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Sunday, July 11, 2004
Good evening friends,
Market Recap
As predicted in Thursday's Commentary, there was a small bounce for stocks on Friday from their oversold levels. The Dow rose +41 points and the NASDAQ gained +11 points. This small bounce was accompanied by very little volume. When there is no volume, the markets do not have enough fuel to put together any type of lasting rally. Friday's rally stalled out because of this lack of volume.
Volume is the market's fuel. Just like a car, it can not run without that fuel. The charts still look weak, and I do not expect a meaningful rally to occur any time soon. The Dow did manage to close above its 200 SMA again on Friday – that is good news but how long will it stay there? My guess is not long.
Holding Shorts
As you will see in tonight's Bulletin comments, sometimes in these flat markets we can find stocks to short and hold for a while. I mentioned last week that if we had not traded at all and held our cash from the beginning of the year, we would have still out performed the market. This is because no gain beats a -3% loss as in the NASDAQ's performance year to date (YTD).
But having said that, take a look at how we would be doing this year if we had shorted each stock on our short list the day after it appeared on the Bulletin and held our position. Buy and hold? Maybe we should re-think that and change it to “short and stay short”
Earnings Season
Last week was the start of the quarterly earnings season:
- Alcoa missed estimates by a penny,
- Yahoo met estimates, even doubling their revenue, but the stock took a beating,
- GE beat estimates by a penny and the stock had only a minimal gain. One positive note from GE is that their cyclical businesses seem to be in a bit of an upswing so there is some hope in the future.
This week MSFT, INTC, and IBM will reporting along with others. The markets need to get through these announcements without taking too much of a beating.
Several companies have already started off the earnings season announcements with pre-warnings. Most of these companies with pre-warnings are in the tech sector, and that sector is what really fuels the NASDAQ. Computer Associates, Unisys, Veritas, Siebel, and Peoplesoft have all come out with warnings that their earnings will fall short of estimates.
Intel, which reports on Tuesday, will be a huge announcement. Even if Intel only meets estimates, we may see a sell off. Meeting estimates will not cut it, they need to exceed expectations. Intel's chart is in bad shape right now so it will take some time to repair itself. What we need to hear from Intel is a very strong statement about the coming quarters, and I do not think we will hear that this time around.
IBM reports later in the week, the same story holds true for them. Current quarter earnings do not matter as much as what they say about future quarters, that is what will move the stock one way or the other.
Several banking firms report next week as well. Earnings should be okay for these financial stocks, because the interest rate raise did not affect their earnings for this past quarter.
Bearish? Hmm…
Last week I said that I was rapidly turning bearish in my outlook. “Turning bearish” does not mean I am bearish. It means 1) I am less bullish than I was, and 2) I am beginning to see bearish signs. I just want to clarify that because I do not want members to read into this too much or come to the wrong conclusions.
There is a lot of concern in the market, and we want to make certain that we are prepared to react to market direction when the market does commit one way or the other. There are some market watchers who feel a lot of selling is required before the buyers finally come out. This is true at the end of bear markets and long down trends; it is called capitulation selling (the final panic selling to wash all the weak out of the market at the end of a long down trend). We are not in that situation now; the markets have already been through that in late 2002. The markets are still in up trends from the Oct 2002 lows so there will be no capitulation selling now.
What we are in is a consolidation period, transitioning from a three year bear market to a new bull market. The market rallied for about 16 months from those Oct 2002 lows until Jan 2004. For the last 6 months we have been consolidating those gains with a flat, sideways basing pattern right in the same area as the Dec 2001 reaction high. This can be seen clearly on a six year chart of the NASDAQ dating back to 1998 (see tonight's chart of the NASDAQ).
So am I bearish? Not yet. However with everything the market has to digest in the next few months, we do not know where we are headed. If this six month consolidation base is broken to the down side, then it will be very difficult to get back up through that resistance. If sellers break a chart of a stock or an index then it will take quite some time for that damage to repair itself. At this stage of the game, any downturn in the market will not be a sign of good things to come; it will likely to be just the opposite.
If the markets cannot hold this support area of 1900 on the NASDAQ and 10000 on the Dow, the markets will be headed a lot lower I will turn bearish. It is my opinion that investors are still overly optimistic and there is no fear or panic. The majority is not bearish and that is why the markets will not go up. The market never does what the majority expect it to do. If too many people are optimistic, then markets do not go up. Remember the TRIN commentary from last week.
TWPD Portfolio
Earnings season will be a key to market direction over the next three months. If the numbers fail to impress, and more importantly if the outlook is cloudy, we will likely see a strong downturn in the markets. We currently have 11 open long positions and 13 open short positions on the Bulletin. I would not call that bearish or bullish. It is about as neutral as we can be, and it is as close to being all cash as we can get while still trading. This puts us in the best position to move with market direction when and if the market commits itself to either direction. If you are not hedged in this manner, it would be wise to be in cash. Cash is King.
OTC BB Watch List
- AVCA
- UFSY
- CCLH
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