A quick update for those who wonder if this past Friday's end of week rally means that we are out of the woods.
Friday's bounce was the 2nd largest percentage gainer
in NASDAQ history. The market was terribly oversold
leading up to the Thursday -- then Dow Jones component
Home Depot pre-announced (it got whacked 30%), which
really hurt the Dow; Add to that the terrorist attack
on the USS Cole, and the shooting war in the Middle
East, and you have the makings for a very nervous
Thursday Market.
The equity put/call ratio had increased above the 72%
level; That has been historically an accurate
predictor strong contrarian indicator suggeting that
an oversold rally is due -- and Friday was that
oversold rally.
Late Thursday, Goldman Sach's Abby Joseph Cohen
thought stocks had gotten down to "more reasonable
valuations," further adding to the Bullish sentiment
on Friday.
But valuation is not the be-all or end-all of
measures. If it were, we would never get as over
valued as we were in March of this year, or as
undervalued as we were in '97.
Its very possible that this bounce could carry us
forward a bit -- maybe even as far as the US
elections. Still, playing that game maybe a fool's
errand. For everyone but the nimblest of traders, the
risks are MUCH greater than the rewards.
You can never tell whether a "bounce" such as Friday's
is a new trend or not, until it has had at least 3-5
days of seasoning. William O'Neil, founder and
publisher of Investor Business Daily, has a trading
rule for bottom-spotting. O'Neil says that the first
three days are "ripples on the tide" that can mean
anything. Its between days 4 to 9 where you can form
a better idea if the rally can re-exert itself.
If a rally fails to reassert itself, the next phase of
the bear market will be one "waterfall decline."
Let me refer to Don Hays, the former Chief Investment
Strategist of First Union, a very astute and long
seasoned market observer. He is extremely cautious,
observing that this bounceback could be a classic head
fake: The "snapback will send [the market] up rather
violently just to get back to the sharply declining
downtrend line. Bulls are rushing to point this out as
a buying opportunity." he noted.
Don Hays' methodology calculates that a failed rally
here would take the Dow "down to at least 9000. The
NASDAQ's minimum risk is to the 2600-2800 level on
that next sell-off."
So look to the next 2 days earnings for the short term
catalyst. Tuesday we have Intel, EMC, Citigroup, IBM,
Merrill Lynch, and Sprint PCS reporting – each
represents a key sector of the economy – Banking,
Brokerage, Semi-Conductors, Wireless, Computer
Services, and Storage.
Wednesday has Chase Manhattan, AOL, Apple, Microsoft,
Sun, Texas Instruments – PCs, Internet, Servers,
Software and Chips.
These two days could give us guidance as to what the
next few weeks will look like.
One last observation, again from Hays: "With the
brewing resentment by the 3rd world terrorist-prone
countries against the riches of the US, with the new
brewing "religious" war that is so unnerving, with the
surging oil prices, and with the excesses that
[Federal Reserve Chief Alan] Greenspan & Co. has built
into the system, can you imagine why anyone would want
to be President now?"
That's all for now. Stay tuned.
--Barry Ritholtz
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Copyright © 2001 Barry L. Ritholtz, All Rights Reserved worldwide. May not be copied, stored or redistributed without prior, written permission.
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