In my May 2000 newsletter, I was expecting the DOW to rally (ascend) to between 10,758 and 10,900 by either 5-12-00 or 5-15-00. Well, it topped on 5-16-00 at 10,971.24. Therefore, I was off by one day and about 71 DOW points, which is very accurate for wave pattern analysis. I was able to enter this trade (short the DOW) with less than 1.5% of capital risk and generated a profit between 8.3 to 10.5% and an additional 5% on the S&P 500 spread retracement. In other words, I applied a spread by going long the S&P 500 when I felt there was a retracement (rally) due and protected the profits from the DOW short position. The total profit generated for the DOW short and S&P 500 spread was between 13.3 and 15.5%, and an additional 2% profit was generated in both the currencies and Eurodollar spreads for the month of May 2000.
Currently, I feel the DOW has completed another retracement rally today (6-5-00) at 10,863.00 and am still looking for a selloff into late-June or early July 2000 to between 9,400 to 9,700. I was expecting it to top on either 6-1-00 or 6-2-00, so, once again, I was off my one day if it begins it’s selloff tomorrow.
For your review, I have provided below items of interest that are additional fundamental reasons for a stock market retracement.
THE NASDAQ AND IT’S CONTINUED BEAR MARKET CONCERNS:
As the NASDAQ placed, what could be a major top for the index in late March 2000, and started in it’s decline in early April 2000, we have seen the strongest moves upward in the sectors like the consumer staples, energy, real-estate investment trusts and utilities. These four groups are all defensive and usually become market leaders toward the end of a bull market and in the early stages of a bear markets.
Energy prices are rebounding, after a pullback in April, back toward $30 a barrel. This sector is starting to show signs of leadership and outperforming the rest of the market. While this may be good for the energy sector, it may be bad for the rest of the market, because energy stocks usually take over the markets leadership near the end of an economic expansion and bull markets. Over the past year, rising energy prices have fed inflation fears, and have clearly contributed to the latest round of Fed tightening. The most recent upward move in energy prices can only make the situation worse.
The other sectors, consumer staples (food, beverages, and personal products), real-estate investment trusts, and utilities, have risen as well since investors are trying to find safer investment sectors with the selloff in technology stocks. These sectors along with energy, may offer some safe haven in a further tech-selloff, but will require a carefully selected group of stocks. The most profitable solution would be to sell the NASDAQ as a whole on rallies like I have been suggesting for the DOW in my previous Newsletters by using the derivatives/futures market.
Every rally in the NASDAQ or bounce has occurred with “very low volume,” which is not a good sign since investors are not participating with concerns that the index will go lower. There are a lot of investors that simply do not want to liquidate their stock positions due to the tax ramifications, but are continuing to subject their stock portfolio to further equity loss exposure. These investors could reduce their exposure by diversifying/hedging in the derivatives/futures market.
All my wave pattern indications show that the NASDAQ will retest it’s lows at 3,042.66 and continue lower to create a new trading range between 2,550 and 3,900 before the end of June 2000 or early July 2000. This represents a wide range and I am anticipating a continued high level of volatility in this sector Therefore, I feel there are more reliable ways of generating profits in other stock indices like the DOW or S&P 500 as stated above.
INTERESTING POINTS FOR FURTHER STOCK MARKET CONCERN:
1. Sentiment Versus Commitment: Mutual fund investors have cut down on their purchases, but they haven’t stopped buying and are still continuing to purchase the wrong funds like aggressive growth funds. The pros are guilty of the same thing where they remain fully invested, and are bearish, but are extremely loaded with stocks. The gap between the sentiment (consensus of future market direction) and the commitment (actual allocation of fund into the market as a percentage of available cash) has never been as wide. This suggests simply that the investment mood will have to turn a lot darker among individuals and institutions before we can even see an end to the down trend, let alone a reversal of it.
2. Measure of Stock-Market borrowing: Commercial and industrial clients have been staking it up with margin debt reaching around 25% of the aggregate commercial and industrial bank loans, which is easily an all-time peak. This compares to levels of 10% margin debt in 1995 and 5% in 1990. This continued optimism has led these type of clients to borrow additional capital to increase their stock position by using leverage, which could create a very unstable environment and further stock market volatility
3. Continued Supply of Stock: Last month, there was 2.8 billion IPO (Initial Public Offerings) shares of stock with an approximate market value of $121 billion, that left it’s lockup period and was freed up and available for sale by it’s insider holders (i.e., CEO’s, VP’s, Director’s). This month, another 1.3 billion shares, worth $40 billion, will be similarly liberated from restrictions. That’s atop the billions of shares that have left lockup in the first quarter. Please refer to my February 2000 newsletter for further detail on this issue. In a brief summary of it’s contents, supply of stock could exceed demand by $215 billion this year compared with, in the past, a steady level of excess stock demand of $12 billion per year since 1982.
COMMENTS REGARDING EMPLOYMENT NUMBER RELEASED ON 6-2-00:
Currently, there is about a 30% chance that the Fed will raise interest rate by 25 basis points in their next FOMC meeting on 6-27-00 and 6-28-00 with continued concerns over inflation. The employment number issued on 6-2-00, showed signs that the economy maybe starting to slow, but there were abnormal weather conditions in the month of May 2000, and it could well be payback for unusual strength in the prior three quarters. A slower quarter after such a growth sprint really is no surprise. One Fed chief was quoted after the release of the number that there was little evidence to conclude the economy is finally cooling off. We shouldn’t assume the central bank is out of the picture due to the wildly optimistic American consumer. The soft jobs report notwithstanding, labor markets remain drum tight. Consumer confidence surged in May to 144.4 from 137.7 even with a recent 50 basis point rate hike and sizable losses in the stock market.
Americans have been anything but rattled by higher borrowing costs so far. And home prices have risen sharply of late, increasing household wealth, even if the stock market has taken away some. Consumers are fearless, and have become deeply entrenched with optimism. It may take additional rate hikes aimed at Main Street to push the expansion onto the slower growth track which the Fed wants. We will know more when the CPI and PPI are released later this month.
With the items mentioned above and the consumers high level of optimism, inflation continue to remain an issue of concern. Even with the possibility of a rally after late-June or early July 2000, it may only represent a bear market rally into the November 2000 election.
A bottom in the stock market will probably only occur when the “buying on a dip” mentality has been broken and investors are forced to liquidate their stock positions to meet margin call requirements. Currently, consumers can meet these calls with excess cash and choose to hold on to stock positions, due to tax ramifications, with the hope that the bull market will continue.
The next 3 to 5 years maybe difficult to generate profits in the various stock indices as we go through a period of consolidation or retracement. My wave pattern analysis in the derivatives/futures markets can offer a means of diversification or hedging in this type of environment where profits can be captured by either going long (buying) or short (selling) the various stock indices, currencies, and/or Treasury bill (Eurodollars) markets. Should you have further interest or questions regarding the information discussed in this newsletter, please either send an e-mail to JOHNTMOIR@aol.com or call me at (775) 841-9400.
John T. Moir
Wavetech Enterprises, LLC