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Tonight I will present additional evidence that the long-of-tooth secondary bull correction within a secular bear market is coming to an end. I don’t wish to sound too much like a broken record, yet in the backdrop of bullish hype that is being espoused in the media, perhaps this bearish commentary is healthy to bring readers a fair and balanced perspective. There is presently a tremendous contrary opinion play – the presidential election effect on the stock market– where everyone, bulls and bears alike, are thinking the same thing at the same time. While it has been lonely and for some, expensive, to be a contrarian over the last 20 months, I feel that contrary opinion may finally pay off between now and the election. This case is made stronger by the weight of yet additional bearish intermediate term technical evidence, some of which I will present tonight. (And some of which I presented previously in a and b.) Following this discussion is a technical analysis of a small but potentially profitable sector where bullish chart patterns are forming. While these stocks are as yet, largely below the Wall Street radar screen, their chart patterns are suggesting that they are being quietly accumulated. Contrary Opinion Theory Serves Up a Hanging Curve – The Presidential Election Through the Bull Run, stock market contrarians have focused on the “bullish” and “bearish” figures such as those from Investors Intelligence, which indicated overwhelming bullish consensus opinion throughout the rally. Contrary opinion theory, suggests that the crowd is usually wrong, and therefore the market should have sold off a long time ago. Yet the market has advanced in spite of the crowd’s atypical correctness. So is contrary opinion one more technical tool that needs to be thrown away as new era thinking is embraced in the stock market? Is the crowd now all of a sudden right? I think that the consensus “bullish” and “bearish” statistics have perhaps been misused. In the book, Stan Weinstein’s Secrets for Profiting in Bull and Bear Markets, Weinstein provides a good perspective on the use of contrary opinion (page 304, my emphasis in bold): “…I want to caution you. Contrary opinion (CO) is a very valuable tool when used properly. Unfortunately, not one investor in a hundred really understands it, although everybody and his broker wants to be sophisticated and thinks they are using CO. Do not make the mistake of so many contrary-opinion buffs and try to force an answer from CO every week or even every few months. A true CO signal may not arise for a year or more. It is only valid when a prevailing theme starts to play through the media and is thoroughly accepted from Wall Street to Main Street. …The trick is to wait for a very obvious one-sided opinion to form, whereby everybody suddenly believes he knows something, and then to become suspicious of that conventional wisdom. I thoroughly believe in the slogan that says, “When everybody knows something, it isn’t worth knowing.” It appears as though the conventional wisdom that everyone now knows is that the stock market will perform well at least until the presidential election. While those currently bullish and those bearish may disagree with each other on the state of the economy, Fed policy, market technicals, and a host of other issues, everyone seems to agree that the stock market will be propped up until at least November. You only have to read the latest edition of the Barron’s roundtable to experience the heard mentality that is now spread from here to Wall Street. So while on the surface contrarians appear to have been wrong for a while, I think we now (finally) have the “very obvious one-sided opinion”. EVERYBODY KNOWS the market will do well until the presidential election. In spite of some previous anxiousness on the part of fundamental bears to use CO, I think we now have the proverbial “hanging curve ball”. Careful use of market technical indicators may (finally) pay off for contrarians before the election. Bullish Nasdaq Stocks are Thinning Out Relatively few stocks carried the latest Nasdaq rally from mid March. Only four stocks, Microsoft, Yahoo, Ebay, and Amazon, accounted for about 20 percent of the recent Nasdaq rally from mid may to June 30th. Whereas "the generals,” represented by the major averages, still are close to their recent highs, the troops, consisting of most rank-and-file stocks, paint a significantly more bearish picture. Following is a plot of percentage of Nasdaq stocks that are above their respective 50, 150, and 200 day moving averages over the last 2 years:
You can see in all three charts, a pattern of lower highs and lower lows. At the present time, less than one-half of all Nasdaq stocks trade above their 50-day moving average. Only 38% trade at a price that is above their 200-day moving average. It is notable that these percentages peaked in the summer and fall of last year, and diverged from the Nasdaq average as the Nasdaq made a high in late January of 2004. These chart patterns point to the Nasdaq index being carried by a thinner and thinner group of leaders. It seems unlikely that with the rank-and-file stocks continuing to retreat, that the Nasdaq index will not do the same thing before election time. Similar, yet not as severe behavior is shown in the rank-and-file New York Stock Exchange, S&P 500 stocks, and the other major indices. European Stocks Rolling Over A bull market is usually accompanied by a host of surging indices around the world. Such was the case with the recent and now long-of-tooth stock market rally. Whereas during the rally, all major world indices seemed to be “in gear”, there are now decisive technical breakdowns in some indices. An important example follows in the European stocks as indicated by the Dow European STOXX 50 index. Following is a weekly chart from the fall of 2002 to the present.
After bottoming at about the same time as the US indices in March of 2003, the European index surged from under 2,000 to almost 3,000, a gain of about 50% in $USD terms. However the index is now showing clear technical weakness as indicated in the daily 6-month chart.
The index is now in a consistent downtrend that is similar to downtrends in the Dow Jones Industrials and the S&P 500. In addition, the shorter-term rally up trendline has been decisively taken out at the open on Thursday of last week. As with the secondary indicators presented above and in previous Wrap Ups, the bearish action in the European indices are confirming the warnings that are flashing an alarm that rallies should now be sold! The Nasdaq Market Itself is Bearish Secondary indicators are nice and can be useful, but they are only secondary. Here is a two-year daily chart of the Nasdaq, with key technical features annotated.
The index enjoyed a sharp and decisive rally from the March 2002 bottom. The fan line pattern traced by the Nasdaq rally is typical of secondary corrections against the primary (in this case, down) trend. Pring describes the rational basis for the fan line pattern well in Technical Analysis Explained. When the third fan line was broken to the downside, technical analysis of the fan pattern suggested that the Nasdaq should have already “seen its highs” (at about 2,000 in November 2003). Yet this conclusion didn’t hold true as the Nasdaq broke a short-term upper resistance trendline to the upside on very heavy trading in January 2004. This was likely a “climax run”. The third fan trend line (L-3) then became a resistance line. Since that time, although it has been a wild roller coaster ride, the Nasdaq has only traced three lower highs and two lower lows as indicated by the green arrows. There is now important support in the general area of 1,900. Although it was almost broken in May, the resistance line remarkably “held up”. If this resistance is finally taken out, there does not appear to be any major areas of support down to about 1,500. Unless the Nasdaq can begin to make higher highs and higher lows, the intermediate term technical picture is bearish. On a valuation basis the Nasdaq could go a lot lower, but time and time again fundamental analysts of the Nasdaq have been burned. The disparity between valuation and Nasdaq stock prices are so wide that it would be foolhardy to consider fundamentals and valuations in any intermediate term equity investment decision, although eventually these factors are the only ones that will matter. Funeral Stocks Appear Bullish A few weeks ago, I presented data suggesting that defensive stock market leadership was evidence of a soon to be bearish stock market. One of the defensive sectors I listed was funeral stocks. It may have been wiser and more profitable for me to look more in depth into their stock charts. Better late than never. Unlike many sectors that appear to be technically overextended or in newly forged downtrends, the funeral sector appears to not only to be strong, but the technical charts of this relatively small sector suggest that they are in a range where small positions may bought, or bought on breakouts of their presently tight trading ranges. Following are representative 2-year weekly stock charts of the funeral stocks that trade publicly in the US.
As you can see from the charts above, all of the stocks after having advanced from low single digits are now in basing patterns. It appears that as a group they are being quietly accumulated. I wish to focus on the stock that I feel is the strongest of the group, Stewart Enterprises (STEI) and whose behavior is fairly typical of the entire group. Below is a long-term monthly chart of STEI.
Following an IPO in 1992 at split-adjusted 4, the stock surged to over 27 in 1998. As with the other publicly traded funeral stocks, Wall Street loved their roll up growth strategy (for awhile), as these companies bought up small family-owned businesses as portrayed in the first season of the excellent HBO TV Series, “Six Feet Under”. Eventually their increasing debt overwhelmed the profitability of the businesses, and Wall Street punished companies such as Stewart, to low single digit level. Following a partial recovery in 2001, Stewart failed again to a skeptical Wall Street in 2002. But following the spring of 2003 rally, the funeral stocks now appear to be back in play. They are now owned by institutional investors (but not over-owned), and covered by Wall Street analysts (but not over-covered), as indicated in the following table (Source: Yahoo Finance):
Here is a closer look at the bullish reversal pattern made by Stewart Enterprises.
The stock has completed a reverse head-and-shoulders pattern and now is against near term resistance as shown on the chart. A shorter-term chart indicates clearly how the right shoulder was taken out on decisively high volume.
A shorter-term weekly chart shows the bullish action over the last year.
As you can see, the stock is under accumulation. Note that the large black volume candlesticks are the tallest. Its relative strength line is in a clear uptrend. If Stewart Enterprises clears its current short-term resistance, it could run to its “head-and-shoulders measurement target”. Will support from the general market be important? How will Stewart perform when the Nasdaq reaches its inevitable fate? Let’s look at the performance of Stewart Enterprises as the Nasdaq crashed during the previous stock market bubble.
From the March 200 top to the October 2002 bottom STEI was both hot and cold. Stewart crashed more than 60% from the March of 2000 top to New Years 2001. However, as the Nasdaq continued to drop, Stewart staged a comeback reaching 80% “to the good”. So from the positive perspective, Stewart (and the funeral sector) has shown the ability to surge while the Nasdaq crashed. This is a relevant fact, since (as indicated above) the Nasdaq is likely to roll over again. From a tactical perspective, until Stewart breaks its current short-term resistance at about 8 and change, the stock is unproven in the short term and does not need to be bought. (Except for perhaps a small position.) It tried to break out last Thursday, and reached 8.16 on heavy trading, before whipsawing those who bought on the apparent breakout. It now sits in the mid to upper 7’s with the apparent breakout having failed for now. However, this stock and the entire sector should be watched carefully for bullish breakouts. Today’s Market The Nasdaq and the other two major indices suffered unequivocal distribution days today. The Nasdaq closed down 31 points (1,935) on about 1.8 billion shares traded. The damage wasn’t as bad for the Dow and S&P as the Dow was down 69 points (10,171) and the S&P 500 was down the “maximum allowable” amount of 9 points to close at 1,109. Small caps were no place to hide, as the Russell 2000 was down almost 2%. The stock market news was disappointing “earnings” from Yahoo, as well as some software stocks. Yahoo actually closed substantially higher than it opened. I know it’s a little sick to do this, but let’s look at a single day chart of the Nasdaq.
Not pretty! Time will tell if the Nasdaq will break the support in the area of 1,900, because an election may ride on it. The S&P 500 broke its 50-day moving average to the downside. Its 200-day moving average still looks both healthy and intact for now.
The dollar was down again today, and the long-term trendline that was challenged over the last few weeks, now appears to be alive and very much intact as shown in the chart below. There is one more corporate earnings-reporting season before the election, and I can’t help but think that the weaker dollar will give multinational corporate America one last profit (before special items, and one time events) ha-rah before the election. We’ll see if the forward-looking stock market doesn’t pick up on that before the election.
The 10-year note finished little changed today and the chart appears to suggest that interest rates want to go down a bit more.
This could spark one last round of home buying, refinancing, and spending for the all mighty (for now) American consumer before (you guessed it), the election. The US utilities index seems to confirm the lower interest rates ahead, with its 50-day and 200-day moving averages both sloped upward.
Gold was up big today and closed at $407.40 per ounce. For those long-term investors among us, lets look at a long-term monthly chart.
The very nice trendline says that gold is going up. Silver was up 40 cents today. It is clearly in a powerful bull market. Yes, as we found out this spring, there will be severe pullbacks at times, but the fact remains that silver is in a bull market. Explosions will likely be to the upside.
I’ve said enough for one night. Have a good one. Martin
Goldberg
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