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Weekday Commentary from Jim Puplava
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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
Thursday, November 21, 2002
Only "The Market" Knows For Sure
In the short-term the markets move on emotion. Fundamentals move the markets longer term. You can prognosticate, pontificate, illiterate all that you want and it is still meaningless. In the end, the market is going to do what it wants to do. If the market wants to party, it is going to party, which is what it looks like it wants to do. Fundamentals don’t count at the moment. An example of this point is found in the economic and earnings information this past quarter as listed below:
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Consumer confidence drops to a 9 year low.
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Housing starts fall 11.4 percent in October.
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Trade deficit hits new record.
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Bankruptcies now at record levels.
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Durable goods fall 5.9 percent In September.
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Industrial output declines for three consecutive months, factory utilization falls to 75.2 percent.
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Auto sales drop sharply despite zero % loans, zero down payments and no payments for a month till the New Year.
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Retail sales fall 1.2 percent in October and are down over 1 percent in November.
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Unemployment rate rises to 5.7 percent and October job cut announcements increase by 150 percent.
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S&P reports core earnings for last 12 months ending Q2 were only $18.48. The market is selling at 50 times earnings.
Everybody's Got a Move
In addition to worsening economic information and poor earnings, geopolitical threats such as war and terrorism are also ignored. At least for the moment it is back to “party time” on Wall Street. Judging by what I see in the mutual fund industry and the recent momentum that has built up, investors are hoping to recoup their losses. However, this has been a market that has gapped up, gone sideways and swooned both up and down, leaving most investors without a clue. Most investors are wondering, “What on God’s green earth is going on?” Up until recently, most of the market's action has been institutional. It has been mainly fund managers and the Big Boys rotating in and out of stocks and bonds, playing with other people’s money. The institutions are trying to generate a year-end rally to make things look better after three years of losses. It is hoped that this rally will bring back John Q Public and his friends, Herby Homeowner and Tommy Trader, back into this market. For this market to have legs, money has to come out of money market funds and go back into stocks. As of the end of the third quarter, there was $2.2 trillion sitting in money market funds. The yield on these funds is headed below 1 percent.
It is this money that the Fed and Wall Street hope come back into the markets. As of today, it looks like some of that money may have moved off the sidelines. We’ll know tomorrow when weekly mutual fund flows will be released. As of September, money market funds represented 36 percent of mutual fund assets with bond funds representing another 18 percent. It is this 54 percent of assets lying around in money market funds and bond funds that is needed to keep this market running higher and on firmer legs.
PARTY TIME!
Meanwhile it looks like the herd wants to party as fund managers move en masse to the same old stocks of the last bull market. Techs, telecomm, and financials are at the top of the list. Internet stocks are back in vogue. Stocks such as Amazon.com have doubled. Shares of Oracle, Cisco, JDS Uniphase have all come close to doubling. Amazon.com is selling at 192 times earnings. Cisco is trading at 28 times earnings with less than half the growth rates it had in the 90’s. Cisco even acknowledges that the company’s stock option plan would have reduced first-quarter profits by 60 percent. Stocks like JDS Uniphase have no earnings, but shares are up 125 percent in this rally. And as if to underscore the current mania, Time Magazine's November 17th issue published an article entitled, "Cash Out Now! It only sounds crazy. Here's why you should borrow against your house and buy stocks." The article urges investors to rebalance their portfolios by borrowing equity out of their homes to invest in the market.
This is a high-octane speculative rally. So if you’re going to play and trade it, you would be better off buying ETFs such as spiders, diamonds and the Q’s. The ETFs are closed-end mutual funds that trade on the exchanges. Unlike regular mutual funds you can trade in and out of them at any time. You don’t need to wait until the end of the day to buy and sell. Furthermore, if you are trading this high risk market, you should be putting in protective stops on your ETFs 7-10 percent below your entry price and move those stops up as the market advances. Avoid even and round numbers. There is a tendency for round numbers to stop advances or declines.
Don't Worry, Wallflowers
Unless you have sharp technical and trading skills, you're better off sitting this one out. I can’t over emphasize it enough that this is a high-risk market that is subject to a ten-sigma event and a sharp and sudden crash. Many feel that a crash is not possible. Most mutual fund investors still own their mutual funds. There has been no capitulation by individual investors characteristic of market bottoms. Less than $20 billion has come out of stock mutual funds since the beginning of the year. In addition, foreign investors now own a larger chunk portion of our market than they did back in 1987. Both of these two groups have the potential to generate a major downturn when the ten-sigma event occurs. Inter-market relationships are out of kilter.
The Chaperones Are Watching
High-ranking Fed officials have been making speeches one after the other this week informing the markets of the risk of derivatives and the risks of deflation. Today Fed Governor Ben S. Bernanke warned of the risks of deflation. [See - Deflation: Making Sure "It" Doesn't Happen Here] Fed officials have told the financial markets they are going to put their iron foot to the pedal and flood the markets with liquidity. Even if interest rates go to zero, they will monetize assets from government bonds, corporate bonds, stocks and gold mines. They will do everything in their power to try and avoid another 1930’s Depression or a deflationary Japan. I believe they have already begun to intervene in all segments of the markets. Greenspan is putting his theories of liquidity to the test. It still remains to be seen whether he can defy 5,000 years of recorded history and defy the odds of the market and beat it. I doubt that we’ll ever see a central bank defeat the markets in the long run. Governments have never won this battle throughout all of history. It doesn’t matter if Pharaoh, kings, and emperors, Prime Ministers or Presidents have tried it, they never have beaten the markets. This is why you need to own precious metals. It is your only form of protection against a central bank hell-bent on destroying the national currency.
Looking At The Dance Card
If you follow technical trends in the market, the primary bear market trend is intact. This is looking more like an intermediate counter-trend move. For Dow theorists, the Transports have yet to confirm this trend making it highly suspect. The bottom line is we are still in a bear market that has much further to go on the downside. This recent countertrend is a retracement.
The following Fibonacci graphs of the Dow, the S&P 500 and the NASDAQ show typical retracement levels. If you are non-technically oriented, Fibonacci numbers are based a number sequence discovered by Leonardo Fibonacci in the 13th century. The number sequence is 1,1,2,3,5,8,13,21,34,55,89,144 and so on. These number sequences have almost constant properties such as any two consecutive numbers equals the next higher number. An example would be 3 and 5 equals 8, 5 and 8 equals 13. Fibonacci numbers are used in Elliott Wave and measure a retracement move.
So for example, if an index or stock price moves from 100 to 200, any retracement can be measured in terms of probable outcome. Any market move, whether it is up or down in a primary trend, will move in a countertrend direction. A particular market move will retrace a portion of its move before resuming its former trend in the original direction. This countertrend move tends to fall within certain percentages. Retracement moves can be measured in one-third, two-thirds or 50 percent. Fibonacci moves are 23.6%, 38.2%, 50%, and 61.8%, 76.4 % and 100%. Most countertrend moves are usually contained within the one-third to two-thirds range. If the retracement or countertrend move goes beyond the two-thirds point, it probably means a trend has been reversed. That would mean a bull market correction had turned into a bear market. Or in our present case, a bear market rally had turned into a new bull market.
The three Fibonacci graphs below show the Dow, S&P 500 and the NASDAQ from their earlier peaks. Regarding the Dow, the retracement has already retraced 38.2% of its earlier decline and is now heading towards the 50% retracement level. The Dow should find stiff resistance at 8,935 and should be stopped at 9,345. If this recent move surpasses those new points, and especially 9,345, the emergence of a new trend would have to be considered. For the S&P 500, the index has already retraced 38.2% of it downtrend. The next key retracement levels are at 971 and 1019. For the NASDAQ, the next key levels of resistance should be 1527 and 1626.
And The Record Changes to a Fast Dance
I would doubt that we get to the 62% level in all three indexes. There are too many headwinds that the market is running against. However, I could be wrong. If John Q, Herby Homeowner and Tommy Trader come in off the sidelines, they could supply what the market needs, which is a fresh supply of new money. I doubt it, but only the market knows for sure. There just isn’t anything here, economically, technically or fundamentally, that would give me reason to think this could happen, especially now when we’ve been warned of possible war, terrorist attacks, or a derivative mishap. Even more is the maniacal nature of this market. Shares of the last bull market leaders, bid up on worsening business prospects, a declining economy and heightened geopolitical concerns cause me to shake my head.
Today’s GE announcement that they were cutting their 2002 forecast and kept the 2003 forecast at the lower-end of estimates will be the first time in a long time that GE’s bottom line growth will be in the single digits. GE also announced that their reinsurance unit would post a $1.85 billion loss. GE pulled a rabbit out of the hat by announcing they would raise the dividend by a penny. The penny dividend increase caused the shares to rally by $2.05 to $26.85.
As mentioned earlier, the markets want to have a party. Forget the news. It is only background noise at the moment. The market is simply doing what it wants to do and not what it is predicted to do. It is usually at these times that surprises tend to surface. If you want to trade it, do so carefully. Use only ETFs and with tight protective stops. If you are a bear, wait patiently, accumulate precious metals, strong foreign currencies, defense stocks, water, and food and necessities -- in other words, "things." Things have broken out into a new primary trend and very few investors see it.
Today's Market
Prices surged across the board in a broad-based move. The S&P 500 rose 2.2%. The Dow gained 2.6% and the tech-laden NASDAQ jumped 3.4%. Share volume jumped to 2.05 billion, the sixth busiest day of the past six weeks. Market breath was less than stellar with only 2 shares rising for every share that fell. This rally has been the weakest, in terms of breath, of all of the bear market rallies since the 2000 peak. This is not a good sign and indicates that the move is concentrated in a small group of stocks. Today’s rally was triggered by a flimsy report from the government that unemployment claims fell to 376,000, the lowest level in four months. This is normal at this time of the year because retailers hire extra help for the Christmas season. The VIX fell 1.29 to 27.37 and the VXN dropped .12 to 44.70. Interest rate continue to climb with 10-year notes at 4.145 percent and the 30-year yield now back over 5 percent. The dollar fell and the CRB down a notch today flirts with higher levels.
Overseas Markets
European stocks gained, paced by Infineon Technologies, Royal Philips Electronics and Nokia Oyj, after U.S. and South Korean rivals forecast higher sales and said cost cutting helped profit exceed analysts' estimates. The Dow Jones Stoxx 50 Index rose 3.1% to 2684.91, its biggest advance in almost three weeks. All eight major European markets were up during today’s trading.
Asian stocks rose after Hewlett-Packard Co. posted fourth-quarter sales that topped some analysts' forecasts. Canon Inc., Trigem Computer Inc. and other suppliers to the world's second-biggest computer maker gained. Japan's Nikkei 225 Stock Average advanced 2.5% to 8668.06.
Bond Market
Treasury bond prices took an across-the-board hit following an unexpected drop in jobless claims and a rise in the Philly Fed index. The 10-year Treasury note gave up a heady 23/32 to yield 4.145% while the 30-year government bond was down 1 7/32 to yield 5.015%.