The Blair Witch Nasdaq

  • May 19, 2001
  • Goran Yordanoff

By the
time we can prove it, it might be too late...

After the horse-race of options
expiration had ended on Friday, there were too many jockeys in the winner’s
circle. All three stock indexes, the 5-year, 10-year, and 30-year bonds, oil
(knocking on the $30 level again), and gold (up a whopping $14) posted rallies
on the day. Keep in mind, some of the
rallies were impressive and some were not so impressive.
Nevertheless, I had the biggest “Elmer Fudd” moment I have ever had
in which I scratched my head and said to all around me, “Something vewy scwewy
is goin’ on awound here!”

Let me make my position
perfectly clear: 

I believe this to be the fiercest bear market rally
since the great “suckers rally” of 1930.

That said, trying to gauge when
this will end and the bigger downtrend reassert itself is virtually impossible
to ascertain. Instead, we need to play
the charts on a day-to-day basis, with one eye devoted to the bigger picture.
My strategy and formula for trading profits is based on risk versus
reward. These strategies, over time, have
provided me with excellent trading returns. Perhaps,
looking back over the past few weeks it is clear that (RFMD)
was a “buy” when it was $24, up 300% in 4 trading sessions, as it
subsequently tacked on another 10 points into this week’s closing print.
Unfortunately, we cannot trade with hindsight, nor can we employ the same
blind faith momentum techniques we did back in the bubble days of late
1999/early 2000. The reason? 
Overhead resistance. Overhead
resistance to the stock market is like bad case of herpes.
We don’t know when the outbreak is going to come, but we know that it
can’t be far off. Fascinatingly, we
haven’t heard any of the strategists or chart gurus who have urged the public
to buy at any level over the past week (particularly after the flamboyant
breakout of the Dow over 11,000) discuss this topic. 

James Cramer stated something
this weekend that I have always subscribed to. That is, never short on
valuation. Is it silly that we are seeing
the ill-fated love affair with the overvalued, “no visibility” technology
sector continue when price-to-earnings multiples are at historical highs?
Absolutely. Therefore, it is important to identify only technical and
chart formations that lend validity to a short sale, rather than our perceptions
of a lack of fundamentals. For, let’s
face it, fundamentals have absolutely no role in the current market, as the
street has completely discounted a trough in the technology business cycle and a
thorough economic recovery in the second half of this year.
In fact, many have suggested that the death of the business cycle has
occurred as our “new economy” has entered a new paradigm (there is an
excellent article written by James Grant, titled “Coins Of The Realm” that
can be found on www.grantsinvestor.com.
I believe registration is required). Heck,
for all we know, we may start bidding up stocks again due to page views and
revenue growth, with net profits viewed as a peculiarity.

Nonetheless, we find ourselves at an important juncture in the history of
our financial markets. The Dow Jones
Industrials look poised to either retest their all-time highs without the
participation/confirmation of the other two indexes. How
this scenario will ultimately play out is somewhat difficult to surmise, so we
must go back to our old analogy of Hugh Hefner with his young blonde menage-a-huit: 
It is certain that dipping into the old Viagra bedside candy dish
(liquidity) will deliver the desired results in the short term (we can only
speculate this to be true), but what will happen when it is all used up and
nature regains control of the situation? The
results, as you may imagine, will probably not be that pretty.
In the meantime, however, we can only eat what is currently on our dish.
So let’s take a look at what this weekend presents us:

 



Many charts look exactly like
this AOL chart. We have had multiple breakouts from upward wedge/triangle
formations that have come on declining volume. You
can see from this chart that we are entering an area of significant resistance
from prior rally failures. This is not
the kind of chart that lends to further movement on the upside, due to a lack of
adequate basing action added to the volume/price divergence.
Be on the lookout for a significant failure in AOL once the current rally
dies (if it ever dies).

The following chart of the
daily Nasdaq 100 index is one that we have referenced for the past few weeks.
You can see that in light of all the analyst-pumping with “train has
left the station” foolishness,
the unbridled
positivity and complacency in the market (reference the (QQV)
or the (VXN)
for the Nasdaq),
and the
$20+ billion dollars that predominately came back into high tech mutual funds in
April, the Nasdaq has still failed to exceed its highs from the rate cut mania
highs of April 20th. Remember
what the Dice-Man used to say? “Three
blind mice…see how they run. Where they
hell they goin’, eh?” Just as in the
“Blair Witch Project,” everyone keeps trying to get out of the forest,
only to find themselves going in circles.



In light of the evidence
presented above, as well as the enormous complacency and bullish sentiment
prevalent, the jury of the G-Man finds this market “guilty as charged” of a
tremendous bear market rally attempting to disguise itself as a new bull.
Although it may continue to creep up, the risk-versus-reward scenario
that I employ suggests consideration of short positions at current levels unless
the April 20 highs on the NDX are exceeded.

Have a great weekend.

Goran