How Does This Help Me Today?
As the markets embark on another week, they
will be faced with earnings pre-announcements. From an HVT
standpoint, this will certainly have the potential to introduce some volatility
into the market. From a longer-term perspective, we will see whether or not the
"we see a pick-up in the second quarter" becomes the "we see a
pick-up in the third quarter" nonsense. As of right now, there have been no
earnings to support all the cheerleading coming from CEOs and CFOs. If you don’t
know the answer, just say so. There is no shame in not being able to predict
with any accuracy what the world economy is going to do in the next couple of
months.
On
Friday, I mentioned an e-mail I received from a reader who was asking
whether or not we may see a return to some of the volatility witnessed in
1999-2000. While I do not know the answer definitively, I think it would be a
fair bet to say no. The dynamics of the current market are very different from
those of 1999-2000. First off, depending on your research or who you listen to,
we are in a recession or just coming out of one. As a result, companies are
usually slow to run out of the gate and start spending. This will continue to
put a drag on earnings which will still leave quite a shadow over the market
given how richly it is valued.
Secondly, as of this writing, there is no "Gee whiz" technology out
there right now that can prompt the sort of enthusiasm needed to stir up some
minor speculation and demand. Traders and investors in 1999 were blessed with
the dawning of the Internet, which temporarily re-wrote the rules for the stock
market and the economy.
The one powder keg out there currently which has the potential to stir things
up is, of course, the Middle East situation. Hopefully, the governments in
this region will realize that a peaceful resolution is the only way to build
long-term stability. As of right now, that does not seem to be on the table for
discussion. We all hope for the best.
The above observations don’t provide a whole lot of insight as to whether or
not the market will remain rangebound or not, but perhaps a look at some numbers
will offer some clues. Before I present that, however, don’t forget that the
biggest driver of the incredible volatility of just a couple of years ago was
created by one thing, and one thing only — crowd psychology. For brief periods
in history, common sense and objectivity are cast aside for some new mantra.
History always shows that these periods end and old rules are once again
observed. Given that the bitter taste of the technology fiasco is still on many
investors’ tongues, I suspect it will be a good many years before people lose
sight of reality again.
Trading Range or Capitulation?
This is the $64,000 question. Naturally, from a trading
standpoint, and perhaps even an investors’ standpoint, a capitulation would be
welcome. At current levels, the market is just too far ahead of itself. Unless
earnings make a massive resurgence, the market will have 2 options:
- Grow into the current P/E multiple by marking time
in a trading range. - Capitulate.
Either way you cut it, these are the only two options.
A trading range would be agonizing for investors, tolerable for traders, but
certainly nobody would be really happy. If history is any guide, and the market
remains in a trading range with the current multiple, the data below is rather
sobering.
| When the market’s P/E ratio was… |
…the median return for stocks for the following 10 years was… |
| 22 or higher |
5% |
| 20-22 | 5.7% |
| 18-20 | 7.5% |
| 17-18 | 9.7% |
| 16-17 | 10.7% |
| 14-16 | 11.8% |
| 12-14 | 14% |
| 11-12 | 14.5% |
| 10-11 | 15.9% |
| under 10 |
16.9% |
Source: Growth Stock Outlook
Again, if history is any guide, then the market’s
current situation will not exactly make investors really happy. This could
result in a reluctance to "play" the stock market and further reduce
volatility. Given that scenario, a capitulation is what the market needs at this
point in time.
Speaking for myself, I know that I will be able to
navigate whatever the market throws at me over the coming years. Sure there may
be periods where I am not making a "killing," but I am making a living
and thoroughly enjoying the process. All the while, I am accumulating a vast
perspective on the securities markets that will pay many dividends in years to
come. If you stick to your guns and keep your wits, you too will navigate this
market with minimal difficulties.
Some of you may be saying, "Gee, thanks for the
history lesson, but how does that help me today?" It goes back to what I
have been focusing on over the last two weeks: you need to be selective and make
your kills very early on in the day since the market gets more apathetic as the
day wears on. For longer-term traders, it is simply the fact that regardless of
how nice your setup and entry point were, nothing seems to be moving in your
favor for more than a few days. The rotation is fierce right now. As a result, I
am relying heavily on 15-minute and hourly charts for intraday setups when the
quick scalps are not working.
Key Technical
Numbers (futures):
S&Ps |
Nasdaq |
| 1136 | 1412 |
| 1131 | 1396 |
| 1126-27 | 1383-84 |
| 1114-16 (critical support) | 1372 |
| 1104 | 1349-52 |
| 1084 | 1336 (February low) |
| 1074 | 1300 |
Additionally, the market will need to deal with news from Iraq regarding a
30-day oil embargo and, surprise surprise, IBM
(
IBM |
Quote |
Chart |
News |
PowerRating) will miss targets. This, of course, is no mystery to anyone who has
the good sense to read just how manipulative they have been in preparing their
earnings for many years. It appears that now that they need to play by the
rules, they can’t beat estimates each quarter by that magical penny.
Volatility may just be on the horizon.
Thought For The Week:
Opinions
you get for free; perspective must be earned.
As always, feel free to send me your comments and
questions. See you in TradersWire.