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Major decline underway?

(February 6, 2002)

Overnight, the Nikkei was making fresh 18-year lows again, as it traded below the Dow again (it hasn't down that since 1957). Right before the productivity number was due, Cisco came out and announced it was going to beat estimates, citing a pretty lame excuse for doing so ahead of schedule. Our conjecture: the market was about to break down and the premature statement made by Cisco was to support the stock market. The productivity number was also touted, as that also beat estimates. What was not mentioned was how that number was achieved. A glance at the report shows that business output actually declined by 0.3%, while the number of hours worked declined by 3.6%. So people are working less and producing less. Is that good for the economy? I don't think so.

For all intents and purposes, today was a day when people finally said "no" to inflated earnings and overly optimistic forecasts. Cisco (and the Nasdaq) initially opened up but the latter actually closed down 25 points by the end of the day. Cisco was relatively unchanged. After-hours trading was even more interesting, as the Nasdaq AMI was initially up 20 points only to end down 23 points when after-hours trading was done. Cisco initially tacked on nearly a dollar after-hours only to end down by about the same amount (some listener actually posed the question to CEO John Chambers asking him how much of the profits were booked on the inventory that had been written off). Gold ended its run but the precious metal is trading over $300 again in overseas trading. JP Morgan had to come out and squash a rumor that it was suffering steep losses in its gold derivative positions.

Overall, this was a very exciting and interesting day. It's obvious that "someone" or "somebody" is trying to stop this market from tanking (i.e. trading down to where it belongs) but as we all know, ultimately, all manipulation will fail. Even the government kind.

Now is the appropriate time to paraphrase a rule of manipulation from Jesse Livermore. Quote from "Reminiscences of a Stock Operator":

Stocks are manipulated to the highest point possible and then sold to the public on the way down.

No doubt we are in the latter phase right now as the Big Boys are exiting the market while these same stocks are being dumped on the retail investors (I am indebted to Richard Russell for developing this indicator). But then again, the Dow has been in distribution mode for the last two years. Only when all the stocks have been distributed will there be a decline of significant proportions.

We have been looking for some kind of short-term capitulation yesterday and today but every time the market was on the edge of capitulating, support was given and the market recovered again. So we will be looking for this again tomorrow. We are not looking for a straight-line decline from here mainly because the market does not trade in a linear fashion. Besides, the Big Boys still haven't finished their "distribution" yet.

To see how this decline may pan out, let's look at the (updated) chart that we initially posted on Sunday:

Dow Jones (January 18, 2001 to March 22, 2001) vs. Dow Jones (December 21, 2001 to Present)

Once again, the blue line above reflects closing prices of the Dow from January 18, 2001 to March 22, 2001. The solid red line reflects closing prices of the Dow from December 21, 2001 to the close today. If the same pattern holds, then there would be a one-week rally next week that could take the Dow to near or over 10,000 again before the next phase of the decline resumes. With put/call ratios and general investor psychology getting more bearish, a short-term bottom tomorrow or Friday is probable.

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