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Market Matters A daily recap of all things financial Don Bravo
Equities Roiled Again - March 11, 2005
For the week, the Nasdaq was off 31 points, including today's 18.12 loss, to close at 2,041.60. More significant than the point drop is the change in direction, after the index closed at 2090 on Monday, abruptly changing direction for the next four consecutive sessions.
The Nasdaq is now lower 134 points - 6% - for 2005. Stocks are still pricey. This week was witness to fundamental change of sentiment. The oil situation continues to be a thorn in the side of free market adherents and the global credit glut has surfaced in treasuries. Rates will rise, as will commodity prices, gold, gasoline and taxes.
The inside numbers again were most instructive. The Nasdaq recorded its second consecutive day with new lows outnumbering new highs, today by a widening margin, 92 to 54.
The NYSE Composite closed the at 7,330.43, lower by 24.55. The Comp dropped 110 for the week.
While the A/D lines were somewhat muted, volume was decidedly negative; 61% were lower on the Comp, 69% on the NAZ.
The January trade deficit was the second highest in history, behind November 2004, at $58.3 billion. Coupled with the Treasury record deficit report on Thursday ($115 billion), the twin deficits facing the US economy were not received warmly by Wall Street this time around and the failure of Washington to deal with them are are beginning to erode confidence.
Meanwhile, the country's political condition is less than crysal clear. It was a bumpy week for the administration, and the public seemed to be in no mood for neither the President's Social Secuity nor foreign policies.
All of this played into dour consequences in equities. Government notes and bond yields were up sharply, with the 10-year up 21 basis points, ending at a 9-month high of 4.53. The 30-year followed suit, rising from 4.64 to 4.81. The normally quiet 6 month bills rose 4 BP on Friday.
Next week provides a number of key indicators which should serve to either salve or exacerbate the current dour mood of investors, most prominent are the readings of the Current Account and Housing Starts on Wednesday.
The prudence of ignoring the Dow
The Dow Jones Industrial Average, for those still interested, was down 77.15 on Friday, closing at 10,774.36, off 166 for the week. The only day the Dow closed higher was Thursday, and that was an abberation. The reason the Dow's headline number is not rightfully reflective is because the index is not weighted and its realively small size.
In the Dow formula there is no proponent for volume or bias. The true severity of today's action on Dow stocks is underrepresented badly. There were only five issues to the upside, while 25 traded lower. This would be comparable to a 1-5 A/D line on either of the larger, more inclusive indices. Only Alcoa, Caterpillar, Honeywell, Altria and Exxon-Mobile were higher. An intriguing mix, those five companies, but nevertheless, a small minority
Alcoa, Honeywell and Catterpillar comprise one third of the lowest volume 9 stocks on the index, while XOM is the thrid most active at 24 million shares today, though far behind leaders Intel (114 million) and Microsoft (60 million). Altria traded only 6 million shares today.
The importance of the change in sentiment from Tuesday onward should not be underestimated. Months from now we may be looking back on this week as a serious turning point for investors.
Mid-Day Rally Sputters; Tech Remains Whipping Boy - March 10, 2005
After yesterday's broad sell-off in the equity markets, early nervousness send all the major indices to fresh lows within the first two hours of trading.
However, buoyed by lower oil prices, stocks climbed steadily into positive territory before a weaker dollar and persistent inflation fears snuffed out the run shortly before 2:00 pm. The report of February budget deficit at a record $113.9 from the US Treasury put a severe damper on spirits as the retreat continued into a fairly uneventful close.
The NYSE Composite closed modestly up 0.24 at 7,354.98, while the Nasdaq fell another 1.57, finishing the day at 2,059.72. The Tech-heavy Nasdaq remains the whipping boy in the otherwise hyper-extended exurberant equity rally.
Treasury yields and oil fell, fueling the afternoon rebound, but there was little enthusiasm for buying. Once again breadth told the real story. Declining issues outnumbered advancers once again, by a 14-10 margin on the NYSE and 3-2 on the NAZ.
While the headline number for the Dow (up 45 points) will surely distort the picture, the party is truly over on Wall Street. Call it stealth selling, but down volume outpaced up volume on both indices and the New High- New Low line finally plunged into the red on the NAZ today with 70 new lows and 44 new highs. The same metric narrowed on the NYSE, 61 to 27 in favor of the new highs. The market is rolling over, even though 90% of investors won't notice.
In an historical side note, today marked the 5th Anniversary of the all-time closing high on the Nasdaq of 5048. The overextended rally, which began in earnest late October 1999, peaked on Friday, March 10, 2000 and caused one of the most massive sell-offs ever witnessed in the financial markets, now known variously as the tech bubble and the dot-com implosion.
On that Friday, March 10, five years ago, the Nasdaq closed at 5,048.62. Investors were unaware of the trouble they would face the following week.
On Monday, the 13th, the Nasdaq closed at 4,907.24, a loss of 141 points. Tuesday was even worse as the index lost another 200 points, the largest one-day loss ever, to close at 4,706.63. And on Wednesday, March 15, the Nasdaq lost another 124 points, closing at 4,582.62.
By May 24 of 2000, the index collapsed to 3,205.11, though the slide was far from over. The Nasdaq would eventually fall as low as 1,114.11 on October 9, 2002, reduced by nearly 80% after weathering corporate scandals, the 9/11 attacks and the loss of over 2 million American jobs.
More than anything else, the absurd valuations ascribed to tech stocks in those heady days of 1999 and early 2000 contributed to the eventual deflation of the tech bubble. Venture capitalists were throwing money at just about any scheme imaginable that used the internet as it's main platform. It was seen as revolutionary, lower-cost and highly evolved, and investors were told to ignore old maxims of investing as we had entered a "new age."
The words "old economy" and "new economy" - pitting established, dodgy companies and institutions against the high-flying tech darlings - became established during the time, but by the end of 2000 were largely discarded.
In the end, the old economy proved more solid and trustworthy as wild-eyed speculators and novice investors lost trillions in value over a span of just 2 1/2 years. Lessons were hard learned by some, lost on others, but countless companies spawned in 1998 and 1999 lost all value and eventually vanished. Names like e-toys, webvan, Dr. Koop and countless others simply disappeared. Three notable survivors from the period, Amazon, Yahoo! and eBay, eventually flourished, though their valuations (except for eBay) are still far from the peaks of 2000.
TOMORROW: The virtue of ignoring the Dow.
ALL HELL BREAKING LOOSE - March 9, 2005
Dow drops 107, Nasdaq loses 12, as interest rates spike.
The Great Bear - briefly stirred from sleep in January - has awakened. And he's not in a very good mood. All major US indices took it on the chin today as treasuries were hammered lower, sending yields to multi-month and multi-year highs. The stock markets took note, albeit grudgingly, giving up significant ground.
Perhaps the highlight of the day, however, was the widely reported block sale of 14 million shares of Exxon-Mobil (XOM) precisely as the stock hit an all-time high of 64.37. At the time, oil had also peaked at its all-time high of $55.65/bbl but soon backed off, closing with a 14-cent loss at $54.45.
The damage had been done, however, as Exxon-Mobil quickly retreated, ending the day at 60.79, down 2.31, and 3.58 off it's high. Exxon-Mobil was the most actively traded stock on the NYSE, as over 68 million shares changed hands.
The collapse of the Dow's biggest winner over recent weeks ignited more fires in other sectors, sending the Big Board to it's lowest level this month. Not that the close of 10,805.62 is anything but overvalued, but it is 135 points lower than Friday's close, and the interim support at 10840 was taken out rather handily. The bold sale in Exxon-Mobil may have been just the kind of signal (it doesn't get any more obvious than the market leader taking a huge hit) that the rally which began in November has run its course and a major reversal is underway.
The NYSE Composite slumped 71.43, giving back last week's gains entirely. But there is still a long way to go even to get to a marginal 33% pullback. The Composite index began this recent rally from 6520 on October 26, closing today at 7354.74. Friday's high was 7441, so the index needs to shed another 240 points to achieve normal market dynamics. After that point, the 50% pullback will be eyed in accordance with the prevailing conditions.
If one needs more evidence that stocks are headed lower, the bond market certainly provided in spades today. The benchmark 10-year T-bond yield crashed through the technical 4.42% level and ended the day at 4.50%. The Greenspan "conundrum" - of long rates remaining flat - was also accommodated and temporarily easing the pain of the Fed chief, as the 30-year rose in yield to 4.81%.
Today's move in bonds put the 10-year nearly 50 BPs higher than a month ago, but the silver lining being that the short end of the curve barely budged today, easing inversion fears for the time being.
Breadth was once again in focus for the bears, with the NYSE A/D line absolutely hammered. Losers outpaced gainers, 2700 to 682. On the Nasdaq, the ratio was roughly 2-1 in favor of declining shares. The new high - new low metric tightened to a mere 10 issues, as 71 hit new highs while 61 record new lows. This is the closest to a negative reading in some time, adding fuel to the bear bonfire.
Considering recent headlines - Iraq, record oil prices, extended winter in the Northeast, sabre-rattling at Syria and Iran, continued Fed rate hikes, the twin deficit problem, weak dollar - a sell-off would not surprise even the novice speculator.
But, despite the news and obvious sell signals, nobody seems to be panicking ...yet.
More NASDAQ Deterioration - March 8, 2005
The trend of tech-wrecking continued on Tuesday as the NASDAQ lost more on a percentage basis (-.80) than the NYSE composite (-.19). Perhaps more emblematic of the growing distaste for all things tech is the continuing narrowing between the new highs and lows on the index, which tightened significantly today. There were 98 new highs and 59 new lows.
The number of new highs minus new lows on the NAZ has been in perpetual decline since the start of 2005. By contrast, the H-L number on the NYSE fell sharply in January, but has stabilized since. While this perpetual tech underperformance may be undeserved, there's still the hangover effect from the 2000 implosion, though valuations back then were preposterous.
Today's activity on Wall Street may have been the most instructive and well-mannered of the year thus far. With the NASDAQ shed 16.66 points, the NYSE dropped 14.14. Oddly, the Dow (which will continue to deserve only the briefest of mention here) fell 24.24. Add up the losses on the Comp and the Dow and you get -38.38. Today's date: 3/8. Maybe we've entered the new age of trading in code. It wouldn't surprise anyone.
Continuing on the instructive trading today, we see both the A/D line and the volume indicators decidedly in the red on both indices. On the NYSE the A/D was 33-61%, volume a disappointing 29% up, 68% down. The NAZ was marginally worse, with a 33-62% A/D and 24% advancers to 74% decliners. Traders were seemingly in a reclining mode, with buyers approaching a comatose state.
The internal numbers tell the story of a very jittery market, though the headline numbers belie the underlying issues. The stock market is very much like a torpedoed ocean liner. It looks nice on the surface, gliding across the water, but below it is taking on water and will soon be sinking.
Piling on top of the growing number of corporate indictments and investigations, the interest rate "conundrum" (thanks to Mr. Greenspan for reminding us that even his English is antiquated) and the worldwide credit bubble was the price of oil, which closed at 54.59 a barrel on the NY Merc. Energy consumers have been hit hard in the past year and the effects are beginning to be seen not only at the gas pump but also in the diminished buying capacity of American consumers. High oil threatens to bring the 5-month party to an abrupt and decisive end.
On cue, the collapsing US Dollar fell broadly against most major currencies.
Nowhere fast, the Flattening Curve - March 7, 2005
The NYSE took a bit of a breather today while technology picked up the slack (the NAZ has been lagging the general market badly the past three months (NYSE Composite up 5% since December 7, while the NASDAQ has been off 4%), so it was making up for lost time today.
The NASDAQ was up a somewhat unhealthy 19.60, as declining issues outpaced advancers, 1611 to 1550. Breadth like that is usually a bad sign, that a market cannot sustain itself, or that there is a growing degree of short interest, or that the advance was much ado about nothing. Today's NAZ was probably a little of each.
The story on the NYSE was oddly different, with the A/D line to the positive, 51-43%, though the index lost 87 cents. Overconfidence? Maybe, though we're sure that the government will revise any poor numbers higher (they did so with GDP growth - from 3.1 to 3.9, productivity, and of course, the usual massaging of the employment figures - the unemployment rate increased while the economy added 226,000 jobs).
As I've said previously, this market takes all news as positive development. Higher oil prices? No problem. Lower net income? Great. Declining dollar? Gimme more! The conventional (read, everybody, until they change their minds) wisdom is saying that until something really, absolutely, without-a-doubt bad happens, there's no reason not to own stocks. And even if something really bad happens, you should still own stocks.
If we start another war, you should buy more stocks. If oil hits $60 a barrel, buy more stocks. If the dollar falls further against the Euro or Yen, you really, really need to buy more stocks. The rationale for this last one is simple: with the value of the dollar declining steadily, stocks have to be worth more just to keep pace with the rest of the world. It's that kind of thinking that causes crashes, or worse, long-term bear markets, or currency devaluation (we're getting that now).
Amidst all of the noise on Wall Street, the bond barons did something peculiar today as well. A concerted effort was made to flatten the yield curve. Yields rose on 2, 3, and 5-year notes, while the 10 and 30-year bonds fell slightly.
One can now borrow at 3.57% for two years, but if you want to go out 30, the percentage is only 4.61. While both rates are enticing, the smallish spread encourages longer term debt. At these rock-bottom prices, is it any wonder that capital spending is increasing at a ponderous rate? That is a healthy development for business, but the short rate (mostly consumer oriented) is rising faster. Over the past month, the 30-year yield has risen .13, while the 2 year rose .30.
Nothing in the financial realm occurs in a straight line, but should that rate of narrowing continue, it would put us at inversion in 6 months. The interest rate for a thirty year loan would actually be lower than a 2, 3 or 5-year loan.
The two (actually three) main drivers in this dilemma are consumer credit, vehicle loans (now 5 to 7 years) and home mortgages. Surely, one way or another something evil will come of this trend. While these are not the primary markets for treasuries, the activity in these credit realms will largely determine the direction of government securities.
In the most likely scenario, mortgage rates remain low to sustain the unsustainable housing boom, while auto loans and consumer credit rise to cover expected inflation, servicing costs and defaults. As bankers and other commercial lenders tighten the screws on the short end, ensuring reasonable short-term profit, long term debt floats at a grossly undervalued level.
A speculative squeeze is underway. Fed Chairman Greenspan cannot raise rates quickly enough to avoid dislocation in the credit markets. Already the spread between corporate and treasury bonds is razor thin, exacerbating the perception of a bond market off its moorings. Pressure to keep long term rates (mortgages) low - or even to increase them at a measured pace, as the Fed suggests - cannot contain the speculative nature and financial necessities of the market.
At the very least, the spreads between Corporates and Treasuries are thin and the yield curve is essentially flat. while I am always light years ahead in my financial predictions, I'll say there will be hell to pay for these credit excesses within the next 12 months. (I'm thinking fall of this year, but hedging that it may be sooner).
Despite the bubbling effervescence of the stocks crowd, we should all be lucky to keep our mortgages at low rates, though many of us will be unable to afford new cars (or the fuel to make them go) in the immediate future.
Direction, Please? - March 4, 2005
Having returned from a lovely vacation - sans computer and stock markets - I find that I've missed almost nothing over the past 2 1/2 - 3 weeks. Daily musings will continue apace.
Since bottoming at 2,008.70 on January 24, the NASDAQ has vacillated between there and 2,089.21, a fairly tight range. Even worse is the most recent range - from February 1 to the present, with a spread of a mere 59 points, or less than 3 %.
This 21-trading-day span has produced essentially no movement. On Feb. 1 the NASDAQ closed at 2,068.70. Today, it closed at 2,058.40. Ten points lower. Ho hum.
The S&P 500 has been similarly stagnant, ranging between 1,180.95 on Feb. 1 (the closing low for the period) to 1,205.52. a whopping 24 points and change. Whoop-de-doo!
The NYSE Composite index has been the most volatile and also the best performer. Since February 1, when it closed at 7,146.21, the index has risen steadily, closing at its high of the year today at 7,357.12, though the move is still less than 3%.
Overall, the trend has been positive for traders, especially if one follows the patterns of new highs-new lows, a chart which has been going straight up for nearly two years with only a brief downturn in late April-early May of '04. The NASDAQ Highs-Lows chart shows a similar pattern, with a only one large break from the uptrend, in July '04.
The chart for the tech-laden NASDAQ is beginning to flatten out, while the advance/decline line has been trending lower since the beginning of 2005, suggesting that the overall market - at least in the NASDAQ - is showing some signs of wear.
Conversely, the A/D line for the NYSE, after taking a serious hit at the opening of 2005, has rebounded nicely and continues to indicate broad-based support.
Obviously, the money has been flowing out of technology into more traditional ventures. It's probably more of a technical safety move to more sane price/earnings levels on the NYSE, as opposed to the sometimes ridiculously speculative overvaluations on the NAZ.
Whether the divergence will continue remains to be seen, but the trend seems to be intact. Selling the NASDAQ and buying the NYSE is apparently the trendy play of the day, week, month and possibly the year.
Worry warts will ponder the debilitating effects of another NASDAQ implosion, though it must be pointed out that since 2000, the NAZ has borne the brunt of the correction (while it was ridiculously overvalued at the time), still off more than 60% from it's zenith.
Since the NYSE was recalibrated early in 2003, it's not possible to get an accurate read of the decline since the boom went bust, though it's closest brother, the S&P 500 stands a mere 20% off the 2000 high, so the disenchantment with tech still lingers largely.
Further heavy deterioration in the NASDAQ is unlikely from these levels, though consolidation of gains on the NYSE would seem to be not only predictable, but probable.
Tech, while still highly speculative, is ubiquitous, and continues to evolve and emerge. The greatest gains will be in the tech sector in coming months and years, if indeed there are gains anywhere. The mid-sized companies with growing market share would seem to offer the best bang for the speculative buck.
Mixed Markets, Tight Ranges - February 14, 2005
The NASDAQ and NYSE Composite both finished slightly positive today, the former up 6.25, the latter 18.73 to the plus side. The darling Dow was down 4.88, mostly due to drag from AIG, which received more subpoenas from NY AG Elliot Spitzer.
With over 80% of the S&P 500 having already reported earnings for the 4th quarter of '04, there was little to motivate either buyers or sellers. The NAZ is stalled at an interim top, though the Composite made another '05 high today.
Volume was decidedly light, in fact , the lowest of the year on both exchanges. Investors are waiting for some kind of signal - any kind - and have been in a holding pattern for nearly a week, despite the usual day-to-day market noise.
Gold and oil were both higher and the dollar lower, though none of these markets are in what anyone might consider a trend. Volatility has hit new lows, with a preponderance of investors in the bull camp.
The bond market was equally quiet, though the yield curve did some twisting, as the gap between 2 and 3-year yields widened to 15 basis points, though between the 3 and 5's it contracted from 25 to 20 BPs. The entire curve is looking at flattening right out, as the shorter maturities drop in price (yields rise) while the longer term is going either in the opposite direction or treading water.
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