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D.B. Hi
Ike, how are you doing?
I.I.
Good, thank you.
D.B.
In our last interview on 4-18-03, I said:
"The
SP on 3-21-03 -the day before our previous
interview- had closed at 895.9, it then
fell to 843.68 on 3-31-03, and
subsequently it has continued to push higher,
closing at 893.58 on 4-17-03. So, your
expectation of a pull-back followed by another
push higher, has been fulfilled. At the same
time, one can argue that over the past 4 weeks
the market has not gone anywhere, it is back
where it was 4 weeks ago, but bullish sentiment
-as measured by the put/call ratio, AAII, I.I.,
and the Volatility indexes- is much higher now
than it was four weeks ago, with no net gain in
the market, so, have you turned "rather
bearish" now?
And
you replied: "Not yet"
Here
we are five weeks later the SP has gained just
4.4%, bullish sentiment has gone thru the roof,
the Volatility Indexes are making multi-year
lows, we got multiple divergences in many
indicators, the dollar is plunging, and the
bonds are rallying, how long can the equity
markets continue to hold up, is now the time to
turn bearish ?
I.I.
Allow me to share with you and with our
readers/listeners, something that I have learned
about this business. People often make the
mistake to treat their beliefs about the market
as if they were reflecting an "ideology."
In other words, they identify themselves as
bullish, or, bearish, as if they were a member
of the National Bullish party, or the American
Bearish party! However, there is no room for
"ideology" in dealing with the
markets. The reason is, when dealing with ideas
and principles, they ought to be absolute, for
example, either you endorse the Bill Of Rights,
or, you don't, there is no gray area. However,
that is not true when it comes to the markets.
The markets are dynamic, complex, ever-evolving,
subject to numerous influences and events, and
prone to present us with the unexpected.
Therefore, in examining the markets, we are best
served by not having any dogmatic, pre-conceived
notion. Sometimes, it is best not to look at
market developments strictly in terms of
whether these development are bullish, or,
bearish for the market, in other words, stop
looking at the market only in bearish, or,
bullish terms as if we are dealing with
something that is either black, or, white,
because the markets often are neither!
You're probably wondering why I am
saying all that, well here is the reason why:
It
has been my observation that major turning
points do not happen at once, usually they are
processes that take several months, and during
that period the market presents us with
developments which at the time seem odd and out
of context. For example, the NYSE, the Dow, and
the SP traded in a horizontal range from
January 2000, until they finally broke down in
October of 2000. During that period we had
several "odd" events. A) Between
1-18-00, and 3-8-00, the Dow lost 17% in just
seven weeks, while at the same time NASDAQ
climbed from 3834 to 5006, gaining 30%. B)
During the week of 3-15-00 we had a reversal of
fortunes, the Dow gained 274 points, while
NASDAQ lost 318! C) During the week of 9-12-00,
the NYSE made a new all time high, while NASDAQ
was 25% off its high, and officially in a bear
market. D) The A/D line made a double bottom on
10-31-00 and on 12-28-00, while the NYSE made a
double top on the same days! E) On 12-20-00 the
Utilities made a new all time high, while the
Dow at 10384 was 12% off its highs. F) On
11-21-00 the XAU bottomed, while the dollar made
the first top of what turned out to be a triple
top formation, but at the time no-one seemed to
care, either about the dollar topping, or, gold
bottoming. These are just a few of the
"odd" developments that took place
during the nine months that the markets were
completing their bull market tops. At the time
that each one of those events took place, people
were scratching their heads trying to figure out
the meaning of each event, and whether it was
"bullish" or "bearish" for
the market. In retrospect, the important thing
was to understand that such contradictory
developments were telegraphing a major change in
trend. Major distortions, and break-downs in
inter-market relationships occur during
transitioning periods, and they tend to
intensify right before "point break"
Since
July of 2002, the equity markets have been in
another horizontal trading range, at the moment
the SP is once again challenging two major
resistance lines, a break above resistance would
result in a break of the downtrend and possibly
a rally to 1150, which would indicate a major
change in trend. While the SP is at "point
break" we see several "odd"
developments. A) The equity markets have totally
ignored the decline in the U.S. dollar B) Bond
yields are falling as if the country is going
into recession, yet the stock market is rallying
in anticipation of an economic recovery C) Gold
is rallying in tandem with the equity markets D)
The rise in the market is attributed to
investors' expectations about improving economic
conditions, yet cyclical stocks -i.e. the Dow-
which stand to benefit from an economic up-turn
not only they are not rallying, they have
been declining for the past 4 weeks, take
a look at GE, MMM, GM, DD, for example. On the
other hand, biotech and internet stocks have
been on fire, what does biotech have to do with
an economic recovery? E) Oil prices were
supposed to fall below $20, yet they have
stubbornly remained close to $30.
All
these developments seem "odd" and
again people are scratching their heads
trying to figure out their meaning, and whether
they support a bullish, or, a bearish
argument. The important thing to focus is
this: the markets have been trading in a
horizontal range for nine months, they are at
critical resistance, and we are getting lot's of
distortions and break-downs in inter-market
relationships, thus, a major change in trend
should be expected within the next 2-4 weeks. If
the SP breaks out on the upside, it can rally
close to 220 points, up to 1150. On the other
hand, if it breaks down, it can fall to 650,
which is 280 points below current levels. In
other words, regardless of which way the break
takes place, it should be in excess of 200
points, that type of move doesn't take place in
one day! Therefore, investors do not need to
agonize over it. They should wait until
the market moves and then place their bets, if
the SP breaks out, they can initiate a long
position on a close above 965 with a stop at
945, and if the SP breaks down, they can
initiate a short position -or close long
positions-
The
point that I am trying to get across here, is
that this is not the time to let bullish,
or, bearish "ideology" to stand in
front of the market, because after all, we only
have a 50/50 chance of getting the outcome of
this situation right, it's either going to
break out, or, it is going to break down. When I
see things that do not make sense, such as the
SP at 940, while the yield on the 10 year
T-bonds is making new lows, and all of my
indicators diverging negatively for four weeks
while the SP has continued to march higher, then
I ought to expect the un-expected, and not
under-estimate the market and its ability to
surprise me, and I advise our readers/listeners
to do the same. My personal belief is that the
market will hold up until the end of June, and
then it will roll over, when second quarter
earnings begin to come out, and companies issue
lower guidance for the second half of the year.
According to our work, the chances for a second
half recovery, are minimal. Our fundamental
research has an excellent track record, so, I do
not doubt its accuracy, but I also know
that the market -from time to time- can
defy logic and reality, and this may be one of
those times.
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