Know Your History
At the risk of giving away a bad idea,
let me just say that if anyone really wanted to put a dent in our economy, just
disrupt T-1 line service or the backbone that they run on. Yesterday our T-1
line was on and off intermittently, luckily I was able to trade the first half-hour,
unfortunately nothing after that. But it certainly makes you wonder, if one core
router blows up (as was the case with my T-1 provider), it would not take whole
lot to really make a mess of things.
That being said, I do not have a very good viewpoint of yesterday’s action,
given that I was not actively engaged. As a result, I will focus a bit more on
some longer-term themes I am currently exploring.
A few weeks back I was talking about the troublesome implications of a
declining dollar, and while that still appears to be very much a part of the
problems plaguing our market, in addition to lack of corporate earnings,
executive fraud and excessive valuations, one has to wonder, as I have for some
time, if things are truly different this time. It is a topic that no financial
commentator or journalist with an ounce of credibility will even entertain. But
let’s face the facts, there are many troubling issues hanging over this market.
In doing my usual reading, I came across a great synopsis and commentary
regarding the South Sea Bubble of
the early 1700s. One cannot ignore the eerie parallels between that
"bubble" and what our markets are facing now. The cast of characters
are almost identical: unscrupulous financiers (CEOs), bureaucrats hell-bent on
printing money to solve all the world’s problems, and far too much optimism and
not enough objective analysis. Having a solid historical perspective allows one
to successfully navigate this market, thereby preserving capital and being ready
to attack when all hope is lost by the general investing public.
I am not claiming the sky is falling, just looking at
the situation from a bit more objective angle. Why else would the S&P and
Nasdaq be down 22% and 51% despite the Fed cutting rates 12 times? Valuations.
Given that very few companies report truly accurate earnings, it is not out of
the question to expect prices to go much lower unless business picks up
dramatically.
Yet, Alan Greenspan continues to prime the pump with
the same elixir that caused this problem in the first place, easy money via low
interest rates. It has not worked and probably won’t. What he has managed to do
is create some doubt in investors’ belief in the dollar. Witness the desire for
individuals to suddenly want to own "physical" assets like gold, real
estate and commodities. Of the three, only housing is showing the same signs of
frothiness that the stock market exhibited just a few years ago. It is my belief
that the housing sector will be the next shoe to drop, and with it the housing
stocks. For those of you who did not short tech the whole way down, your second
chance to hop on a bloated sector may be at hand. Historically, real estate has
always fared well after a stock market rout. It takes anywhere from six months
to two years before that too succumbs to the forces of gravity.
I am keeping a very close eye on the housing stocks for
potential short sales. Currently there is still a bit too much cheerleading in
the sector which will cause some nasty upside moves. I will wait patiently for a
few "shoes" to drop. In the meantime, however, fundamentals aside,
some are set up on the short side purely from a technical perspective:
Toll Brothers
(
TOL |
Quote |
Chart |
News |
PowerRating),
Lennar
(
LEN |
Quote |
Chart |
News |
PowerRating),
Centex
(
CTX |
Quote |
Chart |
News |
PowerRating)
and NVR, L.P.
(
NVR |
Quote |
Chart |
News |
PowerRating)
Also keep an eye on Lowe’s
(
LOW |
Quote |
Chart |
News |
PowerRating). This stock has held up well despite Home
Depot
(
HD |
Quote |
Chart |
News |
PowerRating) getting beat up really bad.
Perhaps there is a twist to this story, but I just cannot see Lowe’s not being
effected at some point. Today’s Consumer Confidence number may shed some light
on where some of these stocks are heading.
Key Technical
Numbers (futures):
S&Ps |
Nasdaq |
| 1024 | 1145 |
| 1014-16 | 1136-37 |
| 1010 | 1121 |
| 1004-05 | 1090 |
| 996 | 1070 |
| 985 | 1059 |
| 979 | 1048 |
As always, feel free to send me your comments and
questions. See you in TradersWire.
P.S. Click here if you would like to know the levels
where I’m looking for
reversals in the most actively traded stocks.