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A Bear or Not
A Bear?- That Is the Question |
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The NASDAQ has been getting pretty
soundly thrashed since the end of April. Three months of declining valuations
wears on anybody who is long and believes in the future.
Fear rules the market these days.
In market declines, as in market advances, value doesn't matter until it
matters. None of the talking heads on CNBC are talking value because the
market doesn't care at the moment. Momentum is to the downside, and value
doesn't matter until stocks stop going down. Then they'll all be talking
value.
The market is being knocked down
by the following fears:
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Potential Terrorist Threats- especially
during the week of the democratic convention
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Rising Oil Prices (related to terrorism
and out the Iraq conflict)
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The uncertainty of the outcome of the
pending presidential election
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Increasing interest rates.
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Slowing employment growth
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The unwillingness of companies to provide
aggressive forecasts (see Tort Reform- can you blame them in this litigious
climate?)
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Slowing Consumer Spending
Despite today's relief rally, the market
seems to be mired in a climate of slowing declining values on light volume
against a backdrop of complacency.
This begs the following question:
From March of 2003 to March of 2004 the market rebounded after a nasty
three year bear market. Now that we have spent three months in the red,
was March of '03 to March of '04 simply a relief rally in an ongoing Bear
Market, or was it the beginning of a Bull market which is undergoing a
correction right now?
In my view, some simple technical
analysis might help clear up this murky picture.
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The
50% Retracement: A Simple Look At A Complex Issue |
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On June 20th, I published an edition
entitled "I'm
Dreaming of a Green Christmas" wherein I suggested following the semi
conductor industry or the "SOX" index as a leading indicator a summer rally
might be in the cards.
The SOX did, in fact, turn out to
be a leading indicator. It led the technology sector down. No summer rally
has ensued to date.
Technical analysis is not the science
it pretends to be. I have read books and taken numerous seminars. Believe
me, it is more of a art form than a science.
I have a rudimentary understanding
of many of the hundreds of technical indicators: stochastics, moving averages,
MACD indicators, candlesticks, Bollinger Bands, and relative strength.
After filtering through reams of information, I still always come back
to the simple 50% retracement as a good guideline for low risk entry levels.
In short, I believe if you have found
a good growth situation, a low risk entry point occurs when the stock has
given back 50% of a recent gain. As you can see from the chart provided
of the SOX (semi conductor index) as measured from March of '03 (beginning
of the new bull), the SOX has delivered a nearly perfect 50% retracement.
So, are we ready for the Bull to
resume? Hold the phone. In my opinion, not quite yet.
The NASDAQ's level has not delivered
the same 50% retracement. As you can see from a chart of the NASDAQ Composite
over the same time frame, the COMP needs to find its way down to 1710 before
it delivers a complete 50% retracement. Remember, the SOX is a leading
indicator. The larger market follows.
Most of the damage has already been
done in the semi conductor sector. It might hang in there around the 400
level, or drift down into the 375 area. I believe it is currently quite
oversold, but that doesn't mean it is ready to turn around.
Once the COMP joins the 50% retracement
party, the table will be set for the Bulll to resume. Look for it to happen
between now and the end of September.
The Fundamentals and the VIX
Many technicians are focusing on
the VIX index- which measures the put buying (bearish) against call buying
(bullish). Many argue the VIX is too low for any serious advance. A higher
VIX suggests higher levels of fear. If you operate on the theory that most
investors are wrong, a healthy climate of fear drives prices higher. They
say the VIX needs to be at 21, and it is currently about 16.
I believe fundamental corporate performance
is reducing fear levels. Corporate performance for the June quarter has
come in as follows:
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More than 70% of companies have beaten
Wall Street estimates against an average of 56%.
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Aggregate earnings are running about
4% above expectations.
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At current trends, earnings will be
up 24% for the quarter.
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Guidance supports current expectations
of 14% third-quarter- slowing but very healthy by historical standards.
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Operating earnings estimates for the
S&P 500 over the next 52 weeks stand at $69.09, up $0.20 for the week
and at yet another new all-time high.
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Corporate balance sheet are stronger
than ever. Many companies took substantial write downs during the Bear
Market years, and are currently loaded with cash. Microsoft (NASDAQ:
MSFT) couldn't figure out what to do with it all, so they are forking
$70 billion over to shareholders in the next 4 years.
A summer rally could still be in
the cards. A shorter term look at the COMP's recent trading channel suggests
the NASDAQ could be ready to rebound back up to resistance. It has already
done this twice since the April decline.
Getting past the Democratic Convention
with no terrorist incidents and lower oil prices could help foster a mini
rebound.
The market could make a brave effort
to poke its nose up in August. If so, I believe September will lead us
to the perfect 50% retracement on the COMP, which will lead us to a full
resumption of the Bull Market in October, November, December, and possibly
farther out.
In my personal portfolio, I am stubbornly
hanging on to a few stock which have eroded substantially in value. I'm
hanging on because they are all high growth companies with significant
upside. I don't believe all the losses will be regained this summer, but
I do believe at least 80% of the damage has been done. I'm not going to
churn my own account over against a month or two of patience.
September is traditionally the worst
month of the year, which sets us up for a great 4th quarter. I will be
bargain hunting in September, and will probably begin publishing the long
awaited special Preferred Members editions at that time.
Charts Provided Courtesy
Of TradePortal.com |
