Candlelight Vigil Waning

• January 29, 2002
• Dave Floyd

It is 11:00
a.m. PST and believe it or not, I actually have time to write my
column. There is absolutely nothing going on ahead of the Fed meeting, so I am
catching up on some of the research I do from various publications. There were
some decent setups in the morning, which I capitalized on, but then I
immediately reined it in and thus far have not made any more trades. Right now,
the grand total is five.

As I have been mentioning in my
columns recently, the inaction, I feel, is a direct result of the bulls and the
bears. The bulls who believe that by standard metrics, the recession is nearing
an end, and the technology sector will dash to the market’s rescue again. The
bears, on the other hand, utter the dreaded words:  "It is different
this time."  I happen to agree with them.

Again, I caution you, these remarks
are based purely on a fundamental perspective, but the longer I sit and
trade this market, the more I am sensing that the candlelight vigil for the bull
is waning. Granted, many of these observations will not offer any real insight
in terms of intraday setups, however, I believe that when the current battle is
finally played out, volatility will come back in force. In the meantime, if my
insights resonate with you, incorporate them into your portfolio.

• Retailers
  
  (
  $RLX.X |
  Quote |
  Chart |
  News |
  PowerRating) are the strongest group over the last few weeks. On the
  surface this seems odd given the performance of the economy, but given the
  incredibly stimulative nature of the Fed, I can see how this has played out.
  However, not since 1930 has a recession ended without the consumer and
  housing market rallying off a contraction. That has not happened in this
  cycle.
• Consumers
  (when measured as debt as a percentage of disposable income) currently
  22.3%, is approaching an all-time high. With the Fed signaling the end of
  monetary easing, can this debt fiesta continue?
• The rebound and valuations in tech
  stocks is a joke, and has suckered many a player into them. Where else can
  you pony up your hard-earned money for a stock like Intel
  
  (
  INTC |
  Quote |
  Chart |
  News |
  PowerRating) that trades 70 times earnings, yet has the same level of
  sales that it had in 1997 (when sales were growing at 40%, now they are declining
  at 20%)? In 1997 the stock traded at 18 times earnings. To make this a
  little clearer, the P/E has risen by 300%, while the growth rate has gone
  into reverse. Intel is not the only tech company with a similar story. 
  Old habits die hard, I just do not want to be long when they do.
• The Semiconductor
  Sector Index
  (
  $SOX.X |
  Quote |
  Chart |
  News |
  PowerRating), the poster child for rampant
  speculation, tells a similar story: In 1995 the SOX
  stood at 200, it now stands at 600, yet semiconductor sales are identical to
  what they were in 1995, between $145 and $150 billion. 

Naturally, all of this stuff is
useless without some sort of a catalyst. As of right now there has not been one.
I feel as though the market needs to start with a clean slate. This will happen
one of two ways:

1.  The economy comes roaring
back. (Yes, I do hope this is the case)

2.  The valuations and accounting
concerns are dealt with, resulting in contracting P/E multiples. Traditionally
bottoms are put in with P/E ratios in the vicinity of 7-10.

I get the impression, unfortunately,
that the average investor is growing ever more weary of the market and all the
shenanigans that have been going on.  t will be a very ugly day if the
average investor finally throws in the towel because they are tired of being
duped.

I read a well-written article a few
weeks back that I thought was very insightful  It does a nice job of
shedding some light on the current rally in the wake of Sept. 11. I encourage
you to take a look at it.  https://www.zealllc.com/commentary/rallies.htm

Another thought that I think will
crystallize this whole argument and simultaneously show you the need for
flexibility: I am net short this market in my other accounts, however, any move
above the 1139 level will prompt me to cover all my shorts, regardless of what I
think about the long-term prospects for the market. This
is where technical analysis plays such a critical role in aiding your
fundamental analysis.

Looking ahead to today’s session, I
expect more of the same, early morning volatility, followed by the waiting game
ahead of the Fed meeting and President Bush’s State of the Union speech. I will
continue to stick with my new approach to trading off Fed announcements:

1.  Do absolutely nothing if the
announcement comes in as expected. Play only the counter moves that follow. (The
exception is if the comments that proceed the announcement signal some change in
policy or forward-looking statements.)

2.  If the move is a surprise,
play it immediately. However, this could be a Catch 22, an increase / decrease
could easily be interpreted as bearish. As a result, I plan to do nothing until
the initial moves plays itself out.

The S&Ps as we all know are in a
very narrow trading range. The 120-minute chart below of the S&P futures
highlights the areas which are containing the market. A break of either of these
levels should "open" the market up. A break of the 1139.5 or 1119
level will establish a new trend. Know these levels, they will assist you in
establishing optimal entry points and potentially pocket some nice gains.
Remember, the "big" money is typically made during small pockets of
hyper volatility.

Keep an eye out at 10 a.m. EST for the
release Consumer Confidence, it may offer some insight on where the market may
be heading.

I may not have offered a whole lot of
information which is applicable to your trading today, with the exception of the
analysis of the S&P chart, however, given the trading range, it is
imperative that you establish your game plan. In the coming sessions, I expect
that as traders, we will be faced with a myriad of decisions both short and
long-term, so having a plan will assist you in capitalizing.

 Key
Technical Numbers

As always, feel free to send me your
comments and questions. See you in TradersWire.

Dave