Weekday Commentary
from Michael Hartman
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Market WrapUp for the Week
Monday l Tuesday l Wednesday l Thursday l Friday
Week in Graphs 
Storm Watch 
Geopolitical News 
Energy 
Precious Metals 
Raw Materials
Friday, November 15, 2002
Around and Around and Around
Up and down, sloshing around, where did the money go? Churning and turning, chasing our tails, we’re back to where we started. This market has been running a fast race to nowhere. There is no leadership in stocks, bonds, commodities, or currencies. On Monday the Nasdaq Composite was down 3.0% and on Thursday was up 3.7%. Those are big moves for individual days, but in the end there has been very little change in any direction over the last three weeks. The last four closing Friday numbers for the S&P 500 Index beginning on October 25th look like this: 898, 901, 895, and today 910. For the Dow the last four Friday closings were 8444, 8518, 8537, and today 8579. The Nasdaq closing numbers were 1331, 1361, 1359, and today 1411. Money is bouncing from sector to sector with no direction, just trading dollars back and forth.
In general, there has been significant volatility on specific stocks and commodities, but in the overall market we are in a strange holding pattern. I also notice disjointed movements. The stock market has been going up on bad economic news and today just the opposite as we got good consumer sentiment numbers from the University of Michigan, but the market barely moved. My favorite disconnect for the week was watching on Thursday to see the SOX (Semiconductor) Index blast off for a one-day gain of 8% (that’s huge!), and the very next day Merrill Lynch advised investors to sell semiconductor shares. They downgraded Intel, PMC-Sierra and Analog Devices—go figure. If you made your 30+% on Intel over the last month, my hat’s off to you!!
All I can really visualize in my mind’s eye are these huge blocks of money running around trying to find a home. The stock market has gone sideways, T-bonds made a big dive, bounced right back, and are now headed down again, the dollar has stabilized for now, and commodities have softened a bit. I get this eerie feeling that we’re in limbo-land just waiting for something to happen. I somehow believe that this is the calm before the storm. A month ago we got through the “earnings season” for third quarter, then the Fed’s Beige Book with rough economic news, then on to party time with elections and the Fed rate cut.
Shifting Our Attention. . .
I believe that over the next couple of weeks the attention will swing to the war with Iraq and terrorist threats from Al-Qaeda. After the announcement on Wednesday that Saddam Hussein would allow UN arms inspectors back in the country, investors breathed a sigh of relief. Treasuries sold off early as there was no longer a need for the “flight to safety” of the bond market and stocks were pushed higher, then sold off to give back all the gains. With all the good news from Saddam, the short players on the commodity markets came in right on queue. Oil came down to $25 per barrel on lower anxiety of war, and gold was pounded into submission as it teased the $325 barrier, only to close below $318 for the day. The gold bull is still very much alive as it closed today above the $320 mark.
The easing of war worries quickly came to an end with warnings from the FBI that Al-Qaeda might be planning some “spectacular attacks” that would feature high symbolic value, mass casualties, severe damage to the US economy and maximum psychological trauma. These potential occurrences do not bode well for the US financial markets. It will be very difficult for the stock market to continue its gains with so much uncertainty. As a matter of fact, it appears that the threats are hurting both the dollar and treasuries. Thursday and Friday the treasury market sold off, the dollar was down on Friday, and stocks barely squeezed out some gains. Once again, stay on guard for the days where we see a lower close on all three—the dollar, stocks, and bonds. That should be the indication that the stock market is going to accelerate to the downside.
Two Steps Down, One Step Up
Frankly, the charts that I look at daily as a proxy for “the markets” are all pretty boring. As I have described, we’re going in circles the last couple of weeks—hurry up to wait. It’s like the driver that’s been on your tailgate for miles who finally passes in a huff, only to be waiting for you at the next red light. The markets will certainly teach patience to us all. It can be frustrating at times. So, rather than bore you with the usual charts, I decided to take a different look at the stock market for the last two years.
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S&P 500 Trading Points Bear Market Highs & Lows for Past 27 Months |
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| Date | S&P 500 Close | Point Gain | % Gain | Point Loss | % Loss |
| 08/29/00 | 1,510 | ||||
| 12/21/00 | 1,275 | 235 | 15.6% | ||
| 01/30/01 | 1,374 | 99 | 7.8% | ||
| 03/21/01 | 1,122 | 252 | 18.3% | ||
| 05/22/01 | 1,309 | 187 | 16.7% | ||
| 09/21/01 | 966 | 343 | 26.2% | ||
| 01/04/02 | 1,173 | 207 | 21.4% | ||
| 07/24/02 | 843 | 330 | 28.1% | ||
| 08/22/02 | 963 | 120 | 14.2% | ||
| 10/08/02 | 799 | 164 | 17.0% | ||
| 11/05/02 | 915 | 116 | 14.5% | ||
| Totals | 729 | 74.6% | 1,324 | 105.2% | |
| Average | 146 | 14.9% | 265 | 21.0% | |
Since we know that the markets never go straight up or straight down, let’s take a look at the last five moves to the upside versus the last five moves to the downside. If you were to enter into a trade on either the long side or the short side over the last two years, you would have five entry points and five exit points. The average trade would have lasted a little over five months—five trades in 27 months.
If you were perfect in timing the bear market rallies over the last couple of years you would have gains of 75% and for bear market downturns the gain would be 105%. Your gains would also have been magnified depending on how much leverage was used based on personal risk tolerances. I don’t like excessive risk, so I choose to use an investment vehicle that produces double the gain or loss in the specified index, therefore 2:1 leverage.
It is also not very practical to think that we can nail it right at the top or the bottom, so I throw in an error factor of 20%. My goal is to be within 10-20% of the highs and lows to determine entry and exit points. If I am successful with my 20% rule, I will enjoy the 60% gain in the middle of the broad market swing, multiplied by the 2:1 leverage. Using the numbers above, to trade the rallies I would have seen 60% of the 75% gains = 45%, doubled with leverage equals a 90% gain over 27 months. On the short side, 60% of the 105% gains = 63%, doubled with leverage equals 126% gain in 27 months.
In the past I have used the cliché, “The trend is your friend.” The numbers above demonstrate the accuracy of the cliché. Assuming that we are in a primary bear market, you would have made more money to enter into trades that were in the same direction as the primary trend. It is not only more profitable to trade in the same direction, but it is also safer. If you try to trade the counter-trend rallies, it is easier to get burned by some unexpected news release. As it stands, there is a greater likelihood of negative surprises than there is for a sudden burst of increased earnings.
Have a Plan
Your investment strategy should first be based on market fundamentals, then use technical analysis to confirm the fundamentals and improve timing for entry and exit points. I see way too many people invest their money with good ideas that fail to develop an exit strategy. Most investors tend to be analytical on the purchase side and emotional on the selling side. Fear and greed are powerful emotions to contend with. It is a good idea to develop your exit strategy before you actually make the buy. Things can change and be adjusted along the way, but at least go into it with a plan. It’s hard to believe that so many people sitting in mutual funds just plan on leaving the money in place until whenever………… It could be quite a few years before we see Dow 11,000 again. Don’t just leave yourself hanging in limbo-land. Good luck and good investing out there!!!
Overseas Markets
European stocks had their first weekly advance in four weeks as companies including Vodafone Group Plc and Bayer AG posted results that beat analysts' estimates or forecast better earnings next year. The Dow Jones Stoxx 50 Index rose 0.8% to 2589.33, extending its climb since last Friday's close to 3.2%. Five of eight major European markets were up during today’s trading.
Asian stocks rose, led by exporters including Sony Corp. and Quanta Computer Inc., after a U.S. retail sales report pointed to faster growth in the world's largest economy. Japan's Nikkei 225 Stock Average gained 2.4% to 8503.59.
Copyright © Michael Hartman
mhartman@puplava.com
November 15, 2002