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Web of Finance
424 hits
| Mar 08, 2004 9:14 pm |
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re: Market Direction |
Rakesh Sahgal
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Hi Melanie,
Re. your contention that the markets esp. the tech part of it is about to tank, I would like to submit that the process of a correction was initiated around the 23rd of Jan, '04 - in terms of the NDX. Matter of fact the market has by today corrected the rise commencing 11/21/03 to 01/20/04, by approx 62%. I am unaware of your views on technical analysis. However I would like to think this appears to be the final stages of the shakeout and again the market (in NDX terms) should find support around the 1420 regions on the weekly charts and around 1380 on the monthly charts. Will any of the suport levels hold? Your guess is as good as mine. If they dont I wont hesitate in changing my perception of the market. However in the interrignum I would like to keep an eye out for an end of the present correction given the close proximity of the NDX to underlying support levels on the weekly and monthly charts. This is again loud thinking and no more. The markets have this nasty habit of making all wannabe gurus like me look foolish. So I for one would like to play it by the ear and see how the cookie crumbles, as they say in your country.
> Melanie Hollands wrote:
> I write a weekly market column and / or technology column at various investment sites. On January 14, 2004, I wrote that I thought the market "felt" like it could be due for a correction. At that time a number of elements that caught my attention. First, the put/call ratio, which was they are almost even, whereas usually puts are a multiple of calls. Second, stock newsletters in general were very bullish (often, but not always, a bearish sign). Third, stocks in general, and technology stocks in particular, had run from their 50-day moving averages with no pullback in ten months. Fourth, the weakness in the US dollar; and I don’t yet see the US economy in a self-sustaining recovery. Fifth, we were in the throes of earnings season. Tech stocks in particular looked unlikely to hold onto their lofty valuations - it seemed unlikely that underlying growth rates at technology companies would, for the most part, match expectations that were baked into stock prices.
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>Since January 14, 2004, the market has corrected a bit. But before I describe the market action over the last six-to-seven weeks, I must point out that while in this case I was right that things had started to “feel” different I don't always get it right; I don’t know anyone in this business who does although some are better at it than others. “Predicting” market direction is not my specialty (I’m a stock analyst, not a market technician) and often one gets the timing of a change in market direction wrong a few times before getting it right. This is one of the reasons I rarely trade the "ends" of a trend. Often, I have ended up spinning my wheels trying to “predict” a change in direction and this has lead to friction loss from entering and unwinding positions. I know some who do trade these “ends” well but I am not one of them. In general, I prefer to enter a trend once it has started although there have been exceptions.
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>First, taking a look at the SOX, the Philadelphia Semiconductor Index, this has been a leader in this market correction. This index reached what was, in hindsight, a roughly 21 month high of 560.65 on January 13, 2004; around 21 months earlier, on April 22, 2002, the SOX had closed at around 573. On January 14, 2004, the SOX has fallen back around 10% to close Friday March 504.25.
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>Second, taking a look at the NASDAQ this has also corrected although it has lagged the SOX by nearly two weeks. The NASDAQ closed at 2153.83 on January 26, 2004; the Index had not traded at around these levels for around two and a half years when, on June 12, 2001, it closed at 2169.95. Since January 26, however, the NASDAQ has traded down almost 5% to close Friday March 5, 2004, at 2047.63.
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>This correction could potentially last another one to four months (although if the market gets more oversold then it should bounce a bit). Notice that merger news gets no traction; rather, it gets a one-day pop on low volume followed by a slide back. In addition, many economic numbers have been disappointing. The Chicago Purchasing Managers’ index (PMI) was positive in February, but it’s more of a “gut check survey rather than empirical data. Recent economic releases based on “actual” numbers – such as Durable Goods, Capacity Utilization, Consumer Spending, Industrial Capital Equipment Spending, and Unemployment – have all been weaker than expected. Contrast this with the Department of Commerce comments that 2003 federal spending was +8.7% in the third calendar quarter of 2003 - the highest since being up 9.9% in 1967. And furthermore, the economy has not indicated it is in a self-sustaining recovery - yet.
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>Following a substantial influx of cash at the beginning of 2004 - $40.8 billion in January - the market continued to rally until January 26 when both the NASDAQ and the Dow Jones Industrial Average (DJIA) peaked (although as mentioned above the SOX had peaked nearly two weeks earlier on January 13). At that point, the NASDAQ Index topped and reversed, while the DJIA and the S&P 500 Indexes each formed a temporary top. Since then, neither the DJIA nor the S&P 500 have pulled back as aggressively as the NASDAQ, and both have remained within striking distance of their 52-week highs. While these larger cap indexes have stalled or pulled back, mid-to-smaller cap indexes such as the S&P MidCap 400 Index and the S&P Small Cap 600 Index have continued to make new 52-week highs.
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>This suggests a market consolidation period that could last anywhere from one to four months. However, consolidation does not mean that the primary rally is over; just that it is “resting” and pulling back a bit. The DJIA and S&P 500 have yet to experience a 5% pullback from their January 26 highs of 10,702.51 and 1,155.37 respectively. As of March 5, the Dow had pulled back 1% and the S&P closed all but flat with its January 26 high – up 0.13% to 1,156.86. (The S&P includes more mid-cap stocks, which, given the continued run up in mid-to-small cap stocks, probably accounts for its recent relative strength versus the large-cap DJIA and NASDAQ Indexes.) Until we get a 5% pullback or more in these indexes, then my view is that an endpoint in the primary rally of the last 12 months is not yet in sight despite this secondary (correcting) trend. Once the market gets that level of correction, then I’d be on the look out for another run-up. But that begs the question “What is the next catalyst to propel the market higher again?” One will emerge, but at this stage I don’t yet see one and see the market trading in a range for a while longer.
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>Cheers
>
>Melanie Hollands
>President
>Koala Capital, LLC 
Private Reply to Rakesh Sahgal (new win) |
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