Prime Movers

November 22, 2002
Kevin Haggerty

Perception and crowd psychology once again prove
that they are the primary mover of stocks
since the 769 low, and for that matter, all the time. Imagine that, total
disregard for the Michigan Consumer Sentiment numbers, sell recommendations on
most techs, including Intel by Merrill Lynch last week, in addition to the
almost total absence of any brokerage firm stepping up to the plate telling
retail to buy anything due to overvaluations, etc., etc., etc. Why should they?
Many stocks have risen only 50% to 100%. They want to make sure all the
fundamentals are fully in order before they make a decision. It’s just not how
markets work.

You read here early on
that they never ring the bell, but there are tools you can learn to use that
will alert you to high-probability market opportunities. For those retail that
have moved into bonds at probably the worst time in modern history due to the
parade of amateur financial planners that CNBC struts across the screen every
time the major indices tank, I wish you all good luck, but it’s probably more
like condolences.

Yesterday was a power day
with NYSE volume hitting 2 billion, which is about 45% above average, and there
was 1.6 billion of up volume. It ended up with a volume ratio of 85 and breadth
+1189. The Dow
(
$INDU |
Quote |
Chart |
News |
PowerRating) was +2.6%, the SPX
(
$SPX.X |
Quote |
Chart |
News |
PowerRating) +2.1%, and NDX
100
(
$NDX.X |
Quote |
Chart |
News |
PowerRating) +4.4%, as the leaders in the NDX continue to be the stocks
that were probably going to be dropped from the index. Many of these stocks have
doubled and then some, as the short covering has made them rockets. When you
look at sectors that have led this rally for the past two months, you see long
distance carriers, Internet communication equipment, wireless communication,
networkers, and then our friends the semiconductors. These were all at the
bottom of the glass, as most often happens, and as most often happens, the glass
gets turned upside down because you get the short covering with the real buying.

The programs continue in
size, as the program percentage of NYSE volume is once again at all-time highs,
and the lumbering pensions have continued to adjust their allocation out of
bonds into stocks. I find it amusing that some of the technical analysts that
were telling you about the massive head-and-shoulder pattern on the SPX from
1553 to the 923 and 945 lows in 1998 and September of 2001 which measures down
to 316 on the SPX are not saying a word that it’s back to the neckline of that
head-and-shoulder pattern. Using the average of the 923 and 944 lows, you get
934. I think the SPX closed yesterday at 934 and change. At 316, it’s more like
depression, folks. Don’t think so short-term. They are now the same analysts
late to the party on this move, so they have to cover their asses, but they’re
still better than the “maybe it is, maybe it isn’t” group that never makes a
decision.

The major indices are 30
days into this rally and just about short-term overbought. There is some
resistance, as you know, from 930 up. I will sell some long equity into this
zone and keep 60% of the original equity position, but will hedge it up into
this resistance. Why would I sell some outright when I think 769 has a very high
probability of being the low? The answer is simply +20% and then some on the index
proxies. I believe in the compound way of doing it, as opposed to the
buy-and-hold that certainly hasn’t proven to do too well. There will be many more
opportunities, and it doesn’t matter that they come at higher prices. I would
prefer that because the subsequent pullbacks will be to longer-term moving
averages that have probably turned up and are rising. It will be nice to trade
an up trend once again.

Have a good trading day.

Five-minute chart of
Thursday’s SPX with 8-, 20-,
60- and 260-period
EMAs

Five-minute chart of
Thursday’s NYSE TICKS

Prime Movers

BUY THE FEAR, SELL THE GREED

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