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Distribution

(March 20, 2002)

Definition: The process whereby the "smart money" is passing on stocks to the "dumb money."

The mainstream financial media wants the public to believe that an economic recovery is in the making. Sure, it's going to be a slow one, but it will come. The market indices will consolidate and gradually rise from here, but don't expect any kind of returns that will resemble those made in the late 1990's, they will say.

This may sound cautious and prudent to the average investor, but unless the bubble can be re-ignited, this is the most outrageous comment we have ever seen. No bull market has ever begun with stocks being historically overvalued. The only time a bull market began from normal valuations was during the early 1990's, with the S&P P/E ratio at 14 or so. Major bull markets usually begin with the S&P P/E ratio under 10.

Conversely, we now have the S&P P/E ratio over 40. Note that at the 1929 bull market top, P/E ratios for the DJIA was only about 20 or so. If anything we are, again, at a major top. How a new bull market can be born out of anything like this is beyond our comprehension. In fact, this latest call from the financial media is as outrageous as the "new era" calls in early 2000.

The housing starts number was heralded as bullish today, once again. Once again, a number that only exists in a statistical world. The following commentary from Comstock:

Today's February housing start report has brought forth headlines such as "white-hot recovery" and "super-strong housing market". A closer look reveals that this is more of a statistical recovery than a real one. Economists take the actual monthly number and then seasonally adjust it and annualize it. February housing starts were actually 119,500. This is down from last June's 155,200, but when seasonally adjusted and annualized, February came out at 1,769,000 and June at 1,634,000. What happened was that February, usually a cold month was much warmer than usual, so housing starts were down less than normally. Under this method, 11,000 additional starts made possible by the warmth gets translated into 146,000 more starts on an annual basis. We're not criticizing seasonal adjustments or implying that anyone is deliberately trying to mislead. It's just that abnormal weather messes up the seasonal adjustment process. The retail sales and employment numbers, also widely hailed as improving indicators suffer from the same distortions.

No charts tonight, but it is apparent from our title that we believe today has all been about distribution. The media is touting the housing number and attributing today's weakness to a potential interest hike down the road. The fact is, they are grasping at straws.

We believe today resembled some kind of topping pattern. The Dow closed at 10,501.57 today, slightly lower than last week's low of 10,501.90. The S&P 500 closed at 1,151.85, again, slightly lower than last week's low of 1,153.04. These numbers by themselves may be a weak call for a top but any further downside tomorrow should confirm the downtrend. In addition, both the Dow Transports and the Nasdaq hasn't seen a higher high for the last two to three weeks, and this is very ominous.

We maintain that any negative close in all three indices tomorrow (preferably with the Dow closing below 10,433, which is the low of two weeks ago) should confirm a new downtrend.

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