Today's action suggests that perhaps some more conservative investors are
shifting from stocks into bonds, perhaps as a precaution against any
unexpected Y2K fallout?
The stock markets considered the Federal Reserve's unsurprising announcement of
no change in rates and no change in rate bias as a buy signal. Meanwhile, bond traders
took the wording of the announcement (that the "no change" was due to Y2K concerns)
as an indication that as soon as we've navigated any Y2K problems the Fed would likely
turn its attention back to the economy and increase rates. A rate increase by the Fed
in early 2000 is now almost a necessity given the increases in the rates of freely
traded instruments over the past weeks. By raising rates, the Fed will just be catching
up with what's already happenned in the markets.
Stocks, meanwhile, should rise toward the end of the year. Then, some profit-taking
ahead of Y2K seems likely, followed by a resumed rally once it is seen that the most
important entities in our economy made it through the crisis with little damage.
The Wall Street Journal on Friday talked about what should concern us all: the
sharp divergence between the soaring NASDAQ, flat broad market, and tumbling bonds.
If the divergence continues to grow, it could set up a massive correction between
the markets that will hit high tech investors in particular at some future time.
The NASDAQ is up 70% in 1999, while long-term rates (30-year Treasury bond) are
up 25% this year.
Many commentators say that higher rates don't affect the high-tech NASDAQ
companies. But, do higher rates affect their customers? The flat broad market would
suggest the answer to this question is 'Yes'. So will the highly anticipated future
profits for high-tech companies actually come to be? Hmmm...
Still, our funds remain fully invested in the broad-based NASDAQ clone, FDEGX.
The rallies in the Dow Jones Industrials Average and NASDAQ index were indeed
impressive. However, a considerable source of these gains was very positive news
resulting in positive market action for Microsoft (up 9.9%) and Oracle (up 17.5%).
The broad market was flat, while bonds took another tumble. Setting aside the day's
random fortuitous occurrences, the market was down. The overall short-term outlook,
then, remains bearish.
Today was a pivotal day, according to the short-term models. For conservative
investors, a few well-placed market index puts might provide a nice hedge in
case anything extreme happens in the next few weeks.
The bond drop was particularly troublesome. It had appeared that the long bond
rate might be stabilizing. Now that proposition is doubtful.
If the long bond continues to rise, the Fed will surely follow the rising market
rates in long-term bonds with its own rate increases. The markets will not take
a light-hearted view if this happens. We are entering a period where market risk
is increasing.
Still, we're in the November-January Effect period (see study link on the left).
More than 50% of stock market gains in the past 30 years have occurred in the
November through January period. That's pretty surprising, enough so that I
count it as significant.
Despite the models' short-term negative prediction, I'm staying fully invested
for now.
Tuesday's market action could set the tone for the next week or longer.
Both the bond and stock markets have waffled recently, after gains that
have suggested a bullish turnaround for both instruments. Monday's action
reflected a decidedly cautious tone on the part of money managers, who
apparently took profits after recent gains. A strong move in either direction
should result in significant follow-on trading (buying or selling) in the
coming days.
Today's action at least gives hope that the trend will turn back to upward again.
Although it was a volatile day, the markets lost little ground. If bonds continue
to do well, the stock market should resume its rise.
One troubling note in the stock market at this time is the classic bear market signal
that the Dow Theory is giving. Yes, this is a venerable old timer--but still, some of
its logic makes sense (at least to a worry-wort like me). The Dow Industrials have had
a very good rise since mid-October, but this has not been duplicated by the Dow Transports.
Thus, the Transports are not "confirming" the rise in the Industrials--meaning that the
Dow Theory's opinion of the market remains bearish, because the last confirmed
trend (from late-August through mid-October) was bearish. Add to this the hellish
decline in the Dow Utilities (down 20% since June -- a bear market in itself),
and you've got a very bearish scenario in the eyes of the Dow Theory.
The NASDAQ is also diverging in a major way from the other market indices. This
is nice for investors in the big NASDAQ companies (which dominate the index), but
it only furthers my feeling that we are in a very unique situation here. Americans
are spending 4% more money than they are earning right now. That can't continue.
Interest rates have risen steadily since October 1998. Falling bonds (while stocks
rise) is another classic warning of an impending bear market.
Because of Y2K, we may be experiencing an eerie calm that isn't justified. The Fed
will not disturb things until the Y2K risk has passed. But companies too are on
the sidelines, waiting for January 1, 2000 to pass. Ditto Federal and State Goverments.
Everyone's waiting to see what happens.
Then, when everyone sees that we're still here as January progresses, all kinds of
pent up demand will erupt. And what will the Fed do about that, if statistics
and the markets run wild?
I think we're all safe through the New Year and most of January. Where we're going
long term isn't clear at all.
This dive does not bode well for the markets near term--unless it
stops now. Using the simplest technical analysis, you'd say that in
the latest rally the market failed to reach its previous near-term
peak (from two weeks ago), and that if it falls tomorrow as much
as it fell in the past two days, it will be below its previous
near-term trough--a bad sign technically. So, there is justification
for the pure negative reading the models are all giving.
Still, there was a major positive today: bonds continued their rally.
Absent a deflationary depression, rallying bonds will always support
a falling stock market. All in all, I think we're OK!
However, mid-term through January we remain bullish. In the coming
days, however, we may see a downward trending consolidation.
Still, year-end tax strategies are now in play, and the
January Effect appears real.
Staying fully invested is probably the best course right now.
Thebroad market appears ready to
resume its upward trend after the holiday. The NASDAQ resumed its dash
today, gaining over 2% and closing at a new record high. We continue to
reommend 100% investment in the stock market through January 2000.
17 November 1999
Another breather, after a wonderful
advance. The bond market's reaction to the 1/4 point Fed rate increase
is to be expected. The good news is that the 30-year bond chart is suggesting
that rates may stabilize, ending the rising trend of the past year-plus.
At the same time, the stock market has obliterated its recent bearishness
and is now fully bullish (as it usually is between November and January).
The NASDAQ keeps reaching new highs, and good mutual funds that reap the
rewards of excellent NASDAQ performance (FDEGX, for example) should provide
investors with very nice returns into the new year.
Also, once the Y2K glitches are
corrected, expect a burst of corporate and government spending on new computer
systems and software. The banner headline of this week's Federal Computer
Week is:
29 December 1999: Y2K Caution?
21 December 1999: 'January Effect' Resumes
20 December 1999: Things that make you go 'Hmm...'
15 December 1999: DJIA, NASDAQ Rallies Fail to Convince
14 December 1999: Markets Decline on Pivotal Day
13 December 1999: Nervous Markets Await CPI Data
8 December 1999: An Eerie Calm?
7 December 1999
6 December 1999
Weak follow-through after Friday's big gains casts doubt on the future
of this rally. If the advance ends here, with the market (NYSE) not
having reached a new high, that would be a very bad sign.
3 December 1999
Great economic numbers suggest this rally will continue unimpeded right
through the New Year. Stay fully invested!
29 November 1999
It will be difficult for stocks to begin a new rally phase if the drop
in the dollar and bonds continues. The pullback that appeared to have
ended last week now looks set to continue. The economy's growth was much
stronger than expected in the last quarter. Interest rates may rise beyond
recent highs, which will surely dampen the possibility of a sustained
market surge.
24 November 1999
Y2K Freeze
The article tells how "a growing list of agencies postpone purchases and system changes to avoid new date change bugs."
The same thing is happening in corporate America. Starting in February 2000 we should see a huge increase in Federal and corporate spending on computer hardware and software upgrades and enhancements that are being tabled for now due to Y2K concerns.
The bottom line: expect very high profits for the high-tech sector starting with the 1st Quarter of 2000 and accelerating into the summer and autumn. This makes it difficult to predict a recession in 2000, despite the horror of a -4% national savings rate. The hangover from that will have to wait until at least the 4th quarter in 2000, I guess.
2001 looks scary--but for now, stay fully invested!
9 November 1999
The market may take a breather here. The Microsoft news is just an excuse. Certainly the courts and Federal government can't run Microsoft any more fairly and efficiently than Bill Gates. But, Microsoft's loss is its competitors' gain. The effect on the overall market should be almost nil.
Inflation and interest rates remain
the key factors. But for now the trend is up.
28 October 1999
A huge day: the NYSE was up 3.5%
on the best volume in months. This is the third very bullish high gain
high volume day in the past month. The broad market surpassed its early
October peak. The highest volume days in the past month have been the days
with the biggest gains. All of this is very bullish for the longer term--though
the continued choppiness and volatility have made short-term trading perilous.
25 October 1999
Having risen just a little, the
stock market is turning increasingly choppy--the last two healthy rises
had no follow-through the next day. The broad market must gain another
3% to surpass its high from two weeks ago. With bonds again holding steady,
a bull market would have advanced. Tomorrow's market will likely clarify
the situation for us...
22 October 1999
Another wonderful rally day. It has been a great week, as the models predicted. There's reason to expect it will continue next week. For the first time in a while, bad news (the IBM earnings report) was shrugged off. After an initial dip, the buying continued: yesterday afternoon and into today.
The reason for the IBM dip is interesting: companies are worried about Y2K, and so most are freezing their systems now. This means that for the rest of this year, new development projects will be on hold. But what will be the result in January? Once it's clear that Y2K problems have been cleared up, pent-up demand for new development and deployment of new corporate systems will explode. Projects and systems upgrades that managers have been pining for since this past summer will be taken off hold, and corporate treasurers will loosen the purse-strings to fund a plethora of new development. There should be an explosion in development and deployment of new systems a few months into 2000. So, the dip IBM is seeing now may become next spring's surprise big earnings rise.
Y2K may also end up being more a boon to the economy than a problem. It has forced many mid-sized and small companies to upgrade their technology to the state-of-the-art. Upgrading to the state-of-the-art doesn't just protect you against Y2K failures--it also increases your productivity and efficiency, leading to reduced cost of production and higher profits. It may turn out that because of Y2K-related upgrades, our economy may continue to boom right through 2000, with little inflation due to higher productivity.
But back to today's market: a look
at the chart suggests reasons not to get too excited. Is this just another
brief rise on the downward roller coaster ride we've experienced since
July? I don't know. But there are positive signs--volume was again very
strong today, bonds have quieted down (at higher levels than in the past
year, but 6.35% is low compared with most of the past 30 years), bad news
is finally being shrugged off sometimes, we're entering the historically
best 3 months of the year for stock performance, and the Y2K bug is beginning
to look like a blessing in disquise.
21 October 1999
All things considered, not too bad
a performance. A market that's been ignoring good earnings news was sure
to focus on bad earnings news (IBM). But the late day come-back suggests
that once the news was digested, more investors were interested in buying
again. The rally could easily resume Friday.
20 October 1999: The Rally Continues
A wonderful continuation of the rally! Today's rise was broad, on high volume. Rising volume as prices rise is one of the most bullish indicators of all--instead of fearing a further drop, some investors are now fearing they'll be left behind. The train's pulling out of the station, and they're not on it. So they're buying.
How long will it last? That's difficult to say. Bonds held steady today--not exactly a ringing endorsement of the views of stock investors. But perhaps some professionals who moved into bonds last week are selling to move back into stocks this week.
I always like checking the venerable Dow Theory's view on things. The Dow Theory has not been bullish since May. For it to turn bullish, the DJ Industrials would have to rise past 10650, and the DJ Transports would have to rise past 3080. The DJIA can pass 10650 with a further 2.5% gain. The DJ Transports, however, need a nearly 10% rise (after today's 1.8% slump). In other words, it doesn't look like the Dow Theory is going to turn bullish in the near term.
It's another sign of how divided investors are on this market. Bond investors think the economy and inflation are getting out of control. Stock investors have largely ignored great earnings news lately (but not today).
The good news is that the immediate bear market risk has dropped. This rally has characteristics that oppose, say, a 20% drop in the next week. This is a solid rally that is gaining the attention of investors the farther it goes (evidenced by the increasing volume that's accompanying these increasing prices).
I'm optimistic for the near term
and through January.
19 October 1999
Tomorrow is a very important day: the bond market was nowhere near as pleased with the CPI numbers as was the stock market. A further bond dip tomorrow would likely quash this little stock market rally.
Still, we're nearing the best time
of the year to be in the market (November-January: see
Is There A January Effect?).
18 October 1999: Time for a Bounce?
The strong downtrend was broken in a see-saw market on good volume today. Perhaps we've dropped to a price level where buyers are willing to step in?
Tomorrow's important Consumer Price
Index (CPI) report will likely result in big moves one way or the other.
But today's stock market action suggests there's a good chance for a healthy
bounce to the upside.
15 October 1999
Bonds are up on a day when stocks are way down on inflation worries? Yes, because there is a 'flight to quality' today: professionals are selling stocks and buying bonds.
The market has ceased being choppy. Volatility is high and rising, and downward momentum is building. This is not a safe time to be in the stock market,unless you have a long-term horizon.
The power of Tuesday's drop signalled
that last week's gains were just a break, a little 'relief' rally. Short-term
risk appears to be at its highest level since this all began in July.
12 October 1999
Back to the old pattern of great
earnings being completely ignored in favor of any bad news (declining bonds
and dollar). This recovery appears to be over, as the models suggested.
1 October 1999: Most models easily beat the Market in September
The conservative models suffered
only small losses in September, compared with a substantial drop in the
overall market. The previously high-flying Model 17 underperformed the
market. Statistics compilation is under way...
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