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| Stocks: S&P 1,080, Part IV - Aug. 11, 2004 |
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Introduction
Everything is okay -- "The economy ... appears poised to resume a stronger pace of expansion going forward." This statement from yesterday's FOMC communique is awfully similar to what Greenspan told the Senate Banking Committee on 7/20. The stock market believed it on 7/20, as it did yesterday. However...
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On 7/20, Greenspan told the Senate Banking Committee:
"Economic developments in the United States have generally been quite favorable in 2004, lending increasing support to the view that the expansion is self-sustaining... The evident strengthening in demand that underlies this improved performance doubtless has been a factor contributing to the rise in inflation this year. But inflation also seems to have been boosted by transitory factors such as the surge in energy prices. Those higher prices, by eroding households' disposable income, have accounted for at least some of the observed softness in consumer spending of late, a softness which should prove short-lived."
And yesterday, the FOMC (Greenspan) said:
"The Committee believes that, even after this action [to increase the fed funds rate by 25 basis points], the stance of monetary policy remains accommodative and, coupled with robust underlying growth in productivity, is providing ongoing support to economic activity. In recent months, output growth has moderated... [but] this softness likely owes importantly to the substantial rise in energy prices. The economy nevertheless appears poised to resume a stronger pace of expansion going forward."
On the strength of Greenspan's comments on 7/20, the DJIA, S&P 500 and NASDAQ 100 rose 0.5%, 0.7% and 1.7%, respectively. On 8/10, based on the latest installment of Greenspan optimism, the respective DJIA, S&P 500 and NASDAQ 100 gains were 1.3%, 1.3% and 2.1%.
BUT -- Between 7/20 and the recent market lows, the DJIA, S&P 500 and NASDAQ fell 3.3%, 4.1% and 7.5%, respectively. The decline during this period took most bellwether measures to solid 2004 lows.
THEREFORE -- Will the stock market exhibit more staying power now than it did three weeks ago?
My strong suspicion is the answer will prove to be -- NO! (Is anyone really surprised?)
Stocks have been involved -- remain involved -- in something that began years ago -- something not pleasant at all in its long-term nature or outcome. It is a secular bear market.
In the most recent chapter of this saga, stocks have been involved -- remain involved -- in something that began months ago; it's not pleasant, either. It was a major distribution top that was putting an end to the cyclical bull market that was embedded in the secular bear trend. Yesterday's comments by Greenspan and comrades came at a time when stocks were very amenable in technical terms to react to those comments in a bullish manner. This, too, shall pass!
Of some specific technical interest, of course, is that the S&P 500 closed yesterday at 1,079.04, just below what recently has proven to be the intriguing level of S&P 1,080. (Since this missive is "Part IV" of my ongoing "Stocks: S&P 1,080..." series, I need not go into detail about the contemporary significance of this level.)
The question at hand: will the old technical rule hold true, will old support turn into new resistance?
S&P 1,080 was not a major, major support level in the market's recent decline, but trading patterns did confirm that it was a support level. So, the next few trading days should shed further light on whether the 1,080 number will now evolve into something of greater significance. This time, the test will come from below 1,080 instead of above it.
Overall, I'll stick with the conclusion expressed in yesterday's missive ("Potpourri"), which was:
"I remain of a mind that the technical damage to the market is now of sufficient magnitude that a genuine washout, a real selling climax, will be required to turn things around."
All yesterday's bacchanal served to do was to work off some the market's short-term oversold technical condition. Until the climax or at least climax-like event occurs, my forecast remains the same:
More rugged times ahead!
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