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SUBJECT: FWIW Posted By: wgolac
Posted Time: 7/21/02 16:15 EST
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From PBSP's (Bernie Mitchell's)weekly newsletter for Monday, July 22.
July 22, 2002
ACTION OF NASDAQ 100 PREDICTS COMING RALLY
World markets plunged en masse last week, finally culminating in a 390 point collapse in the Dow on Friday – bringing the two week decline to 14.5% -- one of the steepest selloffs in history.
Neither George Bush or Alan Greenspan could assuage investor anxiety, although they both offered upbeat assessments of the economy.
With most of the major indexes making new multi-year lows, the $NDX (Nasdaq 100) still stands more than 20 points above the July 11 low at 945.85, and clearly has been attracting investor money (on a relative basis, of course.)
Gone largely unnoticed is the fact that the New Economy sector has picked up more than 6% vs. the Old Economy in the past five weeks, registering a 16 week high. (See Technicals below.)
This should be a prelude to a stock market rally, beginning any day now, and lasting until late August or early September.
Our forecast for a tradable bottom, to be formed by July 18, has now been exceeded by most averages -- but thus far the $NDX has held. This coming week will tell the story.
In addition to our sentiment indicators showing extreme bullish readings, (See Technicals below) there are fundamental factors starting to suggest a real turnaround in the tech sector.
* A recent report by Market Profile Theorems, a Seattle research institutional firm, predict that a technical rebound is imminent. To quote: “an inordinate improvement (highest in 13 years) in the absolute level of insider buying in the tech sector…it’s dramatic…doubling from the previous month.”
* With 40 economists gathering real-time data at the Treasury Dept—but not for public consumption --(according to Richard Clarida, Asst. Secretary for Economic Policy) corporations will soon start spending big time for computer equipment and software.
* Capital spending data for May showed an unusually large 5% increase in non-defense capital goods (software and computer equipment – to be followed by a surge in technology spending for June, according to Merrill Lynch. (Out this Thursday.)
* Thus far, according to First Call, 88% of companies reporting earnings have met or exceeded expectations. CEO’s, of necessity, are being ultra conservative, and downplaying the future. As memories of corporate malfeasance fade into the background, CEO’s should be more forthcoming about their company’s prospects.
This empirical data, when combined with the recent relative outperformance of the high cap tech sector, gives credence to a technology led bear market rally. When you add to the mix, the extreme bearish sentiment, the ingredients are in place for an explosion in equity prices – though short lived. This will not be the end to the bear market, but merely a profitable interlude. We don’t expect the cyclical bear market to end until October, at the earliest, or possibly not until March 2003.
The final tally for the week showed the S&P down 7.99%; The Dow losing 7.66%; the Nasdaq dropping 3.96% and the Nasdaq 100 slipping 2.68%.
In Europe, the DJ Stoxx 50 (large blue chips) fell 6.64%; emulating their large cap cousins in the U.S. The FTSE Eurotop 100 also dropped more than 6%. Expect Europe to gap down Sunday, following the bad close in the U.S.
A huge disappointment by Ericsson – the largest maker of mobile phones – on a sharply discounted rights offering, unnerved investors, punishing the stock to an eight year low.
In Asia, the Nikeii 225 ended the week down 3.75%. With the Yen remaining strong, and exporters under pricing pressure, gains in equities will be limited. Reflecting this, securities houses suffered the worst declines on Friday.
Emerging markets have continued to perform the best to date. Jakarta up 47%; Pakistan and Thailand up 42%; Korea up 22%; New Zealand up 17%. David Lineham, of the Excelsior Pacific/Asia fund believes that Asian markets have actually gotten cheaper, in spite of the strong rallies. Price appreciation have not kept up with earnings gains.
Conclusion: Huge selloffs in U.S. and European markets, as investors panicked out of stocks. The triggers appeared to be a criminal probe of Johnson & Johnson, more phony accounting scandals by El Paso Corp and Duke Energy, and weak forecasts by Microsoft and Sun Microsystems. Large redemptions ($11.7 billion) by mutual fund investors, and forced selling by some funds played a part. With the Nasdaq 100 showing relative strength, the market is at a flex point, and needs to rally from a major cyclical low now. This should happen any day. We leave open the possibility of a once-in-a-generation massive decline (like ‘87) before the upswing begins. In any event, stocks are starting to look cheap, and companies with strong and clean balance sheets should be accumulated, on a scale down basis, for a three to five week rally, ending in late August – early September.
Investors Business Daily has finally rid itself of the Buy and Hold mantra it was so fond of in the 90’s, with a cover story titled “Rely on Good Rules, Not Buy and Hold Strategy.”
To learn some of the secrets of the PBSP trading methodology, including, Fibonacci Cluster, attend ourFree Online Trading Seminar 24/7 at your convenience.
Our Technicals Shape Up This Way
1. Weekly Squat- Another big-range week but all-time high volume produced Weekly Squat. Need weekly close over 438.97 on S&P 100 to “trigger” long signal. Moderately Bullish.
2. Odd Lot Shorts/Volume - Another new multi-year high on Tuesday. Bullish.
3. Call/Put Volume Ratio - Highest number of Puts traded on Friday since Sept. 21. Likely a few more days of extreme put trading early in week. Moderately Bullish.
4. Breadth - Still holds better net new 52 week highs/lows than on Sept. 21. Neutral.
5. Leadership - Sixteen week high New Economy vs. Old Economy stocks gaining 6.7% since low on June 21. Bullish.
6. VIX - Spike to 49.79 produced highest reading since Sept. Bullish.
7. Volume Demand Indicator - Multi-year bearish reading, this needs to turn before bear market can end. Bearish.
8. Momentum - Friday, recorded fresh new highs in downside momentum. Bearish.
9. IBD’s Investor Intelligence % Investment Advisors Bullish - Crossed into bullish territory first time since Oct. Bullish.
XAU (Gold Index)
The elimination of Barrick Gold and Placer Dome from the S&P 500, due to their country of origin, caused massive selling pressure in these stocks as Index funds were forced to eliminate them from their portfolios.
So, while gold bullion shot up more than $8 oz last week, and the dollar remained weak, it was of no help to the index.
The huge volume produced a Weekly Squat, in spite of the wide range. It will take a weekly close over 73.72 to “trigger” a long signal. The market tried to do it on Friday, but failed after the morning rally.
The XAU remains in its corrective phase, and will likely not launch a new bull market for several more weeks (months). In the meantime traders need to be nimble to trade the swings.