December 5, 2003
As expected this week, we got to enjoy at least one of the milestones in the major stock indices. The market enjoyed Nasdaq 2000 ....for a few minutes....and not a dollar more. As is typical of these kinds of things, traders and investors alike took the time to celebrate by selling off their stock holdings in response to this joyous occasion. Once again, this "selling on the news" took the major stock indices down in ugly fashion. These reversal of fortunes have been hallmarks of this late stage of the market's rally. Typically, these reversals signal an end of a rally and a major top, yet the market has been able to conquer each of these obstacles, albeit very slowly and sometimes, quite painfully. In fact, this later stage of the market's rally has been so slow, grinding, and full of churn, it is easy to forget that the trend is still up! If this is what going up feels like, we sure don't want the pain of a real correction!
Note that conquering these milestones, Nasdaq 2000 and Dow 10,000 will be made all the more difficult because it is not clear what will come next after that. If we get a CLOSE above these levels for both indices, it will feel a bit like the race to the North Pole - it feels great to have finally have made it, but it may also feel like the only remaining thing to do will be to head back to where we came from. The market will definitely need some extra-special, hand-holding type of good news to keep motoring forward from there.
What also makes it easy to forget that we are still in rally mode is that in the past 4-6 weeks, a good number of stocks have taken quite a beating, beatings the likes of which have not been seen since early in this year for these stocks. These malcontents represent the blood gasping for air beneath the deceptive calm of the general market. These stocks, many of them the over-priced, highly volatile, and often speculative of the bunch, have suffered two waves of selling. In November, some tax management took out the losers in this lot as people looked to book losses in time to hopefully buy back these stocks to play the much ballyhooed "January effect." This effect is so-named because fresh money is traditionally put to work by pension funds and the like at the start of the new year, and it tends to go to the stocks that look cheap at the time...the losers of yesteryear. Tax rules require a 30-day waiting period before and after sale of the stock in order to qualify for write-offs. The second wave of selling that is marking the current period is the continued shellacking of the losers and now some selling of the big winners as nervous types lock in their profits for the year. All these headwinds have meant that hitting these milestones in the indices has become quite a chore.
Another hallmark of this selling is that analysts have been bold when they choose to defend the fallen, but they have been largely ignored as the bloodletting barely takes a pause. When the analysts have chosen to go for the jugular of the vulnerable stocks, well, you can only imagine the carnage left behind.
And now, the worst of all in my opinion, is that the market has become so accustomed to good news that not only does it generally sell off on good news, NOW the market is expecting the best of the best stocks to keep delivering surprises. These are the stocks that have been holding up the major indices. It seems this poison is about to inflict a little pain on Intel, the primary leader in the tech world. I am speaking ahead of turn as the markets have not even opened for trade for Friday, but Intel released earnings news that was in-line with expectations, or at least "not too bad", yet, it seems the market was expecting even more behind the scenes. The disappointment will be reflected in selling.
Time will tell how and whether the market bounces back from this latest setback. But I can say that taken together, all this activity I have described cannot be sustained in the midst of a rally. Either we are building what is called a "base" to launch the market much higher as I have been predicting, or we are finally getting the set-up for the big fall that I feared back in August. Since we are still in "innocent until proven guilty" mode, I am not ringing the alarm bells just yet.
In fact, up until now, I have been pretty flippant in my bullishness and quick to turn tail when I have let my bearishness enjoy some sunshine. I say flippant because I have always made sure to tinge any bullish comments with reminders of the uglier big picture and also include snide remarks about the sustainability of the current party. And while I continue to "suspect" the market is poised to launch much higher in the short-term, I must reiterate that the backdrop for the market has been steadily deteriorating for some time now. At least in my opinion. It is difficult to describe as more than a hunch for now as it rises from the disturbing churn I described above. I could do the typical bearish thing and pull out any one of the litany of strikes against this market that I have mentioned in the past. But that would be too easy, and dare I say, played out by too many other bears. Something else is afoot and the missing shoe is starting to stink up the joint. Hopefully we can stand the stench for at least one more leg up in this rally. Until I can say something new and more specific, all I can do for now is preach my typical words of caution. Stay tuned....