Stunning move – to the upside
(February 20, 2002)
We know the Dow has been manipulated to the highest possible extent in recent
days. We also know the Fed has made liquidity injections of over $18 billion
during the last two days. And finally, we know the short interest in this market
has been huge. However, a stunning rise of 200 points was still surprising.
While the recent action of the Dow still has some correlation to the action
earlier last year (see chart below), it will take some big events to happen
for the Dow to test its September 2001 lows. At this point, it seems that comparable
action to the July/August action would be more likely-some consolidation with
a downward bias and then a plunge in late March/early April.
We maintain today's action was mostly due to short-covering and manipulation.
To propel the market higher from here, volume would need to increase. Today's
volume was okay, but it wasn't a day to write home about by any means. To confirm
this move, volume would need to increase dramatically. We do not believe this
is very likely. On the other hand, the latest downside move in the market has
been accompanied by "good" volume, signaling a confirmation.
To conclude, we regard today's move as being a blip in the radar screen. The
Dow 10,000 level wasn't breached, and neither was the 200-day MA. Taken into
context, it is merely a dead-cat bounce and the market will be resolved to the
downside quite soon.