What Complacency? (Including another look at GOOG)
By Dr. Duru written for One-Twenty
November 29, 2006
Until Monday, it seemed that the stock market's rally simply could not be stopped. Monday's one-day decline was the worst since early this summer. I earlier wrote about the renewed decline in the dollar, but the quick snapback in the market probably demonstrates that the dollar's weakness was simply a convenient excuse for some good old-fashioned profit-taking. So perhaps the market is just complacent? After all, the market has rallied in a near straight line since the bottom was confirmed in August. This most recent snapback occurred even after the Fed Chairman Ben Bernanke tried yet again to jawbone the market into fearing inflation and essentially made it clear that the Fed has no intention of lowering interest rates anytime soon. Of course, today's strong GDP numbers could be taken as good news of economic health instead of the bad news confirming interest rates do not need lowering.
Anyway...we must note that, sometimes, the term "complacency" is thrown around by the people who wish they could buy into the market at lower prices. You can almost hear the accusers cursing under their collective breath: "I wish I had bought into the market back when everyone was so negative," or "I wish that summer-time negativity could return so I can get another good buying opportunity." Notice that you almost never hear these same people call the stock market an outright sham (even it behaves often that way!) Instead, they just disagree about the "right" price. If the market were perfect, then it would always adjust itself to the appropriate price, and everyone could truly rest and be complacent. But, of course, the pricing debate makes the market.
Let's take a look at some data to get a read on just how complacent folks are right now. Statistics on short-selling can be VERY telling. From briefing.com: "Short-selling activity plummeted on the Nasdaq this past month as tech stocks have been very strong. Short positions fell 5.5% vs October to 7.0 blillion shares. This was the first drop since July. Also, the short ratio fell to 3.6 from 3.9." So, you see, it has been the shorts, bears by proxy, who have been complacent during this rally! Until this month, the shorts increased their bearish bets every time the market went up! Calling investors, the buyers of the market, complacent is akin to the swans and egrets in Florida telling the shivering birds up north that this winter there is no need to migrate down south! Over a month ago, I finally gave my own "low risk, all clear" signal to believe in the bull using some favorite technical indicators. I certainly cannot back down now that I see the bears have allowed their negativity to accumulate many specks of hubris. I recgonize all the risks that remain out there in the economy and the like, but the bulls are simply too persistent to be denied right now. Do not fight them at their strongest. The markets are apparently still awash with plenty of liquidity given the abundance of relatively low interest rates all over the world.
Now that I have had some fun at the expense of the bears, I will say that any number of excuses could suddenly provide the market with reason to sell-off at any time. How soon we get a healthy correction, it is anyone's guess. But absent a recession, I strongly suspect that such a sell-off will mark yet another opportunity to buy in the dip. Maybe if we get low enough, even the bears jump in next time. In the meantime, they can enjoy the resurgence in gold, silver and other hard asset bets against inflation. (A quick sidenote - have you seen the stregnth in commodities in general? Oil service stocks are on fire. Even oil looks like it is bottoming!)
Now, if there is any rocket of complacency that irks bears and skeptics more (supposedly demonstrates complacency), it would be the wiggle and woogle of Google (GOOG). Back on November 2 I asked the seemingly anachronistic question "Is it time to buy Google yet?" As it so happened, the answer was yes, at least up to now. After another week or so of congestion, GOOG broke out and took a quick trip above $500. The party ended as quickly as it began after Barron's booed the stock (again) over this past weekend. All signs now point to a return to early November's congestion area. But note that the historical data from that analysis says that if GOOG has not already reached a low before its January earnings, the low is coming in the next week or two. There are many technical things you can observe to make up your own mind. The chart below focuses on the previous all-time high serving as approximate support for the stock. I would say that if GOOG manages to crash below the 50DMA, around $450 or so, then all bets will be off. If you want to call this bullishness in GOOG complacent because GOOG's market cap is approaching the entire GDP of the universe, then so be it. Let the debates continue...and be careful out there!