As stated in Wednesday's missive (6/2, "Stocks: Maybe Good Really Isn't ..."):
"...If you would like to see the similarities between the 2002 and 2004 markets end, the current rally might not be a very positive development. Because ... it is about on schedule to lay a base for the poor June-July period I've been opining for a while now."
The rally referred to above began on 5/18, and it may have ended on Wednesday. That could be determined in a few hours, with the release of May employment data. Numbers that put any significant upward pressure on interest rates would likely be reflected negatively in stock prices as well.
Using the DJIA, S&P 500, NASDAQ 100 and Russell 2000 as proxies, if the rally did end on Wednesday (Tuesday, for the NDX), the respective gains (using closing prices on 5/17 through the high closing prices this week) were 3.6%, 3.8%, 6.5% and 7.3%.
Yesterday, my seven-measure tracking group fell an average 1.1%, with losses ranging from 0.7% for the DJIA and the S&P 500, to 1.9% for the Russell 2000. And as of yesterday's close, the tracking group stood an average 0.4% below respective 12/31/03 closing prices. Three of the group's components were up for the year, four were down.
These are hardly bad numbers in their own right, but when you take a couple items into account, they become a little more so. To wit: (1) The highly bullish expectations for the stock market as 2004 was beginning, and (2) where prices stood towards the end of January, which marked the market's 2004 upside momentum peak to date.
Between 12/31/03 and 1/26/04, the tracking group was up a solid 4.8%, on average. When you compare this return with the minus 0.4% year-to-date result through yesterday, stocks have significantly underperformed expectations.
And lest I create confusion, let me clarify the statement, "towards the end of January, which marked the market's 2004 momentum peak to date."
After the 1/26 close, six of the seven components in my tracking group went on to set new 52-week highs. The exception was the NASDAQ 100, which made its closing high on 1/26. But based on an amalgam of the technical indicators I regularly employ, the 1/26 close was the momentum peak, marking the date from which the general technical breakdown began.
I have used the following table in past work, but here it is again. It compares the 2002 episode with the current one, using the tracking group as a proxy. The "fit" certainly is not a perfect one, but it is still tight enough to generate some genuine concern if you are a fully invested bull!
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SELECTED STOCK-MARKET MEASURES --
2001-02 TOPS VS. RECENT 52-WEEK HIGHS
(Listed in Order of 2001-02 Chronology)
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Post-09/21/01 Recent 52-Week
High Close High Close
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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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A countervailing argument to my bearish one is that the economy is in much better shape now than it was in the comparable 2002 period. But remember, expectations for a strongly improving economy ran high in 2002, predicated on the interest-rate cutting and all the liquidity the Fed had pumped into the system after 9/11. And there are two exceptionally important dichotomies between then and now.
(1) Potential inflation problems are far more onerous now than in 2002, which helps create the second difference.
(2) The interest-rate environment now is much different and much more potentially hostile.
And I think there is one additional consideration, one that is somewhat more academic than the two above, but one that could become very critical, were the market to break badly to the downside in the weeks ahead. In 2002, there was an immense structural short under the market that helped materially to put a bottom on the slides of the summer and early fall that year. At present, a condition with the same characteristics simply does not exist.
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