Sunday, December 12, 2004
Issue Contents:
| 12:12 | The weak dollar – causes and consequences Noted on the web: Bill Gross |
| 12:53 | Dow 13,000? 22,000? Or... "Insert positive adjective here" market. |
| 17:54 | Swing Scanner Results Friday December 10th closing data. |
| 17:56 | Market Statistics For Friday December 10th. |
The weak dollar – causes and consequences
I believe its important to see the market through the eyes of the cup half full and cup half empty (or about to be tipped over) folks. Bill Gross and PIMCO manage a literal ton of bond money, and are thus important to listen to even if one does not agree with their point of view. Bonds matter, even though we only tend to notice them when things are going stunningly well or exceedingly bad.
The weak dollar – causes and consequences
John Snow and Alan Greenspan have finally bowed to the inevitable. Instead of blocking the lane in defense of a Shaq Attack slam dunk, they have politely if somewhat obfuscatingly stepped aside. “Put it down brother” they seem to be saying, but it’s the dollar and not a round ball that they’re referring to. The dollar has gone down. The dollar is going down. The dollar will continue to go down because it’s the easiest way out (for the U.S.) to begin to rectify its imbalanced finance-based economy.How the world came to this point is well documented in some journals, including this one, but it bears repeating if only to reacquaint pre-Alzheimer candidates and those with “senior moments” such as myself with the facts. The U.S. spends too much; eats too much; drinks too much; TOO MUCH, (thank you Dave Matthews). And we pay for it with our debt and 80% of the world’s excess savings. In so doing our creepy crawly balance of payments deficit has inched its way up to 6% of GDP – a level never seen in the U.S. and reflective of third world nations in financial crisis. The imbalance has been tolerated by those nations on the surplus side of the ledger – read “Asia” – in a strange sort of mercantilistic Faustian bargain that promises China and Japan the benefits of a strengthening economy now for the perfidy of falling dollar denominated Treasuries bonds later, an arrangement that once again will prove that there is no free lunch, or that hell often follows heaven on Earth. More >
Those with little time for reading can scroll to the end for a current if / then view of the Dow Industrials
And for the cup is half empty and still filling folks, today we have Ralph Acampora, Managing Director, Global Equity Research for Prudential, long-time self-described Bull famous for his book Mega Market (published 2000) and therein his call for Dow to quickly reach 22,000. Perhaps Mr. Acampora was a little off on that call, but people still like that message.
Ralph Acampora: December 6th Morning Market Commentary
As you know we have been referring to this bull market as a cyclical bull market. I want to highlight the four cyclical bull markets that developed between 1966 and 1981. The shortest one was 13 months and the longest was 31 months. The smallest gain was 31% and the biggest gain was 69%. I wanted to give you that as a backdrop because we are in a powerful cyclical bull market right now.The cyclical bull market that we have been using as our model the last year and a half or two years started in May 1970 and ended January 1973. That was the first time the Dow crossed 1000 and then collapsed. That bull market exhibited something called a measured move which is a three wave movement of price over time. The second leg up, is equal to the first leg and in the interim is a correction. We believe that the present day correction ended in August for most of the leading averages. Therefore, by definition we are in the second up move in the cyclical bull market.
Ultimately, I have a target of 13264 for the Dow, 1473 for the S&P 500, 389 for the S&P Small Cap index, 789 for the S&P Mid Cap index, 797 for the Russell 2000, 2796 for the NASDAQ composite, 2278 for Value Line composite, and 8595 for the NYSE composite for 2005.
We have gauged the percentage gain in the cyclical bull market from the beginning of October 2002. So far, the leading index in the market that we are in is the Value Line composite which is up 112%. That is a very broad based unweighted average and it tells us how very powerful this bull market is. In fact, of the eight averages coming off their October 2002 lows, five of them are up over 90%. More >
At Least Two Bones To Pick
A couple of points struck me about his commentary this week. I found it ironic that even though Mr. Acampora is modelling the current leg up in the market after one in the 70’s, he has not raised a red flag here as a comparative model would suggest. The information is present in his piece, but not the caution, as he states:
The smallest gain was 31% and the biggest gain was 69%.
Yet with respect to the current market:
So far, the leading index in the market that we are in is the Value Line composite which is up 112%.
In my books, extraordinary performance is always a cautionary note to be heard and heeded, even as one is celebrating.
On Forecasting
I am not a fan of long-term market forecasts. At best they are useless for most market participants, at worst they are specious and merely a marketing tool supporting the on-going deception perpetuated by Wall, Bay and Howe Street.
Why? Indexes lie. Their components change all the time. When one company starts to become irrelevant, it is replaced by another.
What remains constant then? The fundamental nature of the market: pass risk from one set of stake holders off to another. Market the wares while the marketing is good. For a time buyers will be more right than not, until the sellers are more right than not.
Forecasting higher market prices long out into the future is about the easiest game to play. Anyone – not just Mr. Acampora – can safely predict that the Dow Jones Industrial Average will one day be 15,000 or 22,000 – but few of us will get paid to write a book promoting such a no-brainer goal. If Ralph’s timing happens to be out a few years, it won’t matter one whit – the goal is to sell services, books, stocks and “dreams” now, to today’s consumers (investors), not tomorrow’s.
When I see long-running trendlines reaching back in time decades, stretching out to some imaginary future goal, I am unable to surpress a chuckle, since we know that indexes lie. The Dow of today is not what it was 3 years ago, let alone 30 or 50 years ago, and the components of that index surely will change multiple times even in the next decade. What happens today is of great importance to those who are making or losing money, today. Where price landed 10 years ago on a trendline is without relevance to anyone but the most devoted to such practices.
If today’s index is not yesterday’s index and won’t be tomorrow’s index, its therefore only natural to question how long past index price performance can possibly be used to justify future price movement.
This is a jaundiced view perhaps, but one that makes sense.
Dow Industrials and Dow Transports
The second point I'd like to make seems minor, and would probably be overlooked by many, or chalked up as a point of disagreement, an irrelevance in the bigger picture, a simple mistake, or even a typo by some.
Later in Mr. Acampora’s piece he makes mention that the Dow Transportation Average is leading the Dow Industrials which, in his own words, ”is very rare”. While this wasn’t the only component idea supporting his thesis, since his statement was categorical, it only made sense to check it out.
The 80’s
INDU / DJT circa 1980’s break out from congestion – a “bull market”. The Dow Transportation Average led the way – not for months or even a couple years, but for three quarters of a decade. Suddenly this observation of Acampora’s doesn’t seem rare at all. And what followed?
Black Monday struck, almost halving market values before all was said and done. In hindsight it was a glorious buying opportunity. Was this outperformance followed by a correction an isolated occurance? No.
In fact the DJT has led the Dow Industrials out of every single market correction since the 70’s, and in all but one, DJT over-performance forshadowed major market corrections. Is the DJT therefore a uniquely important indicator? Probably not, although it does make sense to follow the sector since transportation is so closely linked to commerce.
The Early 90’s
The mini-crash of US markets in 1990 was also preceded by the Dow Transportation Average leading the Dow Industrials by a big margin.
Interestingly, then, as now, real estate asset value inflation was running strong. Housing prices in southern California peaked in the second quarter of 1990, and began a lengthy recession that year which mirrored recession in the US for part of that decade. Then, as now, the US was involved in fighting Iraq.
Coming out of 1990 Japan suffered a crippling stock market crash and experienced economic difficulties for more than a decade before real improvement was seen.
1998 Currency Crisis and Black Monday
Again, the Dow Transports led the Dow Industrials for almost a decade, right up to the 1998 “Black Monday” crash. Then, as now, currency valuations and international monetary stresses of enormous proportions had been shaking financial markets for many weeks.
In hindsight, the ‘98 crash was just another example of a buying opportunity as had been the experience during corrections over the past 20 years.
Finally, and only in this instance, does Mr. Acampora's assertion even partially hold up and the Dow Industrials took the lead. After the 12 months following Black Monday, the Dow Transport Average told a different story than it had through the prior 240 months, only it wasn't a bullish story...
Finally, Mr. Acampora’s assertion (that the Industrials should lead the Transports) is correct – for the first time in over 20 years. We can’t help but wonder what he is talking about, as we can clearly see that the Transports generally lead, not lag, and the one significant period in which the did not led to a bear market.
1999 – Predictor of 2000?
Some might say, and we’d be hard pressed to argue with them, that the Transports were a leading indicator of the economic malaise which followed the market bubble bursting in 2000, as DJT peaked in May 1999. But the behaviour here is much different. Looking to the past, we would have seen no clues from DJT underperformance, if force-fitting the current market against one long past was the foundation of our analysis.
The bear market of 2000 and on is not like the sharp corrections of 1998, 1990, 1987.
However a little common sense and price alone would have told us that transportation, inextricably linked to commerce, was weak and perhaps a reason other than the mantra of the day ”this time its different” was at work.
2003 – Heading Back to Black.
Having undergone the longest correction and consolidation seen in many years, the market in 2003 as a whole advanced and here we see once again the Dow Transports leading the Dow Industrials.
As we’ve shown this phenomena is not rare, as Mr. Acampora suggests, but rather is a common feature of a broadly advancing market. If anything we should be on guard for weakness in the transports as a potential warning indicator, particularly after an extended run in both the DJT and INDU. Any significant weakness in the Transports may well signal that a broad market advance is nearer to the end than the start.
2004 – Today is What Matters Most
If there is any value in using the Dow Transports to assist us in market timing, price is where our focus should be.
Here we see the DJT make minor break of the rising trendline and form a complicated looking flag in the consolidation which has formed over the past 7 trading days. Ordinarily we’d like to see price retrace less and spend less time moving sideways after a “breakout” (coming out the end of November), so the longer price meanders the more chance of a deeper retracement. Given that the Transports are up some 23% since August, a retracement at some point will not be a shock to anyone.
The question waiting for price to answer is which market is going to lead going forward? The Transports are trading at levels not seen since before Black Monday in 1998, up 25% for 2004; the Dow on the other hand still remains below the high of this year.
On the monthly chart we can easily identify a declining consolidation zone forming over the course of 2004 and see also that price in November broke up and out of the range. Continuation is critical here; longer term Dow-oriented investors can with some condifence now use the low of November as their personal line in the sand—price should not go there again this year of the November break out is to hold.
And if the breakout does not hold, then we can almost certainly expect a much deeper retracement in the weeks and months to follow. The initial target would be the low of 2004 (9783) which is also the base of the breakout in late 2003. If this price level fails then 9000 is the next major target ahead.
If the breakout holds, then its logical to expect a retest of the 2004 highs (S&P 500 and Russell 2000 indexes achieved this weeks ago and headed higher yet until stalling as of late) and, if a rally can continue beyond the start of 2005, we might see the Dow even move back to its all time highs.
Two scenarios, decision time coming up quickly.
Fortunately for us, this question is likely to be answered soon as both the Dow and Transports remain in relatively narrow ranges, and one useful bit of knowledge that historical chart study tells us is that short term patterns repeat over and over again. This is of course only common sense—consolidation patterns always denote periods of uncertainty—our job is to detect when the uncertainty has ended and engineer a trade on the long or short side of the market as appropriate.
Summing Up
We’ve seen through this exercise that the Dow Transports have led broader markets higher; we’ve seen that when price rises steeply, sharp market corrections inevitably follow - this is true for all markets, not just the Transports or Industrials. The key to exploiting this is timing, for often markets rising parabolically longer than we expect.
We’ve all learned over the past five years that what starts out as an apparent short term sharp correction can morph into a longer term cyclical bear market. We’ve also seen a renowned market analyst and the head of Prudential’s research group make a statement which has no apparent basis in reality.
What should be the moral of this story or lesson learned? Is there any?
If anything, the take away is that our motto should simply remain “let price be our guide”, and common sense our foundation.
Friday December 10th closing data.
Click on the title above to expand this document.
Statistics for Friday December 10
Note: Statistics are compiled based on our custom symbol universe of the most heavily traded stocks.
| Symbols in Up Swings | 410 |
|---|---|
| Symbols in Down Swings | 359 |
| Up/Down Swing Ratio | 1.14 : 1 |
| Advancers | 48% |
| Decliners | 50% |
| Unchanged | 3% |
| Close > 20EMA | 47% |
| Close > 50SMA | 74% |
| Close > 200SMA | 68% |
| 20EMA > 50SMA > 200SMA (trend up) | 47% |
| 20EMA < 50SMA < 200SMA (trend down) | 12% |
Lots of “up bars in down swings” in the latest Swing Scanner Results. Direct continuation to the upside seems critical here, anything less is likely to extend these down swings through a test of the recent range lows.