It’s How The Market Reacts To The News

  • October 28, 2002
  • Gary Kaltbaum

Longer-term, nothing
has changed. (How many times have I had to say that in the past two years?)

The evidence:

  • All major indices
    continue to trade below their 200-day moving averages.

  • World markets
    continue to be in major downtrends.

  • The best stocks in
    recent weeks have been the worst stocks of the past two years. I hear several
    geniuses hailing the moves in names like
    (
    AWE |
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    PowerRating)    ,
    (
    PMCS |
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    PowerRating)     and
    (
    PCS |
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    PowerRating)    .
    Certainly, they are big numbers off their recent lows, but are still down 90%
    plus.

  • Most sectors
    remain in poor technical shape.

Shorter-term is more
difficult.

While the rally has been very strong off the lows, I am seeing some suspicious
signs you need to know about.

  • Volume patterns
    have not been especially bullish. The market is starting to see lighter volume
    on the up days and higher volume on the down days. Just look at Thursday and
    Friday. Thursday’s drop was on much higher volume than Friday’s rally. This
    most definitely needs to change.

  • Even with the
    strong two-week rally, there are more NEW LOWS than NEW HIGHS.

  • Sentiment numbers
    have already done an about face:

            a. Put/call figures have become very
    complacent.

            b. The VIX is now plunging.

Amazingly, bullish
advisors had their largest one-week jump that I have ever seen…the same for
the drop in bears. This wrong-way crowd has already jumped on the bandwagon
after a two-week rally.

Nevertheless, I don’t believe the market gets in much trouble here, but keep an
eye on  the major indices if they start to break their 50-day averages…8220 on
the Dow and approximately 873 on the
S&P 500. Even if those numbers do not hold,
I don’t expect to return to the lows. Expect the pullbacks to be just that: a
pullback…not the destruction the market has had in the past.

As far as the Nasdaq, it’s true.
TECHS are definitely getting a head of
steam. Many companies have ignored the “bad news” and continued to rally. For
example, KLA-Tencor
(
KLAC |
Quote |
Chart |
News |
PowerRating) misses
estimates and warns…opens down $2 and finishes up $2. Please understand that
most of the TECHS are in longer-term, major downtrends. There have been plenty
of bear market rallies for TECH only to lead to more destruction.

I do need to make a few more points.

While the better action goes on, please do not be complacent. It seems that
every day there are more and more blow-ups. These blow-ups usually happen in
stocks that are already in poor technical shape.

I have been stopped out of many shorts lately. This tells you something about
the market. It had been a field day for most of the year in my service…not in
the last two weeks. Since the follow-through day, the shorts have not been
obliging. There are still many stocks with poor patterns, but I will be going a
little slower.

Lastly, I have been asked numerous times in the past couple of weeks as to how
can the market be going up with all the bad news out there. After all, the
economy is sluggish. After all,
(
INTC |
Quote |
Chart |
News |
PowerRating) as well as many other TECH names
said terrible things about the next couple of quarters. After all, Iraq. After
all…well, after all doesn’t matter. If there is any one sentence that
describes how I feel about the market, it is this: IT’S
NOT THE NEWS. IT’S HOW THE MARKET REACTS TO THE NEWS. If we listen
when the market goes down, we have to listen when the market is also going up.Â