Here They Come, Walking Down The Street
After
weeks of the bulls and the delusional financial media trying to will the market
higher, one thing has become very evident: any strength whatsoever is being sold
into. We saw it last week with the ludicrous Oracle-induced gap up in
which professionals sold aggressively to the retail investor who once again felt
he/she was missing the boat if they didn’t buy that morning (we are still trying
to determine what boat, if any, is planning to leave dock). We saw
numerous discussions from multiple websites regarding the 10-day Arms Index
reading. We saw numbers discussions on multiple websites regarding the Fibonacci
turn window which stretched roughly from June 19-22 (some had it narrower, at
June 20-22). Nevertheless, no single technical reading and/or condition can
reliably foretell or indicate an impending trend reversal in the markets. I feel
there has been too much emphasis placed on the oversold reading of the 10-day
Arms Index (please hold the hate mail, I’m aware of its history) with too much
anticipatory buying as a result while other market internals totally conflicted
with this widely publicized indicator. For example, a daily chart of the VIX
below shows that it was moving aggressively lower into the Fibonnaci turn-window
of last week as the 10-day Arms index was having everyone dust off their bull
horns.
In addition, many of the technical oscillators of the market indexes continue to
look weak. As I stated at the beginning of last week, I still believe
there is slightly more downside to this market before a sustained advance can be
launched. Had you traded with this mindset from last Monday, you would have been
wildly profitable, shorting any and all rallies that were conjured up by the
bullish Wall Street spin doctors over the past week.
This evening, we heard AMCC confess that they stunk far worse than anyone had
ever imagined possible. Does anyone remember the arrogant CEO, David Rickey,
tell Maria Bartiromo of CNBC that he “dares anyone not to own” his
stock? Applied Micro Circuits cut its first quarter outlook to a pro-forma loss
of somewhere between 4 to 6 cents a share excluding restructuring charges. It
had previously estimated its first quarter to either break even or generate a 2
cent a share profit. In addition, the chip maker ratcheted down its revenue
forecast to a range of $40-45 million, compared with analysts’ estimates for
$73.3 million in revenue. Just last year, the firm recorded $74.2 million in
revenues for the quarter. Here we come to another inevitable question: what is
the proper valuation for this stock and many with similar stories? Well, back in
1999 and 2000 we were told by Wall Street to disregard the conventional methods
of calculating a stock’s valuation because the “new economy” tech
stocks were going to generate unprecedented revenue growth, and thus create an
entire new paradigm for stock valuations and growth. (Heck, even Alan Greenspan
had us believing that we had entered a “new economy” with permanent
productivity gains to be enjoyed indefinitely). However, we have now witnessed
the reality of the matter. These stocks, which were widely heralded as the
“must own” growth stocks that you had to buy for your portfolio
regardless of their price. ended up being good old fashioned cyclical stocks
that were subject to the same good old fashioned business cycles everything else
is. This reality came as an incredible shock to many– to others it was always
just a matter of time.
So, in a situation like AMCC’s (or any such company in a similar predicament),
we have a company that is not only losing money at a pretty hefty clip but is
actually growing its revenues at a negative (yes, negative) 40+% rate. Without
the earnings and without growing revenues positively, what exactly is left?Â
Oh yes, I almost forgot, buy now for the second half recovery which has now,
quite conveniently, been slowly moved out into the future a few more quarters.
Heck, it never really has to come as long as people will keep buying the
semiconductors in anticipation of the recovery. Damn the fundamentals and all
who trade based on them, this is a new economy with a new stock market–which is
going to create an entirely new generation of poor just like it did in the
1930’s.
 It is clear that it is only a matter of
time now as the speculative excesses not only continue to be present, but
continue to rage. However, the speculation now seems far more misdirected,
erroneous, and easily manipulated in their nature. This is precisely what is
going to perpetuate the panic when the decline finally commences in earnest. In
the short term, it is hard to find a market strategist anywhere who doesn’t
count on a revisit of the May 22nd highs, if not a new recovery high in all
three indices, with the potential of a new all-time high in the Dow. Let’s take
it one week at a time and not get carried away quite yet.
The cup of rate cuts continues to runneth over. Alan Hood and his merry band of
imbeciles will seize the headlines worldwide tomorrow as the FOMC meets once
again to determine how to make it easier for us to spend money on credit. If we
lined up 100 people and asked them if they thought the rate cuts would help the
economy, there is a good chance a great majority of them would say
“yes.” Upon further questioning, if we then asked how they supposed
this would take place we would probably receive a lot of blank stares. The truth
is, the most aggressive Federal Reserve in the past 20 years will continue to
fail in their attempts to stimulate the economy because businesses have no need
to invest money in new plants and equipment due to their high inventory levels
of unsold goods. What good is lower rates if businesses don’t have the need to
increase their capital spending?
In addition, the value of the dollar usually falls when the Fed cuts rates,
making U.S. exports cheaper for foreign buyers, which in turn stimulates U.S.
production. But the dollar has kept rising as the trade deficit steepens and the
Euro-zone and Asia continue to slide into recession. Go ahead, Mr. Greenspan,
continue cutting rates until the U.S. consumer gets further in debt, and the
savings rate becomes negligible. I will be the first in line at the
“Maestro” burning bonfire when all this blows up in your face.
We are going into our defensive FOMC meeting posture once again. If you must
play, play small and be prepared for incredible volatility the next few days.
Good luck, and Carolyn Lueck will provide the next update from this trading
office on Wednesday.
Goran
P.S. DR J’s TRADERS show is cataloged this week
on webfn as well as last weeks’ show.