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To
OTC Journal Members:
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Still Mired
in the Doldrums |
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The online discount brokerage stocks
got beat up pretty badly this week. Charles Schwab led off by announcing
May trading volumes were down nearly 30%, and the stock responded with
an appropriate sell off, dragging the rest of the group down with it. Etrade,
Ameritrade, and Knight Trading Group all followed with disclosure of equally
anemic activity and anticipated earnings shortfalls.
The market is mired in one of the
most prolific stand offs I can recall. Fund managers are hanging onto stocks
and buying puts for downside protection. Outstanding corporate performance
has stalemated fears of rising interest rates, war in the Middle East,
and rising oil prices. Sector rotation continues. The high beta stocks
(volatile tech stocks) are being rotated out of in favor of the safe haven
of low beta big names (Microsoft, GE, and Boeing are trading at new post
April highs).
We are in one of the most listless
volume periods I can recall. For microcap investors, this is particularly
frustrating as companies are delivering the best corporate results in recent
memory. Shareholders are not being rewarded with corresponding moves in
stock price. This will change when volume picks up. I believe we have another
three year expansion phase for small companies still out in front of us.
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A
New Trend Is Coming |
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In my studies this past week I came
across a fascinating chart, compliments of Adam Olensis of the Agile
Trader. Adam is one of the best readers of the technical tea
leaves on the planet.
You are looking at a chart of the
NASDAQ, which demonstrates we are at a historical magnetic point. The red
bars coming in from the left represent the amount of volume at that particular
price level over the last eight years (as measured from July of 1996).
The red bar at about the 1940
level spans the entire chart, eclipsing its nearest rival by at
least 30%. As you can see, it shoots directly through today's level. More
shares have changed hands at this level on the NASDAQ than any other of
the past 8 years. This is the point of stalemate. This is the level from
which major trends are born, whether they be up or down.
A bullish perspective would have
us believe the market has formed a giant "cup and handle", which
spans late 2001 to the present. Disciples of William O'Neil, the publisher
of Investors Business Daily are familiar with this term. It is very bullish.
The farther the handle extends and the lighter the volume, the greater
the move when the market finally breaks, and a new trend is born. It will
either break out to new post bubble highs, or head down to a 50% retracement
of the move off the bottom. Unpredictable geopolitical events will have
a lot to do with which way we eventually break.
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Mid
Summer Rally? |
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The end of June is shaping up to
be a critical time period. The next FED meeting is near the end of the
month, and the first interest rate increase in the FED funds rate is expected.
The FED will raise interest rates a 1/4 point. Inflation remains tame,
and Alan Greenspan has a history of starting a new phase slowly. A 1/4
point is already factored into the market. Anything else will be a big
surprise.
A less predictable pending event
is the transfer of governing power in Iraq. It is scheduled for
June 30th. The market has priced in a great deal of terrorist activity.
The militant radicals can be expected to be as disruptive as possible.
In the short term, the market is anticipating some ugly headlines. However,
the Bush Administration's steadfast commitment this date bodes well for
the long term solution. The Muslim world is anxious to see the Iraqi people
in charge of their own fate, and this move will eventually result in enhanced
relations with the more moderate factions in that part of the world.
If the end of June passes benignly,
watch the Semi Conductor Index (SOX) for a clue that a summer rally in
the cards. As you can see from the chart, the SOX index is performing poorly.
The index is camped below both the 50 day and 200 day moving averages,
which is technically bearish. The means both the long and short term trends
in the SOX are down. The semis are the key to the whole tech sector.
It the SOX can muster enough energy
to rebound back above these averages, look for a summer rally to ensue.
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I'm
Dreaming of a Green Christmas |
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I believe when the market finally
breaks, it will break to the upside. My view is supported by the latest
S&P earnings estimates. The operating earnings forecast for the next
52 wks stands at $67.85, up $.81 last week and at another
new all time high. Earnings growth is expected to decelerate to 10.2%,
which is not too shabby.
Here's a chart I published in the
May
8th edition. I believe the theme still holds true. The pink represents
the S&P from Oct '91 through December '92. The blue is the S&P
from Oct of '03 to May of '04.
In May of 1991 the nation was preparing
for a tight Presidential Race between an incumbent Republican named Bush
and an upstart democrat who came out of nowhere. Oil prices were sky high,
fueled by war with Iraq and turmoil in the Middle East (remember the oil
fields burning in Kuwait?). The economy had been mired in a recession,
and was just starting to show signs of recovering. Today's headlines are
deja vu all over again.
The S&P rocketed in September
of that year, and kept those summer lows in the rear view mirror for the
next eight years. If history repeats itself, look for a ten percent move
in the S&P 500 in the 4th quarter. This rising tide should lift all
ships, including the microcap stocks.
I continue to believe this is not
a traders market. I think you will grind up your own capital if you buy
and sell a lot. If the companies you hold continue to deliver good growth,
just hang in there.
A summer rally could bring some profit
opportunities. However, don't plan for it. Expect the to hear Ka-ching
in the October, November, December time frame. Christmas will be green
for profits this year. By then, tensions in the Middle East might have
relaxed, the outcome of the next Presidential election will be in the bag,
and the economy will be humming along.
Charts Provided Courtesy
Of TradePortal.com |
