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In
our last newsletter, we thought that
the market was misguided in believing that the economy
had slowed down substantially, or, at least to a level
that would be desirable by the Federal Reserve
(4.00%-4.5%) To much of our surprise, all the economic
data that came out the last thirty days, paint a picture
that the slowdown is probably for real. If it is, then
one of the two forces, rising interest rates -the other
being high valuation levels- that usually put downward
pressure on stock prices has, at the moment, been
removed from the equation. However, according to
the Federal Reserve, signs that the economy has indeed
started to behave according to the Fed's liking
"are still tentative ." Consumer
spending has weakened, durable goods orders have
fallen, new home sales have fallen as well, but
household earnings have increased, which means, if
consumers decide to go on a buying spree in the second
half, they have they buying power to do it. According to
the last NAPM report, on one hand domestic orders have
fallen, on the other hand exports are on the rise,
threatening to make up the lost ground from the slowdown
in domestic orders. Moreover, the slowdown in consumer
spending -which was caused primarily by the decline in
Nasdaq during the spring, can easily come to life again,
as stock prices regain their altitude. In our view, the
biggest problem with the data that came out thru out
June -suggesting a weaker economy- is the fact that many
of the reports are tied to the employment numbers.
Consequently, benign unemployment reports in May and
June, had an adverse impact on other reports such as the
leading indicators, industrial production figures, etc.,
further indicating a slowing economy, that may not be
that slowing after all. And of course, we have to point
out, that for the past five years, the Federal Reserve,
has been expecting the economy to slow down in the
second half of the year, and it never has! Even
if we assume that the economy has slowed down, we think
it is not because of the hikes in interest rates by the
Federal Reserve, but because of the stock market jitters
during the Spring, and the high energy prices that have
reduced spending power. The stock market has recovered,
and energy prices -unless something unexpected takes
place in Middle-East politics- should begin to
head lower. Consequently, the economy should rebound in
the second half, unless the Federal Reserve continues to
raise interest rates -which can't be all that positive
for equity prices. We strongly believe that the Federal
Reserve will raise rates in August. Furthermore, we see
disturbing similarities in the days leading to the
decline in Nasdaq in March. A)Back then, biotech stocks
had a spectacular run and they collapsed a week before
Nasdaq did. B) Breadth was flat to negative during the
last days leading to the top C) Internet stocks were
making $15-$20 daily moves during the same period D)
momentum indicators -such as MACD- were moving lower as
Nasdaq was moving higher. The past two days, biotech
stocks have been hit hard, advancing issues have barely
out-numbered declining ones, internet stocks have been
making $15-$20 daily moves, and momentum indicators have
been moving lower. These are eerie similarities, of
course keep in mind they do not necessarily have to lead
to the same results -as in the Spring- but the
likelihood should be considered. In conclusion, we think
that the markets will probably continue to move higher
for a few more days, but -at least a short-term top- is
very near. We expect a short-term top to take place
sometime between 7-17-00 and 7-21-00.
We advise to employ tight stops
and avoid committing new capital, until a more
re-assuring technical condition takes shape.
Our
Market Positions:
Dow: Bearish ,SP500: Bearish
NASDAQ:Bearish
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AEGEANCAPITAL
GROUP INC.