by Barry Ritholtz
June 7, 2001
So much to say, so little time:
What an interesting couple of weeks, to say the least! I just got back from a whirlwind tour of Europe, and have lots to say about what I saw and did there -- but that will have to wait til next time; Too many pressing items to cover today.
As we previously discussed, the markets have hit a wall at the technical resistance points of 11,000 on the Dow, and 2250- 2300 on the Nasdaq. We have approached this stopping point by employing three distinct strategies:
1) We have taken profits in our more speculative holdings, locking in gains from the past run;
2) We have rotated money into several defensive measures(NSC, EK), which should do well, even if the Nazz pulls back to the 1950 level or so;
3) We put on a variety of aggressive short positions (MUSE, SEBL, MERQ).
Why the change of heart after being bullish since March 15? We have seen a great run up, from the Dow lows in March of 9100 up to 11,000, and from theNasdaq low on April 4 of 1610 up to 2200. Those are tremendous percentage gains (21% and 36% respectively), and if you were positioned aggressively (as we were, starting on 3/15/01), you are now sitting on a tidy set of profits. Under normal circumstances, the expected pullback would be a healthy sign -- any where from 30 - 50% retracement -- and could be absorbed with aplomb.
Instead, we have a few unusual factors: The built in expectation of the Fed cutting half a point has turned that usually major positive into a negative. If the Fed "only" cuts 1/4 point, or cuts a half point but shifts their bias to neutral, we will see an interesting bit of panic -- and a 100 - 200 point sell off.
This sentiment shift was visibly reflected last week from Wednesday to Thursday: The market gave the appearence of resiliency after Cisco's lousy conference call. But Morgan Stanley's ballsy CSCO upgrade the morning before earnings caused more excitement -- and made the day appear more significant -- then it really was. A nice bit of misdirection to confuse the masses.
That appearence was short lived -- and the CSCO data was probably "built in;" -- meaning, the market was expecting it and had already discounted its overall impact.
The true color of where this market is was revealed on Thursday -- despite more good news than anyone could recall coming out in a single day -- the European Central Bank's unexpected 1/4 point rate cut, the Semiconductor upgrade from Morgan Stanley (them again? What do these guys think, they are players or something?), EMC (our largest tech holding) announces a 50 million share buyback and GE (called by some "a barometer of general business conditions") says it will beat prior expectations (modestly). At the same time, Mutual Fund Inflows pick up steam, suggesting more money will be "put to work" in equities. Lastly, Money market funds -- cash on the sidelines -- hit new records last week, also a positive for equities.
Despite that slew of good news, after starting off positive, we closed lower on Thurday. The selling followed thru on Friday. The only silver lining was the terribly light volume all week; Friday was the lowest volume day of 2001.
Institutional Buying?
What has exasperated this move upwards, and made the navigation all the more treacherous, has been the latecomers chasing performance. Many mutual funds were caught flatfooted by the rise off the bottom, and piled in late so as not to miss the run. To think, all these slow and late funds had to do was read my March 23 article on thestreet.com, "Ten Reasons to Start Getting Bullish" (OK, utterly shameless plug mode is now off).
My head trader is fond of an expression: "Last man in pays for beer," and in this case, the late buyers gave the more nimbler players a nice exit.
Going Forward
I have no love for either the Bull or Bear camps -- in fact, the obsessive overuse of those words are a continuing pet peeve of mine.
Instead of "declaring a major," we shall continue to read the market signs, and adjust our trading posture accordingly.
I am quite comfortable with our holdings, even if we are hit with a 10% pullback to 1900 and 10,000. That would provide another buying opportunity.
We are watching the Fed closely, and will either cover the shorts or ride them down as appropriate.
I am also considering additional long term hedges via leaps (year long options), in particular, buying puts on IBM and Krispy Kreme. This could happen as early as today.
As skiiers must be aware of changing terrain conditions, so must we adapt to shifting market conditions. If the signs point to a more aggressive selloff, then we will adjust accordingly. But as of now, it is reasonable to expect a moderate retracement, and then begin the next leg up.
Copyright © 2001 Barry L. Ritholtz, All Rights Reserved worldwide. May
not be copied, stored or redistributed without prior, written permission.
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