NOTE: Three very helpful graphs supplment this research missive. The order in which I've laid out the text has the graphs bringing up the rear, but be sure not to miss them; they tell an important story! -- Doug Gillespie
Onward
Bob Brinker, who I happen to like and respect, was at it again recently, ragging on the "bad news bears." Again, like the last time I heard this tirade, Brinker's contention was that with all the sour news that's been around, the bad news bears had been highly unsuccessful in having it reflected in stock prices.
Sorry, Bob, but I could not disagree more!
First, the correction -- termed a "healthy" development by the CNBC crowd, as all declines are -- has been a wee bit steeper than the bulls acknowledge. As of last Friday's close, my seven-measure tracking group stood an average 7.8% below respective 2004 closing highs. From recent highs to recent lows (using closing prices), the decline was a steeper 9.0%, on average.
As of last Friday's close, the worst performing component in the group, the Russell 2000, was a solid 9.9% below its 2004 high. Even the best behaving measure, the S&P 500, finished Friday 5.5% below its high close of 1,158, recorded way back on 2/11.
And "way back" represents another part of the not-so-good stock story. The last genuine highs the market put in were made towards the end of January, when there was still uniform strength in overall momentum. Since then, the tracking group's components have been falling by the wayside one by one, as the following table helps illustrate.
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SELECTED STOCK-MARKET MEASURES
(Ranked in Order of 05/21 From High)
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Recent Highs Recent Lows
------------ -----------------------
05/21 Intra-
Close Close Date Close Date day Date
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S&P 500 1094 1158 02/11 1084 05/17 1076 05/12
Wil. 5000 10625 11314 03/05 10518 05/17 10456 05/12
NYSE Comp. 6308 6780 03/05 6231 05/17 6211 05/12
DJIA 9967 10738 02/11 9907 05/17 9852 05/12
Value Line 351 387 04/05 346 05/17 344 05/17
NASDAQ 100 1408 1554 01/26 1370 03/23 1368 03/24
Russ. 2000 546 606 04/05 535 05/17 531 05/17
-----------------------------------------------------
To 05/21 High To 05/21 To 05/21
From High To Low From Low From Low
Close Close Close Intraday
--------------------------------------
S&P 500 -5.5% -6.4% +0.9% +1.7%
Wil. 5000 -6.1% -7.0% +1.0% +1.6%
NYSE Comp. -7.0% -8.1% +1.2% +1.6%
DJIA -7.2% -7.7% +0.6% +1.2%
Value Line -9.3% -10.6% +1.4% +2.0%
NASDAQ 100 -9.4% -11.8% +2.8% +2.9%
Russ. 2000 -9.9% -11.7% +2.1% +2.8%
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Average -7.8% -9.0% +1.4% +2.0%
Median -7.2% -8.1% +1.2% +1.7%
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Then there is the matter of reality versus expectations. As this year was kicking off, the vast majority of strategists, analysts, etc. were sporting stock-market forecasts that ranged from highly constructive to wildly so! Thus, to be nearing the end of the year's fifth month in the red represents a huge divergence from expectations.
And even from a technical perspective, just how oversold is the market? Six of the tracking group's seven components made 2004 lows last Monday. But the stability to upward bias in prices for the rest of the week, on balance, probably mostly a function of last week's expiration, served to remove some of the oversold condition from earlier in the week. As to the intermediate- and long-term technical condition of the stock market, I make the former neutral at best, while the latter clearly remains in overbought territory.
And as opined earlier, I simply do not see the negative fundamentals that have been bothering the market getting materially better anytime soon.
We will hear more about Iraq tonight, when the President addresses the nation on the subject. But it is reasonable to expect that insurgents there indeed will step up their efforts at destabilizing the country with the approach of the 6/30 "handoff."
As for interest rates, they began reacting negatively to concern about inflation even before the recent spike in energy prices. Now, at least in my opinion, the additional and growing concern that the Fed is falling farther behind the curve is adding to bond-market angst. In this regard, Greenspan and colleagues have said nothing lately to dispel these concerns.
And then there is what has been a so far ephemeral positive market reaction to how the Saudis will turn up the tap. I suspect that just about everyone else comprising OPEC has been cheating on production "quotas" for a while now, so how much excess capacity really exists? And I think we may find some of the grandiose numbers/promises coming from the House of Saud may turn out to be just that as well.
Conclusion
People following my work this year are not surprised by the direction of the stock market's developments. If you accept the idea that coming events always cast a shadow in advance of their arrival, then there's not much to be surprised about, is there? We've were discussing the general framework of the major events now transpiring from their more embryonic stages.
As stated on a few occasions in recent weeks, I remain fascinated by how the stock market this year appears to be retracing steps eerily similar to the ones of just about the same period during 2002. As the outcome unfolded during June but mainly July of 2002, those were not good steps!
In a tabular format, the following data tell an interesting story.
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SELECTED STOCK-MARKET MEASURES --
2001-02 TOPS VS. RECENT 52-WEEK HIGHS
(Listed in Order of 2001-02 Chronology)
---------------------------------------------
Post-09/21/01 Recent 52-Week
High Close High Close
--------------- ---------------
Value Date Value Date
----------------------------- ---------------
NASDAQ 100 1721 12/05/01 1554 01/26/04
S&P 500 1173 01/04/02 1158 02/11/04
Wil. 5000 10932 01/04/02 11314 03/05/04
DJIA 10635 03/19/02 10738 02/11/04
NYSE Comp. 610* 03/19/02 6780 03/05/04
Russ. 2000 523 04/16/02 606 04/05/04
Val. Line 382 04/16/02 387 04/05/04
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*Former NYSE Composite series.
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And now for the piece de resistance of this offering, Mark Readdie's graphical handiwork. The following graphs trace the movements of the DJIA, the S&P 500 and the NASDAQ 100 during this year from about mid January on with the same period during 2002. We could have slid things around a bit to make even better fits, but the primary mission was to keep the two lines for each measure on the same time scale. What I think you will find of interest are the similarities in the various directional moves.
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