The market that continues to amaze
May 29, 2003
Folks - this rally in the American financial markets continues to amaze me. As I hope people understood from previous missives, this market rally is DIFFERENT from all the other bear market rallies we have had. It started with the typical huge burst upward, but a correction soon followed that allowed for better entry points. And from there the move upward has been gradual enough to allow plenty of buying opportunities (recall that I said some time ago that a true bull market is characterized by a gradual advance where, if you do not pay attention, the market is up big and has long left you in the dust). The best part about this rally is that it has gone up in the face of continued, sometimes hardcore, skepticism. Why is this important? As long as skeptics remain, we know that there is still money out there waiting to buy into the rally. This explains why most dips have been quickly bought --- more skeptics throwing in their lot with the current converts. Every last one of our past bear market rallies were met with a cackling consensus declaring things like "we have seen the bottom" and "this time the rally is for real."
"But, Duru. Aren't you a skeptic?!?" you might ask. Oh yeah! Definitely. But, again, I hope people have understood from previous missives that at this point I am bearish over the longer haul. Short-term, I think the bulls are the clear victors, and the players to make your bets on. This rally has powered along in the face of a barrage of poor economic news. It has mainly gone up because, heck, it went up the last week. Speculative stocks have been on fire yet again - often doubling and tripling and more. Buyers have largely been slinging broad strokes of cash at the market looking to see what sticks. This has provided a huge cushion. As we move forward, sellers lose their desire to take profits since every attempt to take profits simply means losing out on EVEN MORE profits. As a humbling example, I at first thought I was making brilliant analyses on the bull side --- only to find out almost EVERYTHING was going up!!! I can say though that as we reach further and further into the nosebleed seats, dart throwing will fail more and more often.
Anyway, hope springs eternal, but there is little in the short-term to dissuade people from the optimism of rosy outlooks. The "sell in May" folklore may finally fail this year, but we do have the next earnings season to next worry about. Anyway, I will not repeat all the hazards that are out there. I do not want to distract anyone from the opportunities that remain. There is plenty of time for worry and hand-wringing.
Since I do not believe there is much on the economic horizon to roar about, let's review some key levels that the market has hit that have confirmed (or may confirm soon) the market's insistence on reaching for the skies.
May 5: For the first time since 2000, the Nasdaq revisited the downtrend line marked by the ENTIRE BEAR MARKET.
May 6: Nasdaq first poked above the December, 2002 highs.
May 8: Nasdaq dips just below the major downtrend line.
Currently: Both the downtrend line and the December, 2002 highs are clearly behind us.
The S&P and the Dow have not been nearly as impressive as the Nasdaq or other speculative markets like bio-techs. However, the S&P is now at a very similar critical juncture that the Nazz was at earlier this month. Yesterday, the S&P first poked above those December highs and today it FINALLY, for the first time since 2000, nicked the major downtrend line of the entire bear market. If the S&P clears this hurdle just as the Nazz did earlier, all bets are off as to how high this market may go before a truly serious correction takes place. Many more people will be forced to jump on the bandwagon. If the S&P fails this latest hurdle, then we could easily see a major correction as early as mid-June. If THAT happens, determining whether the fallback is buyable will have to be done on a very cautious case-by-case basis. Dart throwing will definitely have to end at that point.
Please note that while I am giving overall market indicators, I have lately rarely focused on the specifics of what the market has been doing. As long as the bias has been up, it has supported my bullish analyses of individual stocks. If the up bias disappears, I will obviously have to change methods once again - and with a quickness! Again, dart throwers will have to take a breath and start honing their aim a bit more.
Whew! I need to take a pause. I cannot believe how bullish I sound, but yes, it is me. I am not going crazy or falling off the rocker. But I truly did not think I would be writing such stuff at this juncture in the bear market. If this bullishness continues, I may even run out of things to say given my steady training in trying to counter the misinformed over-optimism spewing from mainstream media! What a truly amazing turn of events.
OK - I cannot resist. I have to let the bear speak for at least a spell. Here is a quickie list of top things to be worried about:
1. Weak dollar. Bulls think this is great for exports and the general economy. It could backfire on us (and probably will) if the rest of the world economy remains weak and cannot buy our stuff anyway. Note that despite the weakening dollar, import prices have STILL increased AND our trade deficit has increased along with it. Truly crazy. Could spell inflation. The US is probably trying to FORCE the Euro-zone to get more aggressive in easing it's own interest rates. This is a battle royale.
2. A super-easy Fed. As I mentioned in the previous missive, these guys are going to force the economy to start spending more even if it kills everything else in sight. Their current hand-wringing over deflation tells me that, as they look to prevent such a disaster, they will sow the seeds of rampant inflation in the not too distant future. Gold will look even better as this inflation becomes more apparent. In the meantime, bonds continue to rally as yields go further south. As you can tell, I am not quite convinced that deflation is a real threat. The Fed thinks it has conquered inflation. In 1999, the Fed thought it had conquered business cycles. In 2000, the Fed thought it could lead the economy to a "soft landing." Need I continue....?!?
3. Sluggish business investment. Apparently, while consumers are getting the point from the Fed, businesses remain cautious. Who knows why at this point. Perhaps they still have not unloaded enough debt or superfluous worker bees. I can say that things are really looking up for my company. I take that as a GREAT sign of potential hope.
4. Terrorism. This is a constant concern that the market has struggled to properly discount. Hard to say what is appropriate - the market is probably being over-optimistic as usual here. I will say that we probably have more to fear from fear itself. Terrorism is a REAL threat worldwide, but we can figure out ways to deal with it. However, the pace of our response to the fundamental problems at hand will be as slow as it always is.
5. Lack of job growth. This could kill the incentive to spend like there is no tomorrow. So far, it has not worried people much - especially as people have been able to load up credit cards and squeeze cash out their homes. Watch out for the increasing default rates on both ballooning sources of debt. Do not pay attention to consumer sentiment reports. People spend whether they are happy or sad. There is always an excuse to shop in America.
6. SARS. I never believed this would have a huge global economic impact. Sort of like the dockyard worker strikes that looked to bring global trade to a standstill but, in the end, was just a blip on the screen. SARS is definitely deadly and a huge tragedy. But it looks like we are getting it under control. The big concern is whether NEXT winter will feature a SARS outbreak much larger than this one. In that scenario, serious economic destruction could occur.
7. Remaining unknowns from bursting the bubble. I have long argued that we still have not "paid our dues" for those insane times. But the longer we seem to be getting away with the bubble without truly serious consequences, the more it SEEMS we might just squeak by. We are still in uncharted territory here. My bias here remains on the side of caution, even alarm, longer-term. But since the forces unleashed are a bit mysterious, we must recognize that somehow we might "get lucky" and squeak by as well. America is truly a rich country, and we have never been richer. The fact that we have gone this long post-bubble without true hardship and suffering is a testament to the vitality of this economy. Let's just hope that at its core is more than a frantic Fed, treasury, president, Congress, and International Monetary Fund (IMF) running from one crisis to the next.
If I missed something major, it is truly a good measure of the bullishness coloring my glasses the past 6 weeks or so.
Never fear, the bear in me is alive and well. He has just recognized the need to rest and hibernate for "better days."
Be careful out there!