What Everybody Knows is Not Worth Knowing
11/15/07
Uncertainty begets volatility and volatility reigns supreme on Wall Street these days. Friday, November 9th, which featured the failure of yet another rally attempt, the market collapsed into the final hour. This past Monday then, the market tried to stabilize all day, mounted a rally only to give it all back again in the final hour of the day. Tuesday morning then, the “market with no memory” gapped up and produced the strongest rally in 5 years, closing the day essentially at the highs. That also marked the high of the week. In the following two days, the market gave it all back and began to approach the lows of the week’s range on Friday yet again. A last hour rally finally pushed the indices into positive territory and left bulls and bears whip lashed and as confused as the Friday before. The market has been trying to figure out whether the Consumer-crash and the credit-crunch will mean a recession, or whether strong corporate balance sheets and strength in exports will save us from such fate. Needless to say, the jury is still out and the markets react with according uncertainty. Next week has seasonal strength almost baked into the turkey. The market supposedly closes positive in the week of Thanksgiving 3 out of 4 times. This year, I believe that this seasonality is going to come through for us. Let’s look at the charts:
The two pictures above are courtesy of Decisionpoint.com, which is a very affordable technical analysis website.
The first chart shows the 1% exponentially smoothed moving average (EMA) of the New York Stock Exchange. The second chart shows the same indicator for the NASDAQ. The 1% EMA is a 200-day exponentially-weighted moving average of the daily advance-decline ratio. It is an overbought/oversold indicator that can assist in identifying long-term tops and bottoms. To read more click here. Both charts show that the market is essentially in an area where it bottomed in summer 2006 and in summer 2007. The market’s gyrations might be caused by investors’ uncertainty regarding tumultuous credit markets, recession anxiety and a tapped out consumer. A true technical analyst, however, would tell you that this is the market’s way to frustrate the greatest number of market participants (bulls and bears alike). The market thus ensures that when the next truly big rally comes, that nobody believes in it and shorts into it because it paid off so many times in the past. I believe that this moment of the next intermediate bottom is upon us. We might enter a recession in 2008 or we might not. It is a close call and despite my optimistic disposition, I can not guarantee you a positive outcome. Neither can Barron’s Michael Santoli but he is a very smart fellow and he has the following to say:
“What's clear is that the notion that the economy is vulnerable has become rather commonplace, in contrast to the early moments of the 2001 recession, when 95% of economists polled said there wouldn't be one.
As the folks at Bianco Research noted Friday, the current covers of both the Economist and BusinessWeek are on the recession theme, with the former warning of "America's Vulnerable Economy" and the latter insisting, "Coming Soon: The Consumer Crunch." While Bianco analysts themselves are on high recession alert, they admirably remark: ‘Keep in mind when we get multiple covers on the same subject, one must consider the possibility that this story has been discounted and therefore will not happen.’ “
Continues Santoli: “The good news is that there's already so much public worry about a recession at a time when the job-and-wage story hasn't yet faltered and when nonfinancial companies are flush. This suggests that -- as in past slowdowns -- if we get only a near-recession, there's plenty of upside risk in stocks.” Like I said, he’s a very smart fellow. So let us assume for a moment that the worst is already discounted in stock prices and that we are on the verge of another upward explosion in stocks. (I know, I know he said “plenty of upside risk” not “upward explosion”.) What we need to find out is what sectors are going to lead us and what sectors are going to lag.
Value stocks (first chart) have been leading the pack since 2000. It might be time for growth stocks (second chart) to lead us again.
Hermann Vohs
"It is through science that we prove, but through intuition that we discover."
Jules Henri Poincare
Hermann Vohs is president of Cales Investments, Inc., a registered Broker-Dealer. All material presented herein is believed to be reliable but we cannot attest to its accuracy. Investment recommendations may change and readers are urged to check with their investment counselors before making any investment decisions. Opinions expressed in these reports may change without prior notice. Hermann Vohs and/or the staff at Cales Investments, inc. may or may not have investments in any of the markets cited above. Hermann Vohs can be reached at 303-765-5600.
This information is not to be construed as an offer to sell or the solicitation of an offer to buy any securities.
