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Summary
During 2005, on balance, the stock market has conformed closely to my dour forecasts of the last few months. This certainly includes the market's horror show of last Friday, the strong possibility of which I had outlined in a research piece distributed well before the day's trading commenced.
It is awfully tempting at this juncture to become greedy regarding the downside. But greed -- in either direction -- is almost always a losing strategy. This said, I continue to look for the market to go to much lower levels in the weeks and months ahead.
For better or worse, here are some thoughts I have regarding what is immediately ahead, and what I plan to do about it in the GRA Model Equity Portfolio.
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First, a Damage Report
Using the tracking group as a proxy, here's what the situation looked like from three key dates through last Friday's close.
------------------------------------------------------
SELECTED STOCK-MARKET MEASURES
(Ranked Versus November 2004 Close)
------------------------------------------------------
04/15 04/08 12/31 11/02 % To 04/15 From
2005 2005 2004 2004 -----------------
Close Close Close Close 04/08 12/31 Nov.
------------------------------------------------------
NYSE Comp. 6958 7182 7250 6701 -3.1 -4.0 3.8
Wil. 5000 11247 11635 11971 11075 -3.3 -6.0 1.6
S&P 500 1143 1181 1212 1131 -3.2 -5.7 1.1
DJIA 10088 10461 10783 10036 -3.6 -6.4 0.5
Value Line 368 385 404 366 -4.4 -8.9 0.5
Russ. 2000 581 611 652 585 -4.9 -10.9 -0.7
NASDAQ 100 1409 1486 1621 1495 -5.2 -13.1 -5.8
------------------------------------------------------
Average -4.0 -7.9 0.1
Median -3.6 -6.4 0.5
------------------------------------------------------
As the numbers indicate, last week was terrible, coming in with an average decline of 4.0%, and with a median decline that was only slightly better.
With a good deal of help from last week, 2005 to date is now pretty ugly. The year's 7.9% average decline overall comes about from losses running in a range of 4.0% for the NYSE Composite, to a whopping 13.1% for the NASDAQ 100.
Although not shown above, the group's respective January lows have now been eclipsed by material amounts.
As to the piece de resistance, the respective 11/2/04 closes, two were taken out last Friday (the Russell 2000 and the NASDAQ 100), with the entire group finishing the week a mere 0.1%, on average, above the 11/2 values.
The 11/2 close was a critical one indeed, since it was the inflection point of the "Bush Relief Rally," something I've discussed many times in the past, and to which I have referred in terms like "counterfeit." Of course, it was evident many weeks ago that something was not quite right with this event, since the bullish camp was not able to extend its life by even one trading day in the new year.
Although the 11/2 numbers are buckling, they have not yet broken, not by technically significant amounts. So this remains the overall level of greatest importance currently. Beyond this, the August 2004 lows become the key set of numbers. We will look at them when it becomes appropriate. But let me state, with great emphasis, I do believe this examination will become appropriate!
April 15, 2005 -- A Day That Will Live in Market Infamy?
At the end of the text portion of this missive, I've listed the various research pieces (including their website links) that I consider most relevant to mapping out the course of getting us to where we are at. Perhaps the most useful of these was the one from a week ago, entitled: "Stocks: 'Red Alert' Reviewed and Update." It summarized much of the material appearing in two earlier pieces (the ones dated 3/24 and 2/11).
The most recent of the five missives listed and linked later was the one I distributed very early Friday morning, entitled: "Stocks: Meltdown Friday?" An excerpt of its key section:
"This year's first three expirations have not treated bulls at all well. However, it is the year's fourth such event that could be the real stinker!
"...In this regard, a lot will depend on something the market may not reveal until early next week. To wit: How much stock for sale gets thrown back into the market from equity-option put contracts that were written naked and where there has been inadequate hedging during the current trading week's decline. Strike prices now in the money from GM and IBM alone could have an important bearing on the overall outcome.
"Nevertheless, ingredients are in place for a nasty expiration, in which you must include next week's potential aftermath.
"And there is something else that might aggravate the situation, due for release at 8:30 (ET) this morning [on 4/15]. I speak of import prices for March. The Labor Department might out and out lie about them, but in the absence of this, this indicator of the inflation the United States is now importing from abroad should be relatively troublesome." [These results were indeed bad!]
There is little question after the fact that the phenomena opined above definitely came into play on Friday. Of course, the extent to which the naked put portion of the scenario will exert additional downward pressure on the market this week remains to be seen; I think it could be consequential.
And in the aftermath of Friday's downdraft, there's another consideration entering the picture -- margin calls. The major averages closed right on their lows on Friday. With the plethora of hedge funds there are that are leveraged to the hilt, old-fashioned margin calls are another likely consequence of Friday's dive.
Some Thoughts in Bullet Format
* I suspect the coming week in the stock market could resemble the week beginning July 22nd in 2002 -- with one exceptionally major difference. More on the difference in a moment.
* That week in July of 2002 followed a very rugged expiration on 7/19. The following week, the market put in a low that was the beginning of a complex bottom (my technical interpretation of the July-October 2002 period) that helped launch a cyclical bull market that was major in both duration and magnitude. Following is a summary of the July 2002 options expiration and what came immediately thereafter, employing the DJIA, the S&P 500 and the NASDAQ 100 as yardsticks.
--------------- July 2002 ---------------
Date High Low Close Change
---- ------------------------------------
DJIA 19* 8019.26 -4.6%
22 8173.08 7668.35 7784.58 -2.9%
23 8007.91 7590.75 7702.34 -1.1%
24 8243.07 7489.53 8119.29 +5.4%
----------------------------------------
S&P 500 19* 847.76 -3.8%
22 854.07 813.24 819.85 -3.3%
23 827.72 796.06 797.70 -2.7%
24 844.29 775.75 843.52 +5.7%
----------------------------------------
NAS 100 19* 965.37 -2.9%
22 980.64 928.83 939.10 -2.7%
23 954.07 896.56 896.82 -4.5%
24 951.83 869.17 951.58 +6.1%
----------------------------------------
*Date of July 2002 expiration.
----------------------------------------
* Based on my own work and as outlined in recent writings, I believe the 2002-2005 cyclical bull market ended with something resembling a complex top -- a major distribution top -- that was completed in early March. If so, we can now compute the bottom to top numbers for various market proxies, which I've done below for the DJIA, the S&P 500 and the NASDAQ 100.
---- 2002 ---- --- 2004-2005 ---
Low Close/Date High Close/Date Gain
-------------- ----------------- ------
DJIA 7286.27 10/09 10940.55 03/04/05 50.2%
S&P 500 776.76 10/09 1225.31 03/07/05 57.7%
NAS 100 804.64 10/07 1627.46 12/14/04 102.3%
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The Major Difference
July 2002 was a phase in the secular bear market where huge damage already had been incurred, and where the market was beginning to fetch for a bottom from which to launch a serious cyclical bull phase. If you accept my thesis that the cyclical bull that evolved from the July-October 2002 bottom is now over, then the market has been looking for a top, not a bottom, and it has reverted to the primary trend -- a secular bear.
In addition, there were massive amounts of stock -- real stock -- sold short going into the summer of 2002, providing the market a great environment from which to rally, once those shares began to be repurchased to cover very profitable short positions.
At present, I think there is next to nothing under the market in the way of real shorts. However, what may be under the market is a ton of derivatives people have used in lieu of real shorts. Instead of protecting from a decline, these instruments may actually contribute to one, should problems arise among those writing the contracts, or with the contracts' counter parties.
Some Strategy
As of Friday's close, the GRA Model Equity Portfolio's S&P short position was equal to something just over 30% of the account's value. (Account guidelines permit a maximum short position of 40%.) The short had an unrealized gain of $13,130, resulting from an overall position that was acquired at an average price of 1196.15. I believe the latter will withstand the test time, say, the next several months, quite nicely, and I don't want to disturb it. (See Table 1 in appendix.)
On the other hand, I don't want to violate the greed dictum mentioned earlier, and I do suspect there will be some variety of bottom made this week. Moreover, I suspect the bottom will be followed by a significant upward bounce, albeit one probably relatively short in its duration.
So as matters stand, here's the game plan:
(1) To "cover up" (as opposed to "cover") the account's short position through establishing a separate S&P 500 long position.
(2) If market conditions ultimately warrant it, I would be willing to take the long position to an amount exceeding the short position. Obviously, this would be in anticipation of a bottom, then rally. Therefore, a long that exceeded the short would be viewed purely in terms of a short-term trade.
As always, I will keep clients posted on developments as they occur.
Past Related Research Material
(1) Dated 4/15: "Stocks: Meltdown Friday?"
(2) Dated 4/11: "Stocks: 'Red Alert' Reviewed and Updated"
(3) Dated 3/28: "Stocks: Confusion and Strategy"
(4) Dated 3/24: "Stocks: 'Red Alert' Reaffirmed"
(5) Dated 2/21: "Stocks: My Near-Term Outlook Moves to a More Ominous 'Red Alert'"
Table Appendix
Table 1.
--------------------------------------------------
GRA MODEL EQUITY PORTFOLIO 2005 NON-MONEY MARKET
ACTIVITY (Account Inception Date = 12/31/04)
--------------------------------------------------
Open Positions
--------------
S&P 500 Equity Market Unit Short Sales
--------------------------------------------------
Contract Gross Less Net
Date Quant. Price Proceeds Comm. Proceeds
--------------------------------------------------
2005
03/04 SS 82 1220.38 $100,071 $125 $ 99,946
03/30 SS 43 1177.33 $ 50,625 $ 63 $ 50,562
04/01 SS 42 1189.36 $ 49,953 $ 62 $ 49,891
04/07 SS 43 1190.10 $ 51,174 $ 64 $ 51,110
04/12 SS 42 1190.07 $ 49,983 $ 62 $ 49,921
--------------------------------------------------
252 1196.15* $301,806 $376 $301,430
--------------------------------------------------
Memo: S&P 500 close as of 4/15 = 1142.62, result-
ing in approximate unrealized gain as of that
date of $13,130 (including allowance for commis-
sions to close out position.)
--------------------------------------------------
*Average (calculated on net proceeds).
--------------------------------------------------
Closed Positions
----------------
S&P 500 Equity Market Unit (Long Transactions)
--------------------------------------------------
Contract Net Net Gain/
Date Quant. Price Cost Proceeds Loss
--------------------------------------------------
2005
03/29 B 82 1164.48 $95,606 -- --
03/30 S 82 1178.44 $96,511 $905
--------------------------------------------------
Table 2.
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DJIA, NASDAQ COMPOSITE AND S&P 500 CLOSING PRICES ON
SELECTED DATES VERSUS RESPECTIVE 20-DAY, 50-DAY AND
200-DAY MOVING AVERAGES (Percent or Portion Thereof)
----------------------------------------------------------
DJIA Vs. NAZ Comp. Vs. S&P 500 Vs.
--------------- --------------- ---------------
Date 20D 50D 200D 20D 50D 200D 20D 50D 200D
----------------------------------------------------------
2005
04/15 -3.5 -5.2 -2.8 -4.1 -6.1 -4.2 -2.8 -4.2 -1.0
04/08 -0.7 -1.9 0.8 -0.2 -2.1 0.4 -0.1 -1.2 2.4
04/01 -2.3 -2.4 0.2 -1.9 -2.9 -0.4 -1.5 -1.7 1.8
03/25 -2.7 -2.1 0.6 -2.4 -3.0 -0.1 -2.4 -1.9 1.7
03/18 -1.4 -0.4 2.5 -2.0 -2.5 0.8 -1.2 -0.4 3.5
03/11 -0.3 1.0 3.9 -1.0 -1.3 2.5 -0.6 0.5 4.4
03/04 1.6 2.6 5.7 0.3 -0.4 4.1 1.5 2.3 6.6
02/25 1.2 1.7 4.9 -0.0 -1.1 3.9 1.1 1.4 5.9
02/18 1.4 1.2 4.6 -0.1 -1.8 3.8 0.8 0.7 5.3
02/11 2.1 1.6 4.9 0.9 -1.2 4.9 1.6 1.1 5.8
02/04 1.8 1.1 4.2 1.2 -1.0 5.6 1.8 1.1 5.9
01/28 -1.1 -1.6 1.5 -1.7 -3.6 3.1 -0.8 -1.5 3.2
01/21 -2.3 -2.0 1.2 -3.6 -4.0 3.0 -2.0 -1.8 3.0
01/14 -1.3 -0.3 2.8 -1.8 -1,3 5.8 -1.0 -0.3 4.6
01/07 -1.1 0.5 3.3 -2.6 -0.9 5.9 -1.3 0.1 4.9
2004
12/31 0.9 2.9 5.1 1.1 4.0 10.4 0.9 3.0 7.3
==========================================================
2002
10/09 -7 -13 -23 -7 -12 -30 -7 -12 -24
07/16 NA -12 -14 NA -11 -22 NA -12 -18
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Table 3.
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THE BEHAVIOR OF CBOE SENTIMENT-RELATED MEASURES
AND THE S&P 500 FROM 10/29/04 THROUGH 04/15/05
----------------------------------------------------
CBOE Options S&P 500
Date --------------- -------------------
or Put/Call Ratios Vs. 10/29/04
Week CBOE -------------------- Prior 1130.2 =
Ended VIX* All Equ. Ind. Tot.@ Close Week 100.00
----------------------------------------------------
2005
04/15 17.74 1.42 1.00 2.17 0.86 1142.6 -3.3% 101.10
04/08 12.62 0.93 0.55 1.82 0.86 1181.2 +0.7% 104.51
04/01 14.09 1.06 0.81 1.61 0.86 1172.9 +0.1% 103.78
03/25 13.42 0.78 0.50 2.04 0.88 1171.4 -1.5% 103.65
03/18 13.14 1.27 0.72 2.95 0.88 1189.7 -0.9% 105.26
03/11 12.80 0.99 0.62 1.97 0.88 1200.1 -1.8% 106.18
----------------------------------------------------
03/07 12.26 0.77 0.57 1.38 0.86 1225.3 -- 108.41
----------------------------------------------------
03/04 11.94 0.81 0.61 1.31 0.86 1222.1 0.9% 108.13
02/25 11.49 0.81 0.63 1.32 0.88 1211.4 0.8% 107.18
02/18 11.18 0.86 0.59 1.76 0.88 1201.6 -0.3% 106.32
02/11 11.43 0.86 0.66 1.44 0.88 1205.3 0.2% 106.64
02/04 11.21 0.75 0.49 1.65 0.88 1203.0 2.7% 106.44
01/28 13.24 0.77 0.61 1.19 0.88 1171.4 0.3% 103.65
01/21 14.36 0.87 0.64 1.91 0.87 1167.9 -1.4% 103.34
01/14 12.43 0.72 0.58 1.19 0.89 1184.5 -0.1% 104.80
01/07 13.49 0.97 0.78 1.60 0.89 1186.2 -2.1% 104.95
2004
12/31 12.73 0.66 0.45 1.68 0.88 1211.9 0.1% 107.23
12/24 11.23 0.84 0.57 2.19 0.87 1210.1 1.3% 107.07
12/17 11.95 0.84 0.54 2.10 0.86 1194.2 0.5% 106.66
12/10 12.76 0.63 0.47 1.34 0.88 1188.0 -0.3% 105.11
12/03 12.96 0.74 0.54 1.60 0.88 1191.2 0.7% 105.40
11/26 12.78 0.73 0.58 1.76 0.87 1182.7 1.1% 104.65
11/19 13.50 0.81 0.52 2.53 0.89 1170.3 -1.2% 103.55
11/12 13.33 0.76 0.64 1.15 0.88 1184.2 1.5% 104.78
11/05 13.84 0.69 0.51 1.32 0.88 1166.2 3.2% 103.19
====================================================
10/29 16.27 0.73 0.60 1.32 0.88 1130.2 --> = 100.00
----------------------------------------------------
VIX Highs and Lows (Including Intraday)
---------------------------------------
Year High Date Low Date
---------------------------------------
2005 18.05 04/15 10.90 02/04
2004* 22.67 03/22 11.14 12/23
2003 41.16 03/12 14.83 12/15
2002 56.74 07/24 18.87 03/28
----------------------------------------------------
*New series, all of 2004 forward. @All
products. #High close during period.
----------------------------------------------------
Table 4.
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DJIA, S&P 500 AND NASDAQ 100 -- TW0-
WEEK COMPOUND ANNUAL RATES OF CHANGE
------------------------------------------------
PROJECTED VALUES TO 04/22/05 FROM 04/15/05 CLOSE
------------------------------------------------
Projections to 04/22/05
From ------------------------------------------
04/15 2-Wk. S&P 2-Wk. NASD 2-Wk.
Close DJIA ROC 500 ROC 100 ROC
------------------------------------------------
+5% 10592 38% 1200 51% 1479 -11%
+3% 10390 -16% 1177 -9% 1451 -46%
0% 10088 -61% 1143 -57% 1409 -75%
-3% 9785 -82% 1108 -81% 1366 -89%
-5% 9583 -90% 1085 -89% 1338 -93%
------------------------------------------------
DJIA, S&P 500 AND NASDAQ 100 -- TW0-
WEEK COMPOUND ANNUAL RATES OF CHANGE
-- 26 WEEKS ENDED 04/15/05
------------------------------------------------
Week S&P NASDAQ
Ended DJIA 500 100
------------------------------------------------
2005
04/15 -55% -49% -67%
04/08 5% 24% 32%
04/01 -43% -31% -23%
03/25 -56% -47% -46%
03/18 -53% -50% -62%
03/11 -15% -22% -31%
03/04 45% 55% 9%
02/25 12% 14% -6%
02/18 18% -3% -28%
02/11 147% 110% 70%
02/04 122% 116% 70%
01/28 -28% -25% -65%
01/21 -41% -33% -65%
01/14 -42% -45% -62%
01/07 -42% -41% -55%
2004
12/31 38% 47% 49%
12/24 100% 62% 15%
12/17 15% 7% -51%
12/10 5% 12% 55%
12/03 40% 58% 362%
11/26 -4% -3% 39%
11/19 19% 10% 57%
11/12 265% 236% 240%
11/05 408% 405% 360%
10/29 28% 67% 170%
10/22 -54% -46% 14%
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