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Fear Still Lacking

(March 27, 2002)

The market closed at 10,426 today, less than one point below Friday's close. Since then, the Dow has gone nowhere. Monday brought about a 146-point decline, and the two 70-point rallies during the past two days brought us back to this level. Very frustrating to both bulls and bears.

The highlight yesterday was the blowout in the consumer confidence number. The rise was the steepest in 25 years, and yet the Dow only managed a 70-point up day. During the morning, it was up over 140 points. A few weeks ago, a number like that would have produced a 200 + up day. Today only saw a bit of follow through. What's the matter? Obviously, the number of buyers has been exhausted.

Another new low was made Monday, and the Dow has most probably now topped.

Good news couldn't get the market up, but at the same time, the holders of common stocks aren't selling. So what would make them sell? We don't know. All we know is that the moment is coming, and soon. Virtually all investors are bullish right now, and all it takes is for the very minority of those investors to start selling. Whether it will be an earnings warning (JNPR?) or another bankruptcy (WCOM, LU, Q?) we will leave it for our readers to guess.

Let's take a look at the Dow vs. VIX chart to see how "fearful" investors are:

Correlation between the Dow Industrials and the VIX (June 1, 2001 to Present)

Not too fearful, at all. In fact, the VIX made another new low today-19.25. Through the 146-point decline on Monday, the VIX only jumped 0.86 to 20.48 from 19.62.

We have emphasized this in the past but we will emphasize it once again. We believe the Dow has topped, but in order for the decline to assert itself, the VIX has to move up from here. Whether there will be a trigger event or a series of events we do not know, but we are definitely ripe for a decline. Those earnings warnings are always a prime candidate.

The big news today was the rise in the price of gold. A close of over $300! The HUI (the "Gold Bugs" Index) traded over 100 today, a level not seen since October 1999. We have always believed a new bull market has begun, so any retracements from here should be bought.

Somehow, a rally in gold from out of nowhere seems quite strange to us. Is it just short-covering or is it signaling something? If it is the latter, believe us, you don't want to know. Somehow, though, we think it's the latter.

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