A Buying Opportunity?
(July 28, 2004)
Due to the immense, positive
feedback that I received about my last market commentary,
I have decided to break my weekly schedule and write a quick, interim update
for my readers. Of course, the state of
the market has something to do with it as well, but I definitely do appreciate
I want to begin my commentary by
reaffirming what I said on Sunday evening.
I am now bullish - not only because the market is oversold and not only because
the cyclical bull market is not over yet, but because liquidity indicators are
bullish as well. Buybacks are
increasing, and insider selling has and will be muted for the next weeks. We are seeing more evidence of this
everyday. For example, Comcast just
announced a $1 billion share buyback today.
My cash and margin debt data also directly reflects the immense
liquidity available to the market. Why
do I make this statement, you may ask? I
am making this statement since there have been numerous analysts over the past
few years (especially the bear market of 2000 to 2002) who cited the
bullishness of things such as the amount of money market funds in retail or
institutional accounts - stating to the effect that this money has to go
somewhere and it may as well be the market.
Please keep in mind that no scientific studies have been done on this
kind of indicator, but let me present to you the following chart:
Like I said above, the amount of
cash in institutional and retail money market funds cannot be used as a direct
or reliable stock market liquidity indicator - precisely because cash in these
accounts do not need to go into the stock market - similar to money in checking
or time deposit accounts. During 2000
or 2001, traders who used this indicator in their analyses would have been
bullish - and wrongly so. Over the last
18 months as the S&P 500 rose over 30%, the same trader would have been
bearish - and again, wrongly so.
Presently, this same stock market trader would still be bearish - which
conflicts immensely with the cash and margin debt indicator that I presented in
my last commentary. I believe I am presenting my point in a
correct way, precisely because cash in these accounts are intended for
investment in the stock market; and not for other investments (or for
Now, let's talk about the Dow
Theory in a classic (and purely technical) sense. Following is an updated daily chart of the Dow Industrials vs.
the Dow Transports:
What is this chart saying? First, we note that the Dow Transports STILL
simply refuses to confirm the Dow Industrials on the downside, despite an oil
price that surpassed $43 a barrel in intraday trading earlier today (and
despite the US$ making a new rally high!).
In terms of the oil price, we are simply in uncharted territory, and yet
the Dow Transports simply refuses to confirm.
Before I go, let me reiterate something: The chart above is not saying
that oil prices will go back down, it simply says that the transportation
companies are able (and projected) to make decent profits in this high oil
price environment. Whether the Dow
Transports is discounting a lower oil price or the conjecture that the
transportation companies can pass their higher fuel costs to their customers is
a question that I cannot and am not qualified to answer.
I believe the above chart is
stating that the window of opportunity is running out for the bears. If the Dow Transports does not confirm the
Industrials on the downside by the end of the week, then I believe the major
market indices will head higher.
The cautious investor may now ask,
why do you think we are still in a cyclical bull market? My answer: I have provided numerous reasons
in my previous commentaries (see archives),
such as the fact that we are nowhere close to the typical lifetime of the
cyclical bull markets of the 1966 to 1974 secular bear market, and the fact
that speculation (and margin debt) are again, nowhere close to those at the top
in the cyclical bull markets of the 1966 to 1974 bear market. But if you are not convinced, I present
further evidence - courtesy of www.chartoftheday.com
- the following chart tracks the lag time between the troughs of the Fed Funds
rate to the subsequent tops of the S&P 500 for the last 40 years. Please note that the two cyclical bull
markets within the 1966 to 1974 bear market took 16 and 10 months to top (after
the trough in the Fed Funds rate), respectively. If we are to maintain a similar schedule today, then the current
cyclical bull market (as measured by the S&P 500) will not top out until
April 2005 to October 2005.
The chart of the relative strength
in the Bank Index also tells the same story.
The market has not topped out yet as relative strength of the Bank Index
is still high - this and the fact that it simply refuses to break its recent
support level. Please note that the
decline in relative strength of the Bank Index during the latter part of 1998
and 1999 perfectly "predicted" the huge bear market of 2000 to 2002. The Bank Index has traditionally been a
great leading indicator of the broad market.
One of my readers remarked that all
is well and great, and that although prices are very tempting now, he would
wait for the October period to buy since it is "traditionally" when the market
bottoms; also, he argues: by that time,
the uncertainty surrounding the current Presidential elections would have
lifted. Please note that I have
mentioned this before: when it comes to the stock market, nothing is
certain. The successful trader will
have to take what the market gives him or her; and the market certainly does
not care what you or I think or predict.
Traders or speculators who are going to wait until October to buy may
have to start buying in at higher prices.
Again, the following chart courtesy of www.chartoftheday.com provides a great
illustration of this argument, as the market tends to bottom in the June to
July period during the average election year:
Now, back to the topic of high oil
prices: Lowry's has been looking for panic selling in the face of bad news in
order to achieve a sustainable market bottom.
Today, we got it in the YUKOS news and the resultant record high oil prices. However, the market did not come close to
panicking today. While this may not be
a sustainable bottom, the author believes that it is pretty close. The majority of traders or analysts rarely
get what they wish for, and this may be one of those times. The author maintains that we are in a
cyclical bull market, and any further declines here should be minimal - either
in the number of points or in the length of time until the bottom.
Henry K. To, CFA