Foreword
"Market Thoughts" is an examination of recent financial-market developments to help assess what might be ahead.
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Summary
As we approach the late stages of 2005, the stock market represents a good deal of frustration for bulls and bears alike. However, as you sift through what has taken place this year to date, it is the former camp that is probably -- or at least should be -- more upset about what has (or has not) happened.
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NOTE: President Bush has decided to appoint Ben Bernanke to succeed Alan Greenspan as Federal Reserve chairman. Bernanke was a Fed governor, and he currently chairs the Council of Economic Advisors.
Personally, I think this is a horrendous choice, although it has been widely reported that Bernanke wanted the position very badly. The fact that he got his wish may be something of a reflection that many really solid, serious candidates were, of their own choice, not in the running, since people meeting these criteria are more than aware of the "mess" (euphemism) Greenspan is leaving behind.
Interest Rates
* Notwithstanding Bernanke's appointment, concern about additional Federal Reserve rate increases is credited as one of the factors weighing heavily on the equity market in recent weeks. In turn, it is growing concern about inflation, voiced by several Fed officials (mostly district bank presidents) in recent weeks, that has market participants concerned about additional rate hikes.
* The next meeting of the Federal Open Market Committee takes place next Tuesday (11/1). As of last Friday, the federal funds futures market gave strong indication the FOMC will indeed undertake another 25 basis-point hike in the funds rate next week. The November contract finished Friday at 4.00%.
* And based on other futures quotes, this market was signaling additional rate hikes into next year. The December, January, February and March contracts ended last week at respective levels of 4.14%, 4.22%, 4.37% and 4.39%. Beyond next Tuesday's meeting, the following three meetings of the FOMC are scheduled for 12/13, 1/31 and 3/6 (there's no meeting scheduled for February).
* As to the open-market behavior of Treasury coupon issues, an excerpt from a missive I published in June (6/6/04, "Bombs Away for the Economy and the Stock Market?") stated:
"In addition [to the secular bear stock market], we may now have the makings of a new cyclical bear market -- in bonds... [There were important] lows in yield on Friday morning [5/27] on the 10-year and 30-year Treasury issues: 3.80% and 4.15%, respectively. ..."
* The 5/27 levels remain the lows, and as of last Friday, the 10-year and 30-year issues stood at yields of 4.38% and 4.60%. The respective increases of 58 and 45 basis points are not insignificant, particularly considering the relatively low coupons involved.
* Some quarters continue to express a good deal of enthusiasm for bond-market prospects for the next few months. This is a position I do not share. Soon, I will publish a missive illustrating that on a total-return basis, the rise in yields occurring over roughly the last five months was not as innocuous as some people may believe.
The Dollar
* Using the Dollar Index as the proxy, the greenback recently has been trading right at the top of its range of roughly the last 15 months. In my opinion, the prospect of still-higher US interest rates has helped significantly in keeping a good bid under the dollar.
* Along the above lines, the Dollar Index's last sinking spell, occurring over the summer and seeing the index decline from around its recent high of just over 90 to around 86.25, accompanied Wall Street talk (wishful thinking) that the FOMC would put further interest-rate increases on hold.
* After the Bernanke news broke, the Dollar Index sold off. As this is being written, the index is just off the day's lows.
* Several weeks ago, I suggested that the 90-92 area made some sense to me as a general area in which the Dollar Index would make a major top. This remains my thinking.
The Stock Market
* The market is strong today, a combination of two factors, I suspect. To wit: (1) the market entered the current week very short-term oversold. Therefore, from a purely technical perspective, it was due a good bounce. (2) The Bernanke news probably is adding to strength, since Wall Street bulls are likely -- initially, at least -- to believe that the cheap, easy money with which Bernanke is associated is a highly constructive development.
* As stated at the outset, this year's stock market to date represents a good deal of frustration for bulls and bears alike. Bulls are unhappy for sure that through almost 10 months, most of the highly visible bellwether measures are negative. As for the bears, many of them cannot believe the market is not down much more than it is.
* In assessing what has (or has not) occurred this year, I think you must take into account the high level of euphoria that existed as this year was commencing. Relative to those expectations, this year (so far) has been an even bigger disappointment for the bullish camp.
* As I do frequently, I again affirm my strong belief that stocks remain mired in a secular bear market, one that could very well have years yet to run.
* Next January, the DJIA will "celebrate" six years since its last record high. Next March, the S&P 500 and the NASDAQ 100 will do the same. Thus, it is impossible for anyone to argue vociferously that the current situation does not already fall far, far outside the boundaries of a "normal" bear episode.
* As of last Friday, the DJIA, S&P 500 and NASDAQ 100 stood 12.9%, 22.7% and 66.7%, respectively, below their 2000 record closing highs. This means that from last week's respective closes, the DJIA and S&P 500 required gains of 14.8% and 29.4% to match the 2000 levels. In the case of the NASDAQ 100, it required just about a triple to match its 2000 closing high of about 4,705.
* Last week, the GRA seven-measure tracking group declined an average 0.6%. This followed a week in which it fell 1.0%, on average, which followed a week in which it was down an average 2.8%, making October through 10/21 a rather ugly month.
* For the year to date through last Friday, the tracking group was down an average 2.8%, registering a very similar median decline of 2.9%. Returns ran in a range of +0.1 for the NYSE Composite (the only component in positive territory), to minus 5.3% for the DJIA.
* The group's components made their most recent closing highs either on Friday, 9/9, or on Monday, 9/12 (not shown in the table below). From those dates through last Friday, the tracking group was down an average 5.2% (median decline of 5.0%).
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SELECTED STOCK-MARKET MEASURES
(GRA Seven-Measure "Tracking
Group," Listed by YTD Returns)
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10/21 3/2005 12/31 Week From
2005 High 2004 Ended March
Close Close* Close 10/21 High YTD
===== ====== ===== ===== ===== =====
NYSE Comp. 7254 7441 7250 -1.5% -2.5% +0.1%
Wilsh. 5000 11793 12074 11971 -0.4% -2.3% -1.5%
S&P 500 1180 1225 1212 -0.6% -3.7% -2.7%
Russ. 2000 633 645 652 -0.4% -1.9% -2.9%
NASDAQ 100 1565 1545 1621 +1.4% +1.3% -3.5%
Value Line 388 403 404 -2.0% -3.7% -4.0%
DJIA 10215 10941 10783 -0.7% -6.6% -5.3%
----------------------------------------------------
Average -0.6% -2.8% -2.8%
Median -0.6% -2.5% -2.9%
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*2005 closing highs as of March, as of dates shown:
NYSE Composite (3/4), Wilshire 5000 (3/7), S&P 500
(3/7), Value Line (3/7), Russell 2000 (3/4), DJIA
(3/4), NASDAQ 100 (3/7).
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* Note in the above table that I've left the March 2005 highs in the calculations. In March, I opined that these levels would probably turn out to possess more than a modicum of significance, which I continue to believe. If so, current prices below the March numbers are a negative portent.
* At present, there are more than a few people who believe the end of 2005 will closely mirror the last two months of 2004 -- that stocks will finish this year on a very strong note. They may, of course, but that is not how I assess the situation.
* I think that the fundamental and psychological backdrops are much different this year, and much more negative. Which is not to say that the powers that be will not try exceptionally hard to "help" (euphemism for "manipulate") prices higher. I simply believe they will not succeed.
* So, what I am currently looking for over the short run is enough of a rally to expunge the market's oversold condition. Then, I suspect prices will head south again. If so, it will be time perhaps to dust off the April lows as possible targets, but it's premature to do that now.
* There are some relevant statistical tables at the conclusion of the text.
Physical Gold
* Even including its recent pullback from approximately an 18-year high, spot gold finished last week about 6.7% higher than where it began the year. While not a huge gain by any means, it still is far better than most stock returns over the same period. And since the end of 1999, bullion has risen almost 62%, versus a price-only decline of more than 11% for the DJIA.
* Going forward, I continue to like gold's prospects very much!
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Some Stats
Table 1.
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SELECTED NYSE BREADTH MEASURES --
WEEKLY & CUMULATIVE DATA (10/29/04=0)
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Adv - Dec UVol - DVol 52W H - L Closing Tick
Week ----------- ----------- ----------- ------------
Ended Week Cum Week Cum Week Cum Week Cum
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2005
09/23 -3738 30577 -2.28 7.04 190 31545 -36 21545
09/16 -1842 34315 -0.27 9.32 465 31355 490 21581
09/09* 2269 36157 1.59 9.59 787 30890 721 21091
09/02 2633 33888 1.29 8.00 627 30103 574 20370
08/26 -603 31255 -0.85 6.71 227 29476 193 19796
08/19 -1419 31858 -1.15 7.56 207 29249 390 19603
08/12 632 33277 0.63 8.71 568 29042 524 19213
08/05 -1673 32645 -0.75 8.08 1189 28474 645 18689
07/29 1251 34318 0.31 8.83 1279 27285 432 18044
==========================================================
04/22 1461 12158 0.54 0.41 -386 18445 399 10500
==========================================================
2004
12/31 2269 17673 0.54 7.78 1193 11323 390 4154
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*Four-day trading week.
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Table 2.
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THE BEHAVIOR OF CBOE SENTIMENT-RELATED MEASURES
AND THE S&P 500 FROM 04/20/05 THROUGH 10/21/05
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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
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2005
10/21 16.13 1.02 0.66 1.65 0.86 1179.6 -0.6% 104.37
10/14 14.87 1.06 0.70 1.65 0.86 1186.6 -0.8% 104.99
10/07 14.49 0.95 0.61 1.68 0.88 1195.9 -2.7% 105.81
09/30 11.92 0.83 0.53 1.73 0.89 1228.8 1.1% 108.72
09/23 12.96 0.95 0.63 1.87 0.89 1215.3 -1.8% 107.53
09/16 11.22 0.80 0.52 1.30 0.91 1237.9 -0.3% 109.53
09/09 11.98 0.78 0.51 1.60 0.90 1241.5 1.9% 109.85
09/02 13.57 1.15 0.61 3.01 0.90 1218.0 1.1% 107.77
08/26 13.72 1.20 0.81 1.99 0.90 1205.1 -1.2% 106.63
08/19 13.42 1.05 0.58 1.70 0.90 1219.7 -0.9% 107.92
08/12 12.74 1.28 0.63 2.80 0.90 1230.4 0.3% 108.87
08/05 12.48 1.15 0.55 2.77 0.90 1226.4 -0.6% 108.51
=====================================================
08/03H 11.83 0.88 0.56 2.10 0.91 1245.0 -- 110.16
=====================================================
04/20L 16.92 0.98 0.63 1.87 0.88 1137.5 -- 100.65
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VIX Highs and Lows (Including Intraday)
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Year High Date Low Date
---------------------------------------
2005 18.59 04/18 9.88 07/20
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
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*New series, all of 2004 forward. @All
products. L-Lowest S&P close during 2005.
H-Highest S&P close since 2000 high.
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Table 3.
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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)
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DJIA Vs. NAZ Comp. Vs. S&P 500 Vs.
--------------- --------------- ---------------
Date 20D 50D 200D 20D 50D 200D 20D 50D 200D
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2005
10/21 -1.4 -2.3 -2.7 -0.6 -2.0 0.5 -1.5 -2.7 -1.6
10/14 -1.0 -1.9 -2.1 -1.9 -3.2 -0.4 -1.7 -2.5 -1.0
10/07 -1.8 -2.3 -2.3 -2.0 -2.7 0.6 -1.9 -2.2 -0.3
09/30 0.3 0.2 0.4 0.3 -0.1 3.7 0.2 0.2 2.4
09/23 -1.0 -1.4 -1.1 -1.4 -1.9 2.0 -0.8 -1.0 1.3
09/16 1.0 0.6 0.9 0.5 -0.0 3.9 1.1 0.9 3.3
09/09 1.5 1.2 1.3 1.4 1.0 4.9 1.6 1.3 3.6
09/02 -0.7 -0.8 -0.9 -0.2 -0.1 3.2 -0.2 -0.2 1.8
08/26 -1.6 -1.3 -1.4 -1.9 -0.8 2.3 -1.7 -1.2 0.8
08/19 -0.5 0.2 0.2 -1.7 0.2 3.1 -0.9 0.1 2.1
08/12 -0.3 0.6 0.6 -1.1 1.5 4.2 -0.2 1.1 3.1
08/05 -0.6 0.3 0.3 0.1 2.9 5.4 -0.4 1.0 2.9
07/29 0.8 1.2 1.3 1.6 3.9 6.1 0.8 2.0 3.9
07/22 1.6 1.5 1.5 3.0 4.5 6.2 1.7 2.5 4.1
07/15 1.8 1.8 1.7 3.1 4.5 5.4 1.7 2.6 3.9
==========================================================
04/22 -1.9 -4.0 -2.1 -2.0 -4.2 -3.0 -1.5 -2.9 -0.3
04/15 -3.5 -5.2 -2.8 -4.1 -6.1 -4.2 -2.8 -4.2 -1.0
==========================================================
2004
12/31 0.9 2.9 5.1 1.1 4.0 10.4 0.9 3.0 7.3
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Table 4.
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DJIA, S&P 500 AND NASDAQ 100 -- TW0-
WEEK COMPOUND ANNUAL RATES OF CHANGE
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Week S&P NASDAQ
Ended DJIA 500 100
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2005
10/21 -18% -30% +17%
10/14 -50% -60% -61%
10/07 -27% -34% -23%
09/30 -16% -17% 4%
09/23 -47% -43% -45%
09/16 62% 52% 54%
09/09 100% 117% 124%
09/02 -24% -4% -1%
08/26 -40% -42% -42%
08/19 +0% -13% -37%
08/12 -9% -8% -20%
08/05 -20% -3% 48%
07/29 +0% 14% 57%
07/22 65% 59% 206%
07/15 131% 105% 339%
==================================
04/22 -53% -48% -68%
04/15 -55% -49% -67%
==================================
2004
12/31 38% 47% 49%
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