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The
headline of our last newsletter was “NASDAQ 2500?”
As it turned, it came pretty close with an intra-day low
of 2540. Obviously, the question is: Have we seen the
worse? To better answer this, we would like to refer to
one of our weekly updates on 12-1-00. In that update we
said “...In order to get a better picture for the near
and intermediate term future, we would like to review
how our forecasting model has performed over the past 90
days. If you recall, when NASDAQ was at 4200 it
gave a target price of 3650, then when that target was
reached, it projected 3250, when that target was reached
it projected 2950, when that target was reached it
projected 2475. We came very close to 2475, and now we
see a downside projection of 1250 for the SP500, and
2250 for NASDAQ. Whether these levels are achieved or
not is irrelevant. This is what is relevant: for 90 days
every time the markets reached a support level, the
model indicated that the support will not hold, and it
did not. The question is WHY? Here is the reason why:
technicals DO NOT hold when the fundamentals of a market
(or a stock) have changed. In an efficient market, the
technicals confirm the fundamentals, and vice versa.
Since, the fundamental picture of the economy -and that
one of corporate earnings- has changed, the market is
moving to match the new fundamentals without any regards
to previous "technical support levels" So,
when is this going to change? It will change, when the
perception among investors with regards to the economy
and earnings changes. Investors, over the next two-six
weeks, will have a few good reasons
to change their perception. We believe that a)the
election fiasco will be resolved one way or another, b)
the FED will either change its bias in December, and or
lower rates in January, c) most of the lower earnings
expectations will be fully priced into stocks if the
markets move another 15%-20% lower. Therefore, within
the next 2-6 weeks, the fundamental picture will begin
to change, the technical picture will then also change
in order to match the new perception, and at that point
we will get a sustainable rally. Until, that happens, we
do not expect very much progress. We believe traders
will have opportunities to make money -over the next 2-6
weeks- but intermediate and long term investors, may
find the climate rather difficult...” The events
of the past few days have made it rather easy to
re-affirm our beliefs. The comments from Mr. Greenspan
-signaling that he is about to turn Mr. Nice Guy again-
lifted the spirits of many dispirited souls who
triumphantly ran up the market and declared that a
“bottom” was finally in! Unfortunately for the
bulls, the Florida Supreme Court, decided to be the
“party pooper” and delivered a mind boggling
decision (testimony to why, somehow, we must find a way
to restrain activists judges who tend to legislate from
the bench) that can easily threw in doubt the belief
that indeed a bottom had been reached. Thus, we are back
to square one. Nevertheless, we strongly believe that
although the next four to six weeks may turn out to be
turbulent due to political uncertainty, the perception
with regards to fundamentals will change, and that
will provide the fuel for another bear market rally.
Please note, that we used the word “perception” not
reality! In our June newsletter we boldly stated
and predicted that “...If the aggregate rate of
economic growth is reduced by 33% can one expect
aggregate corporate earnings to continue to grow at the
rate they have been growing? More specifically, can
corporate earnings in the fourth quarter of 2000, first
and second quarter of 2001 even come close to corporate
earnings for the fourth quarter of 1999, We do not think
so. If the economy grows at an annual rate that is 33%
less than the current rate, corporate earnings will be
affected. In other words we've seen peak
earnings.!” Given the data that is
currently available, our econometric model is predicting
that the downturn in corporate earnings will last longer
than currently anticipated, which means the bear market
is not over yet. However, bear market rallies are
furious and breathtaking -after all the public must be
convinced that the bear market is over and they must not
be left out!- thus, they provide great trading
opportunities. As long as, the political situation is
still cloudy, we will maintain a “neutral” position,
because we expect the market to be news driven, and
moving in both directions without real trend.
Afterwards, we expect to change our position, and rate
the market a “trading buy”
Our
Market Positions:
Dow: Neutral,SP500:Neutral
NASDAQ:Neutral
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AEGEANCAPITAL
GROUP INC.