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Not good enough
The market's not as concerned with fundamentals as it is with valuations, writes Tomi Kilgore.

Being better is no longer good enough
Commentary: Reversals emerge, but support likely to hold

By Tomi Kilgore, CBS.MarketWatch.com
Last Update: 12:01 AM ET Sept. 15, 2003

NEW YORK (CBS.MW) -- The markets are no longer satisfied with just getting better.

The anniversary of the Sept. 11 tragedy helped remind me how far we've come. Things looked pretty bleak two years ago, as businesses and consumers alike tightened their purse strings.

Every dip in the stock market was followed by cries of capitulation and calls for a bottom. But they all went unanswered, as the shaky geopolitical and economic environment undercut any rally before it could gain a foothold.

Then, six months ago, things started to finally look like they'd get better. The Nasdaq Composite ($COMPQ) started its latest rally in mid-March (not to mention the one that began in October 2002) on the belief, if not hope, that things would get better. And they did.

Geopolitical tremors are still being felt in the Middle East, but are nothing compared with what they were. The labor market has yet to bottom, but everything else has started to show signs of improvement.

And even the beleaguered technology sector, which is still the worst performer when compared to its highs in March 2000, has started to recover, led by the beaten-down semiconductor sector.

"So, what's not to like?" asked Barrington Research market strategist Alexander Paris in a note to clients last week. "As for trading on hope of a future acceleration in economic activity -- that has now turned into reality, with almost every sector showing unmistakable signs of acceleration."

But apparently, that is no longer good enough. The market is no longer as concerned with fundamentals as it is with valuations.

Texas Instruments (TXN) said last week that third-quarter earnings and revenue would be at the high end of expectations -- that's the "better" part. But the stock fell 7.6 percent -- that's the "not good enough."

"The investment air has definitely become pregnant with possibilities of a slide," said U.S.-based securities firm First Global in a recent note to clients.

I thought that quote was perfect, because it was a candlestick chart pattern called a "harami" -- Japanese for "to be pregnant" -- that indicated that a pullback may finally be coming.

The question now is, how far down does the Nasdaq have to go before we are reminded just how good things actually are.


Nasdaq's 'pregnant' pause

The Nasdaq looked as good as could be on Sept. 8, when it opened at 1,864 -- it's low of the day -- and closed at its intraday high of 1,889, a level not seen since in 18 months.

The next day, the index opened at 1,883, and traded in a range of 1,886 to 1,868, before closing at 1,873, leaving all of the day's activity cuddled between the prior day's open and close.

That may seem innocent enough, but given that it appeared at the extreme of move, candlestick chart watchers see this is a subtle sign that the market has suddenly become indecisive at a time when everything should be clear.

Bulls were ripe to be caught off guard, and bears did not hesitate this time.


Bald bears make their move

By itself, a "harami" isn't always the strongest candlestick reversal pattern. But a downside "marubozu" candle (translated as "completely bald") the day after confirmed the Nasdaq's inherent weakness.

("Marubozu" refers to a day that has no "shadows," which are the difference between the open and/or close and the intraday high and/or low.)

On Wednesday, the Nasdaq opened at its high of the day (1,859) and closed at its low (1,824). This indicates total dominance by the bears, as they led the session from start to finish.

Bulls were obviously caught flat-footed, because if you'd noticed, these two negative patterns followed a "marubozu" candle to the upside on Sept. 8. And the "gap" between the Sept. 8 low (1,864) and the Sept. 9 high (1,859) suggests there were many buyers stranded near the high.

It is encouraging that the downside "marubozu" was followed by two up days, because acrophobic bulls trapped at the apparent high could've easily pushed the panic button.

Nevertheless, the negativity will remain until the "gap" is filled on a closing basis, because even the staunchest bulls will start feeling queasy if left with out-of-the-money positions for too long.

How long, and how far down the Nasdaq has to go before they regroup will be a good indication of how strong the uptrend really is.


Potential pullback targets

The last time the Nasdaq suffered a pullback of any significance was from mid-July to mid-August, when the index fell from its July 14 high of 1,776 to its Aug. 8 low of 1,641, a 7.6 percent slide.

A likely target for any downside move is the 1,800 to 1,750 area, as bears may want to test the level where the Nasdaq last reinitiated the uptrend. If bulls need more time to regroup, a drop to the Aug. 8 low of 1,641 may not be out of the question.

Until things stop being better, and start looking like things are about to get worse, that's likely where any pullback will end.

"Sure we will see some corrections and September is historically a good month for that," Barrington's Paris said. "However, our assumptions remain the same, that we are still in the early stages of an extended, though slower-than-usual, economic recovery...and a new bull market, which will be more subdued and investment-oriented than the last.

Perhaps the Nasdaq has to drop back to at least 1,695.38 -- the close on Sept. 10, 2001 -- to remind us that while things still aren't perfect, they are a lot better than they were, and look set to get pretty good.

And that's no longer just "hope" talking.