FRIDAY a.m.
June 27, 2003
Mirror Images
by David Nichols
First off, I've been getting lots of questions on US Gypsum (USG), now that the short squeeze has sent this stock into hyperdrive. Long-time subscribers will remember USG as my attempt to "pull a Warren Buffett", as he owns a big slug of USG that he bought when the stock was in the low teens. We actually got the stock a lot cheaper, as low as $5 a share.
For a long time, it looked like USG was one of his few mistakes. But the company was being held down by bogus asbestos concerns. Patience was likely to be rewarded here. Also, the 55-days-to-cover short ratio didn't hurt the situation.
Sure enough, USG has been ripping, and following along with the Master has paid off big-time.
Almost unbelievably, the short ratio is still a very high 28 days to cover. There's still more room on this squeeze. I'm looking to hold on for $30, but a daily sell signal from here ought to do it. I'll update when such a signal shows up.
On to the market: When the Fed cut rates on Wednesday, the S&P 500 was trading around 987. By the close that day, it had fallen to 974. With yesterday's rally, it's now right back up to 985. The whole episode has just been "noise."
Pulling back the lens, the market looks to be correcting the initial 38 point decline in the SPX off the high at 1015. With such a swift descent off that high, it looks like a new down pattern is unfolding, and the tide has turned. Since June 6th -- when the fast money got blown out of their puts -- the upside momentum has tailed off sharply.
The 38 point drop was likely just the first leg. Markets always move in alternating advance and decline phases, and the current bounce is the short-term "advance phase." It's the counter-move to that initial descent. Here's how it would typically play out:
If the SPX loses upside momentum now and starts heading down anywhere below 1000, then this scenario is intact. However, a move above 1000 would show that the main uptrend off the March low could still be in force, and this multi-day correction may just be a springboard to even higher prices.
That's possible, certainly. We've already seen some amazing extensions from this uptrend. But it would be pretty amazing to see another extension now, with bullishness near record highs and the VIX down at 21.80.
I read yesterday that the American Association of Individual Investors shows bulls at 71% and bears at 8%. That's off-the-charts. Sure, the market can go up for all these bulls -- for a while anyway -- but that's not the way markets ultimately work. Money flows from the majority to the minority. It has to. There is no other way for markets to function. Fresh liquidity can fuel aberrant market behavior, but that's a finite effect, as we find out at the end of the bubble.
I am seeing a lot of historical and technical comparisons right now to what happened in the late 90s bull market, as a way to justify what potentially can happen now on the upside. But it's essential to remember how that was an unprecedented equity bubble. (Yet with the Fed so aggressively trying to inflate asset markets now, in a sense there is a valid "bubble" comparison to the late 90s.) I think the right way to compare the action now to the action in the late stages of the bubble is to turn the chart upside down , and think of the current market as a mirror image of the bull.
Back in 1998, the bull market hit a big snag as Long-Term Capital and Russian stocks crashed. The consensus opinion back then was a "new bear market" had started. The VIX actually soared over 60 at the very bottom in Oct. 1998. But instead of being a new bear, this bout of fear and bearishness was actually the direct impetus for one last blistering bull run. The "new bear market" crowd was right, but they were about 18 months too early. They had to get completely blown out first.
This current rally is the mirror image of that 1998 decline. We're seeing an unprecedented rush of bullishness. This is directly setting up one last monumental wipeout to end this wicked first phase of the secular bear market.
The timing on this comparison is even similar. There was a 3-year accelerated rush to the upside from 1995 to 1998, then the big pullback in 1998, then a year and a half run to the all-time highs in March 2000. Now we've had about 3 years of a bear market, and we're getting our big counter-move to the upside accompanied by huge bullishness. A similar conclusion would be a dramatic 12 to 18 month slide to new all-time lows.
The set-up is all there for this to happen. When the "second half recovery" doesn't materialize yet again, the market will be in a position to cave in.
I read in the Wall Street Journal yesterday that in the first quarter GDP report, capital spending dropped at an annual pace of 4.8%. That's right -- dropped. Overall business spending in the first quarter hit the lowest level since the third quarter of 1998.
And this is 13 rate cuts later. Companies are not using this cheap and easy money to expand. They're actually spending less.
As I've said before, buckle up your seatbelts, because the next 12 to 18 months promises to be a wild ride. Expectations and reality are on a collision course.
Sentiment Dashboard
by Adam Oliensis
Enviado: 27/6/2003 18:30
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