The Facts, Only The Facts

• January 19, 2001
• Goran Yordanoff

The Nasdaq Composite recorded a high today
of 2841.25 immediately after the morning’s open. This represents a nearly 600-point move from the
Jan. 3 lows of 2251, only 11 trading sessions ago. This 600-point rebound in the Nasdaq Composite is a 27% bounce from the lows of
Jan. 3. Since those lows, the market has absorbed a 50 basis point surprise rate cut by the Federal Reserve, as well as a boatload of negative earnings and forward-looking statements. At present, the market has another 50 basis point cut baked into the cake at the January FOMC meeting. 

So where does that leave us?

This morning, with the Nasdaq futures locked limit up, we heard the happy faces on CNBC tell us that “technology is definitely going higher” and that “the market is poised for a great breakout.” They went further to say that there are “piles of cash on the
sidelines,” and that we are in the midst of (I love this one) “an uptrend that is very much in place.” We are shown the daily chart of the Nasdaq with the downtrending regression line apparently “broken” by yesterday’s close above 2700. This happy “breakout” is not confirmed by shorter term charts of the Nasdaq Composite, as seen below.

The daily chart of the Nasdaq Composite shows us a bearish candlestick formed today, as the Naz barely closed positively and shed nearly 71 points from its intraday high.

This morning, there was total unanimity that the market was going higher and that the next area of resistance was
3000 on the Nasdaq Composite. This type of mass psychology assuming that a move in any direction is imminent is disconcerting, to say the least. 

At times like this, when the entire world is betting one way, I ready my trusty sword and wait until I see the whites of their eyes. Let’s face it, short-term speculative money is virtually always wrong. The options market is the paramount example of what this is all about. That is why such an inordinately large percentage of “long” options (that is, options which are bought) expire worthless. If I see the herd moving one way on a false fundamental premise, I fade the move. 

Many will point to the economic picture in the 1990s and how the low-interest-rate environment bred tolerance and actually supported high valuations. Those pundits fail to point out that we had a growing economy in the
1990s and a slowing economy today. Thus, today’s low-interest-rate environment in and of itself may certainly prove not to be enough to sustain today’s high valuations. 

More frightening yet is the possibility that (contrary to what the market gurus want you to believe), the FOMC might have been prompted to deliver the 50 basis point surprise rate cut as a response to the California utility matter and
not as an act to shore up the equities markets. For those of you who believe Greenspan and his elves would do such a thing to protect the market caps of
(
JNPR |
Quote |
Chart |
News |
PowerRating),
(
BRCD |
Quote |
Chart |
News |
PowerRating) et al, and preserve the figures shown daily on the CEO “wealth-o-meter,” maybe you should look into another line of work.

I am going to state this again and want all to take it to heart: The repercussions of the California utility crisis is still largely unknown. Until this matter is under control and the consequences of this event are revealed, it is quite certain that the manufacturing sector in California will take a big hit. 

Quite frankly, I am concerned that the state of California will plunge into a recession which will spill over to the federal level. If the stock market continues to respond bullishly when all the consequences of this matter are clear, then I will adopt a bullish stance for the stock market for the rest of the year. Until then, I am playing the trading channels and Fibonacci retracement levels on intraday and daily charts, while keeping one eye on the big picture. The big picture being we are still in a
bear market until proven otherwise. As such, with the macro trend still being one of downward bias, I will continue the strategy that has paid me so dearly since March of 1999. That being, short the rallies when they give you the right topping signals.

After eight straight days of positive NYSE breadth, we finally turned negative. In addition, the McLellan Oscillator commenced a move down from a strongly overbought reading. In addition, the NYSE tick recorded extreme tick levels of over 700 (some times as high as 900) in each of the past
eight sessions. Add to this the fact that Investment Advisor bullish sentiment rose to 57% this week, and you may have the makings for a healthy retracement due to readings which are indicative of market tops, not bottoms. 

With extremely weak closes in
(
CSCO |
Quote |
Chart |
News |
PowerRating) and
(
SUNW |
Quote |
Chart |
News |
PowerRating) today, it didn’t seem like anyone was buying the pullback late in the day. With January expiration behind us, next week proves to be very interesting indeed.

Long Watch: The B2B sector had a nice day on the heels of
(
CMRC |
Quote |
Chart |
News |
PowerRating)‘s impressive results. Other than that, tech and many Dow components look extended, short term.

Short Watch: Technology looks ripe for a healthy pullback.
(
BRCD |
Quote |
Chart |
News |
PowerRating),
(
CIEN |
Quote |
Chart |
News |
PowerRating),
(
SDLI |
Quote |
Chart |
News |
PowerRating),
(
QQQ |
Quote |
Chart |
News |
PowerRating),
(
EMC |
Quote |
Chart |
News |
PowerRating),
(
CHKP |
Quote |
Chart |
News |
PowerRating), and
(
MUSE |
Quote |
Chart |
News |
PowerRating) all look very extended.

Have a good weekend. 

Goran

P.S. With the new President ready to assume the reigns on Monday morning, has Alec Baldwin left the
country yet? If not, I’m sure a few of you will be willing to pitch in with me and purchase his
one-way ticket outta here. Hmm,,, you think I got a shot at Kim Basinger?