Market Risk: A Close Shave?

Lots of 'close shaves' in our world. . . have been notable this week; starting with the market's flirtation with (our) projected key resistance in theMarch S&P 1170's, which bordered (particularly in some of the tech stocks) with being a bit 'spiky', and continuing all the way to an only recently-discovered asteroid (big enough to wipe out a medium country) barely missing our Planet, by twice Earth's distance to the moon.

Too bad it didn't get bin Laden's beard (unless it's already gone), or trim the threats facing the rest of us, at least moderately. And we are so early in the overall recovery, along with the challenge of zero-interest auto sales having pulled from the Spring's normal demand, not to mention the slightly more stringent credit worthiness standard by most banks (as their committees review loan app's), or the perception that debt is just off the map (which it really isn't uniquely so, or in any event really new), because the bulk of it relates to those zero-interest car loans, and a bit of a rush into mortgage commitments at historic low rates for modern times a back in October/November. We thought the short-squeeze in T-Bonds (driving to the lowest long-rates) was the last great opportunity on that front, and with common mortgages (all things being equal) at about a full point higher now, there's little surprise that buyers, or procrastinators, have some hesitation in chasing rates, prices, or purchasing much of anything, in the wake of the strong holiday season. All that is seasonally perfectly normal, by the way.

We are also seeing some positive pre-announcements from companies, which we're not surprised about; and is something we previously discussed (few firms warning) in regards to Q4, or even Q1 of '02. They are not experiencing a 'close-shave'; just for the record (such as for new readers), we have said for months the economic trough would likely occur in the vicinity of the proclamation of an 'official' recession, and as people worried about that, the recession would be virtually behind, not starting. More importantly, we argued that the so-called 'bloated inventory' figures were unrealistic, as the official numbers clumped old and new styles and products together, while the big players were trying to blow-out old inventory, and were actually short of the new. Subsequent data, as well as bare shelves of new inventory, affirm this projection; it means that there isn't going to be an inventory-based economic slowdown ahead.

Certainly there's a belief that a renewed rally after the market consolidates would be healthier than an extended move on-top-of a move (more dangerous, as you saw in today's market), and certainly there is the expectation (barring catastrophe, and we do remain on alert after all) for higher prices down the road. Because of the reversal at the particular point it occurred, and in the fashion of an outside-down day (higher high, lower low, and lower close on Wednesday), lots of recently bullish converts will now reverse to the bearish side as rapidly as possible, hopefully reaching a cresendo as stocks find a new short-term pullback low, which if overall trends remains positive as we suspect, won't be a huge decline before we're short-term (daily) oversold (etc).

Capitalist Memoirs?

Interesting how many pro-free-traders lump 'capitalism' and 'globalism' in one basket, when they can be mutually exclusive. We wouldn't argue that 'globalism' was dealt a huge blow on 9-11; how could you not. Companies (as we have repeatedly postured) are loathe to send key executives overseas, and the idea of capital expenditures for the purpose of growing externally, seems verboten to the staunchest big firms; most especially those who have seen their growth in gross exceed domestic operations by a huge amount over the last generation or so. And that's worried us here, constantly.

Hence, that's why we have distinguished between domestic-centric stocks, and those that are (more, or almost entirely) dependent on international trade; not as one once stoic magazine (notably) concluded recently, deciding to proclaim ends of capitalism with the 1990's. Boy do they have it wrong, if you view that problem is not particularly domestic (where service-sectors dominate), but international growth; that is targeted by our enemies, and is something companies decided to base their post-domestic-high-labor-cost expansion upon; nobody mandated that they do that. It is not a problem of capitalism; it's a problem of corporate styles (we won't say greed), trying too hard to maintain growth rates of another era, after that era matured. And it is historically the case that few firms are able to do that without diversifying products, or engaging in vertical integration (often acquisitions), not just by gambling on market shares in areas of the world that are under-exploited, or sometimes underdeveloped.

And then there was that -apparently baseless- story about an 'attack on Iraq' in the final hour Wed. Although denied (some say political feelers about some negotiation are actually in the works), it was enough to withdraw interest from the market, though whether or not short-sellers planted it, to accelerate the pullback, can't yet be known. It might be mentioned that a near-concurrent story surfaced that while Iraq won't be a nuclear power for awhile, China increasingly is becoming one, and within years will in fact be able to mount an effective deterrent (according to the Washington Post) to an effort by the United States to thwart their contemplated invasion of Taiwan, to which we have pledged intervention to help protect their fledgling democracy. There is also a comment about North Korea having a nuke or two; not to mention Iran and others. If the Iraqi story were true, Oil would not have softened late in the trading day.

The latest Fed official (Dallas) to say things aren't so bad, just happens to be among a few who follow the inflation gauges; so he probably has an advance idea that what is coming on Friday will be a benign PPI number, thus not bothersome to the market. Will that be sufficient to rally stocks, catching those who are shorting an outside-down Wednesday? That we'll see, though there's little doubt this was and is a rocky point in a market that looks good to so many (as we thought it would after-the-fact), which so often historically is a time to envision a drying-out of interest, and consolidative action of some sort. That is not necessarily bearish. Keep in mind that we thought even if an successful breakout occurred (and we momentarily got that Wed.) it would be turned around, one way or the other, causing short-coverers or buyers on 'confirmations' of strength to become very sour over some days, setting up the next eventual recovery.

We have argued that a short-term breakout would be less healthy than a correction in fact, whether it occurred or not; now some technicians and strategists are gradually in fact starting to embrace that view. The main aspect of not getting much breakout isn't in our view whether or not we see higher prices in the 'fullness of time', but rather that it will require longer periods of time to see such an affirmation from a long-term basis. Maybe that's actually a plus; because it will keep the debates about market structure alive, for a longer period than would otherwise be the case. Anyway, we've warned for a couple weeks about not chasing strength, and realizing that the movement up in the 4th Quarter and start of the New Year was the reward for those of us willing to buy basically in the September 20th / 21st selling climax, rather specifically as suggested.

At the present time we continue (as discussed all week) to believe the most Senior Dow Industrial Average contains a few domestic-centric leaders (our focus since September's panic) as well as many of the old-line multinational blue-chips, which we generally continue to shy away from, and which had at best rebounded moderately from September's climactic lows. The greatest upside was expected to be technology and we were not disappointed. The overall NASDAQ did well too, while Nasdaq 100 (NDX)stocks generally broke-out, and are 'testing' that breakout point with the mild pullbacks. They may do a bit more than that over time; but probably not drop deeply. We try viewing daily chart patterns more lately here and in 900.933.GENE hotlines.

Now of course we haven't expected much of a drop in the Greenback (which rose a tad again today), partially because of the myriad of international concerns that tend to keep funds in Dollar-denominated assets, and that's one reason we have been barely optimistic in recent months for a rebound in the traditional blue-chips, but little more. In the fullness of time, we'll get that, but for now even based on forward earnings, it is fair to say many of them (Cokes, McDonald's, Alcoa's, Caterpillar's, Gillette's, etc) at this point are clearly not particularly cheap, even though everyone should realize that at September's lows (in particular) the absence of earnings creates high PE rations (it has occasionally been pointed-out here that you get very high PE's twice, at the tops, when prices are absurd even with decent earnings, and at bottoms, when prices are down, but earnings have collapsed). In the present situation, it's a stretch to buy into the overall market's extended short-term rally (in big stocks that already rebounded), when those comparisons are high even on forward earnings prospects.

However, we note at this point the financial media is finally making this point; as we have for weeks-on-end about the old-economy stocks, and can't help but wonder if early economic reprieves (in our view the economy's trough was a few months ago, not out in the future somewhere), or a package of tax-credits that would particularly help capex (capital expenditures) in the biggest firms, would help earnings accrue at least nominally faster to the bottom-line, something nobody seems to be considering.

Amidst all this, a bifurcated aspect to markets continues, having to do with projected strength in domestic-centric stocks over these past months (balance is reserved).

So if the Senior Averages continue trying rollovers in the course of these next weeks or so, that might not be so bearish as some say. Rather, it could help the midmonth consolidation with necessary replenishment of market strength (details are reserved).

Absent further attacks on the key U.S. economic infrastructure, I do not know what more one could have asked from this market, given its backdrop, for the past months. So the overall tide will likely continue rising over the longer-term, as thus a chorus of negativity from some quarters does not mean we don't believe there will be midmonth pullbacks (or even a bit more, underway for example), but does mean many of those portfolio managers are scared fitful that they're trapped in relatively under-performing blue-chips; not where the real action is; technology. That will cool, but not a whole lot, and certainly not back down to the lows. There's no reason for it, as we also said way back in September. So, while a big ragged getting started (and still subject to a later-week rebound attempt), corrective actions are more than beneath the surface, and in fact close enough to the pattern we've forewarned about regarding the year's start; in harmony with no large change in the overall market or economic perspective we see.

In summary . . economic information is not particularly negative; even as short-term indicators had been moving towards greater extension technically, and are just now starting to ease-back, as suspected one-way or the other going into mid-month. We suspect that with (some reserved technical interpretations) there will be declines, but they will be more or less shallow, barring catastrophe. We also believed strength later is better than now. And we believed inventories were being consumed for months.

The McClellan Oscillator readings were about +50 on the NYSE, and near +12 for the NASDAQ stock market. Summation dots contracting now after the terrific upside; it's the normal characteristic of (the technical condition readers were expecting).

The proximity of resistance continued to make us leery of the recent pattern; warning that the several failures at surmounting resistance (more than briefly) were at least an example of a consolidating market, and not particularly ominous. (Reserved technical call.) In respect to that, watch and see if a post-PPI rally is able to be ignited, trapping shorts at least on a daily basis, or as markets trying to cobble-together a rebound, given that the Iraqi story was a final hour fabrication. General expectations nevertheless of course are increasingly dicey, with preliminary expectation for another rally tomorrow. Thursday may try the upside early again, and then almost immediately fade, with a later comeback. S&P is a -64 discount this evening; futures off 40. The hotline will be striving to finesse intraday action. Heartfelt prayers remain with our troops fighting anywhere in the world, and as events of the day explicitly remind us of various risks.