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On
August 25th, in our daily market update -before
the market opened- we wrote: “Our market
indicators gave a "sell" signal after
yesterday's close. That does not mean the market is
going to start a decline today -although it might- What
it means, is that, over the next 1-5 trading days, a
short -and maybe intermediate- term top should be
in place.”
Actually, NASDAQ and the SP500 topped exactly five
trading days later, while the Dow Jones has moved
marginally higher since then. If you recall, in our last
newsletter we outlined the eerie similarities in
the technical condition of the stock market during the
six weeks leading to the top in March, and the technical
condition of the stock market as it was unfolding in
August. In late February and March, market participants,
had convinced themselves, that technology stocks were
a)impervious to rate increases, because they did not
rely on debt issuance, and, b) technology stocks were
immune to any slowdown in corporate profits, because
either they did not have any profits to begin with, or,
their growth rate was in the stratosphere, and thus,
their earnings would grow accordingly. Consequently,
NASDAQ had a blow-off rally, then “value” came into
place, people jumped into “Old Economy” stocks, and
finally they all crashing down together in April!
Thru-out August, market participants convinced
themselves that the economy had finally slowed down, the
Federal Reserve is out of the picture until next year,
some even expect a rate cut next year, and thus all
lights were green for the stock market to embark on
another flight to the moon! Apparently, the view was
held widely only by the small investors.A
careful examination of the daily trades in popular
stocks such as JNPR, PMCS, SDLI, GLW, AMCC etc., reveals
a notable absence of “block trades” which are
indicative of institutional buying. Instead, most of the
buying thru-out August was in small lots, indicative of
buying by small investors. We think they were lured into
a “sucker’s rally.” We believe both “New” and
“Old” Economy stocks have yet to take into account
what a slowing economy really means for corporate
profits. Productivity gains -excluding computers,
communications equipment and chips- is only up 1.8%
(Source: BusinessWeek, 8-21-00) That means when you
factor in wage growth of 4.1% annually, the net result
is a reduction in corporate earnings, for “Old
Economy” stocks. That is why a wide variety of
companies are reporting lower profits, HON, PG, IP,
DD,GT, CAT, and the list goes on. Add higher oil prices,
and inability to raise end prices and you have a real
profit squeeze.
On the other hand, the “New
Economy” companies have to deal with a slowing economy
and slowing corporate profits as well. The reason is
this: as corporate profits of “Old Economy” slow
down, so does capital spending in new technology.
Capital spending from “Old Economy” companies
accounts for about 35% of revenue for “New Economy”
companies! Technology is cyclical as well! If indeed the
economy has slowed to about 3.5% in the third quarter,
corporate profits will show it!
Our
Market Positions:
Dow: Bearish ,SP500: Bearish
NASDAQ:Bearish
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GROUP INC.