks to cheap levels. Are we at cheap levels today? With the S&P 500 trading at multiples above 21, we're not even close.

But must the stock market return to its historical estimations of value? Not necessarily. History doesn't define or predict the future, it merely provides us with a good example of recurring tendencies in economic activity. Perhaps this time it really is different? Possibly. But the unabated and firmly entrenched downtrends that the markets have been locked into for months suggest a different story. Despite guesses and baseless estimations that "we must be near a bottom", the market has yet to offer even a shred of evidence that this might be the case.

Perhaps the S&P 500's P/E need not return to 7 or 8 for the next bull market to begin. But is it reasonable to expect that things are so different today, that productivity gains and the IT revolution have created conditions under which a P/E of over 21 can serve as the springboard for the next bull market? That's very doubtful. It's not even an intelligent guess. 22 is far closer to a bull market extreme than to a bear market low.

As with all things, achieving strong returns in the stock market requires patience. One can't expect to run two marathons in two days. Everyone needs time to rest, to recuperate, and to rebuild strength ahead of the next race. Similarly, to expect the stock market to shift immediately into its next bull market marathon is simply absurd. It has never happened before and it is extremely unlikely to happen this time.

If 100 years of economic history are any indication, if human psychology hasn't changed to any great degree in the past century years, (and it very likely has not), the next bull market is not right around the corner. In fact, it's not even in this part of town.



Mark M. Rostenko

March 23, 2001



Mr. Rostenko is a veteran of Chicago's Commodity Pits and editor of The Sovereign Strategist financial newsletter at www.sovereignstrategist.com

 

[MrVibez]

[IBD] Best Stocks Post Highs When Market Turns

Interesting thread. Found this article today which seems appropriate:

Best Stocks Post Highs When Market Turns
By David Saito-Chung

Investor's Business Daily

Last week, the bear bit the Dow. On Thursday and Friday, blue chip bargain hunters bit back. The wild action has spurred a new round of opinions that the bear market will end soon.

So, just when will it end? Leave the guesswork and fancy predictions to the market pundits. That’s what they’re paid to do.

Instead, ask yourself this: When it does end, what will I do?

Will I embrace stocks beaten to a pulp? Will I buy low, scooping big-name techs that were oversold? Or will I take the high road and buy stocks that race ahead to new highs?

Take the high road. If you do, you’ll walk the same path that many of the greatest growth investors of all time took. Snatching stocks that hit new highs at the dawn of a new bull market gives the best odds of reaping the best gains.

Dick Gould, head of Rockland Small Cap Growth Fund, read all the books he could find about great traders. He found Jesse Livermore, Bernard Baruch, and those profiled in J.D. Schwager’s book "Market Wizards" bought stocks when they hit new highs, not new lows.

Still want proof that this strategy works? So did Gould. So he studied every stock that broke out to new highs in the fourth quarter of 1990 after the market turned on Oct. 11.

The results shocked him.

From a database of 2,500 stocks, Gould found that 109, or 4% of the pool, broke out to new highs in the October-December period. Half a year later, the mean gain of these stocks was 34%, or nearly double the 19% gain seen in the S&P 500 (see point 1 in graphic). At Dec. 31, 1991, or a year after the bear market ended, these stocks gained even more speed (point 2).

The results didn’t stop there. By the end of 1992, these elite stocks gained on average 95%, or nearly triple the 39% rise of the S&P.

The data convinced Gould. So when the bear market ended in October 1998, he loaded up with names that broke out to new all-time highs. In 1999, Gould’s fund scored a 109% gain, better than the Nasdaq’s record 86% run.

"It makes no sense to try and reinvent everything when there has been so much work that has been done on the market,"­Gould said. Today, his fund ranks No. 1 among all 407 small cap funds since inception, says fund tracker Lipper.

Some of the big winners back in the early 1990s – Cisco, Dell Computer and Amgen – are famous on the Street today. Will these stocks become superstars again? Maybe, maybe not.

Stick with ones that hit new highs, even if their names don’t ring a bell. These stocks are reaching new heights because they tend to have positive news coming up, says Gould. They’re more likely to beat profit targets, unveil a great new product or land a new big customer.

The New Highs List in the print edition will guide you to the groups of stocks that are leading the market.

"All of a sudden, you’re going to get a flurry (of new highs)," Gould said. "And you’re gonna say, ‘Oh my God, I can’t believe that’s hitting an all-time new high.’ "

 

[traderx]

First class responses from the boys. Thank you for your efforts.

Looking at Sunday newspapers there is nothing but doom and gloom. The consensus is that we are no where near the bottom, that FTSE 100 will lose another 10%. I think we are at the crossroads but where we go from here is anybody's guess.

Tx

 

[RogerM]

I'm with DarthTrader on this one - the opinions expressed are similar to those I expressed with far less eloquence in the I WANT A CRASH thread. Averages, by their very nature mean that there must be times when prices, indices and ratings are below the average. I have no idea what a p/e of 4 on the allshare inplies in inumerical terms for the FTSE 100, but this was the p/e of the allshare at the bottom of the 73/74 bear market. I suspect something under 2000!

Far be it from me to project FTSE100 at 2000, but under 5000 is very probable based on the break in the diamond that has formed in the ftse over the past 2 years. Although these patterns often fail, they tend to be more reliable the greater the move that has already occured. The projected move to below 5000 is a minimum move, not the projected bottom which could easily be very much lower.

 

[Cigar]

Wether you enter the market or stand aside for a while depends on 1. your trading style and 2. your facilities.

I rarely hold for less than 5 days. I must ask myself if I can trust the market for 5 days. I can't. If this turns into a major reversal, I've missed 5 days. If its a 3 day wonder, I'm still safe.

The temptation is to try to pick the bottom. If you don't have real-time and can watch the screen all day, you'd be mad to risk this market.

I suppose I'm saying the very short term traders are probably in already, but the (slightly) longer term traders should watch a little longer.

Don't become like one of the guys on one of the other boards.. £140k down on margin calls.

Only my own view.

 

[madasafish]

I agree with Darth : this is not the bottom. I was short the Dow on Thursday and when it spiked down at the end closed out and went long. Obvious from the trend it was A bottom.

THE bottom?

Not a chance ... When we go to 7700 and shoot below there will be an interesting tug of war: long term trendline.

Recovery will only come when the driver of the old economy - the consumer in US - has confidence. With zero savings ratio and 30% plus losses in his/her portfolio is he/she going to be spending a lot? With real estate prices falling and layoffs increasing?


As far as the Nasdaq is concerned - the drivers are telecomms and computers/software - we now have a surplus of capacity from the tech bubble. In telecomms it will last 2 years. In PCs - sales are don this year - at least 12 months. Microsoft has a new Windows Operating System. Will we all rush to buy?

Nasdaq will take at least 18 months to recover.. before then we will see the Comp back to its long term trend line: Ie. 1992-95 levels , many Chapter 11s and the Composite at some time below 1000 (maybe not for long). Full scale restructuring and layoffs. Think what that will do to consumer confidence.

Ineterest rate cuts will cut borrowing costs but if the banks are having huge bad debts and people going to the streets without houses and cars would you borrow a lot? Nope. You would save more and spend less.

All a result of a natural reaction to the speculative excesses of 1998/1999.

Just like 1987-1991 , 1972-4 (although then OPEC had a hand - sound familiar?) etc etc.

Plus ca change plus c'est la meme chose as Voltaire (?) said. Not much changes...

Just wait. And remember all these forecasters who call bottoms.. how many called this fall? Oh none? right then we've established THEIR track record.. so ignore them . If they are from ANY brokers/Merchant banks etc they have a vested interest.. they want YOU to buy THEIR shares..

Read today's papers "Do not panic" "small further downturn "etc. Usual rubbish. These people did not see it coming so how do they know where it is going or when finished?

Learn to short.. it's the only way to make money safely for a while. Holding shares is for people who like to lose money - slowly --- or quickly.

Mike

 

[shelman]

Another view

Outfoxing the Bear

The funny thing about the stock market is that playing it well
often depends on doing the opposite of what is expected. If
investing in shares is a war - and the newspapers would
certainly have us believe that investors are constantly under
siege - there are ways to outfox the old enemy.
That enemy, of course, is recession, and reports are rife that
he is on the march once more. All eyes are on Alan Greenspan,
the much-trusted Chairman of America’s Federal Reserve Board,
as he frantically attempts to manoeuvre the world’s most
important economy out of harm’s way. Yet all the signs are
that the downturn could become a spiral - America’s current
bad run will affect us all, and that’s not good news for
investors.
Yet it could be turned to advantage. There are a number of
tactics available. Investors could sell up and get out,
which if you need money in a hurry or perhaps retirement
beckons might not be such a bad idea - especially as a quick
recovery is unlikely.
If you have got time and funds to play with, however, you
might consider not only holding on to your shares, but
buying more. It is when a bear market is in decline that
investors can sow the seeds of profit. When the turnaround
happens, as it always does, you’ll be smiling. But only -
in a week when Scoot.com has taken a nosedive to total
losses of £71.5 million and HSBC fell almost 4 per cent - if
you go for the reliables. Scoot may well not recover, HSBC
undoubtedly will. And that could be money in the bank.

Steve