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TAKING STOCK OF ONE'S SELF

In the last 2 1/4 years, I learned a lot pertaining to writing about the stock market; the most important of which is to refrain about writing about myself and avoid using the words, “I” and “me.” It’s best to keep the author out of the article. But this being my 50th birthday and given that I’ve taken nothing tangible from this assignment save for an Irish flute and a box of apples, I’m going to violate this principle – this article is about me. Now let me state here that although I took nothing tangible away from this job, the intangible personal growth from the on-line and phone conversations with folks I’ve met through this job have been priceless. This has been an enlightening and experience that has helped me view the world in a whole different light. It’s true that with your eyes open, you see some things that are not always uplifting; but all the same, it is best to view the world with your eyes open. 

I try to view the stock market in a most unbiased manner. And this is important since one’s own interest can easily taint what is supposed to be an unbiased analysis. At this juncture let me clearly state that the only US company of which I have complete confidence in with regard to producing a high quality product at a fair price with the highest level of integrity is Casey Burns Irish Flutes. Get the point?

As a market technician, I must be careful about what I say about other technicians. It would be wrong and unethical to take issue with any specific professional’s work. I think that one must stand behind one’s work, be it right or wrong. A general characteristic of many technicians that one should be weary of though is that most of the average ones are quick to tell you when they were right and go silent when they were wrong. In all, the “right” to “wrong” I-told-you-so-ratio seems to favor “right” by about 10 to 1 amongst the general technician population. As an amateur, I’m not compelled to trumpet my rightness or wrongness – only ego drives that. Indeed you may find some of my biggest bone head calls in the FSO archive page. But rather than send you searching, I’ll provide you with a couple of relevant references.

My first posting to FSO, on 9 Sept 2004 was entitled, "Stock Market Gurus and Technical Analysis." It was a well constructed and thoughtful article which dealt with history’s fate of “the hot guru.” It was one of my best, except for the last sentence where an overconfident rookie, Martin stated, “Folks, its time to sell!” The Nasdaq closed that week at about 1,820 on its way to 2,300.

Then my advice on 28 April 2005 was, “Sell ‘em all!” However, the point of this article was that as investments, investors should “sell ‘em all.” This article spoke to valuations, not the technical case. Anyone could have seen that the market was oversold at the time and due for a technical bounce. (And this was stated in the article.) At the time, there was some thought espoused on the internet that dividend paying stocks were of better pedigree than others, and perhaps a better place to invest one’s money at the time. And while that may have been true to some extent, as investments, with dividends of less than 2%, these stocks did not represent value in most cases. Such is the “Stocks for the Long Run” dogma. As I recall the stock of Tootsie Roll (TR) sticks in my mind as an example of what I was talking about at the time. This stock paid just north of 1% in dividends in April of 2005. Ever had a Tootsie Roll? At a 1% dividend, that’s some investment! TR closed that day at 29.5 and today it’s at about 29.

On 22 September 2005, I titled the Wrap Up, “Say Hello to the Bear Market in Consumer Stocks.” In retrospect, the greeting was too early. Below is a table of all the stocks referenced in that article, with their prices then versus the present time. While a bear market was welcomed by me, the average consumer stock referenced posted a gain of 3.1% since the article was posted. Although a laggard, consumer stocks were not quite in a bear market.

But on balance, I’ve been right more than wrong. (So, maybe you should count me in with those other technicians.) Here are a few quotes from “MARKET NOW HOME ALONE, Predictions for 2005 and 2006”, 22 Dec. 2005, with today’s comments in italics.

• “Up we will go through January and February (2006). As good 2005 4th quarter earnings releases are brought forth, earnings after items and one time events will be considered excellent and the stock market should rally through the 1st quarter of 2006.” The prediction was Right-on.
  

• “Short term rates will respond to most media predictions of one or two more short term interest rate hikes. The longer bond will respond positively and the yield curve will invert. As in 2000, the esteemed professional and academic market apologists will preach to the public that this isn’t your big sister’s inverted yield curve and there is nothing to worry about. This story will be taken as fact by the public, hook, line, and sinker.” While the action in the bond market was not exactly as predicted as there was no hiatus in the short rate hikes so far, the yield curve did invert, along with the preaching’s of professional and academic market apologists about the economic insignificance of an inverted yield curve. The public is “buying it” as indicated by the resilient stock market (so far).
  

• “The talk of a housing bubble will be lessened and emotions will cool off. Homebuilder stocks and home buying will respond to the positive long bond as the consumer debt bubble will spin yet again.” This did not happen. Higher interest rates have hurt housing, and based on anecdotal evidence of the housing market, it seems likely that even if interest rates do drop, housing will fall of its own weight. The consumer is weary and this seems to be evident in certain sub-sectors of consumer related stocks such as capital consumer goods, homebuilders, and auto parts stores.
  

• “Stock market bears will be scorned and ridiculed as much as they were in 2000. Squawk Box will institute even more annoying noise making graphics to attract the short attention span of the TV-watching public in order to compete with Fox and Nickelodeon.” While scorn and ridicule would be a bit strong, Jim Cramer appearing in an Uncle Sam outfit comes close enough to give some correct substance to this prediction. Was that a new “swooshing” noise when they show a stock chart graphic now?
  

• “Google will be inserted into the S&P 500 and its analyst target price will be upped to about $750/share as they successfully make inroads into trashing all US copyright laws.” Google was admitted into the S&P 500 in the early spring and the stock responded.
  

• “A celebrity investor will see value in General Motors stock, which will rise back to $30.00/share on this recommendation.” GM closed Monday over $30.00 a share on Kirk Kerkorian activity and publicity.
  

• “Gasoline will rise to $5.00 a gallon, and news commentators will sing the praises of a New Economy” that is not dependent upon low priced fuel. The rise in fuel will be attributed to the speculators.” The Dow Transportation Index will rise to 6000 and the dividend will be reduced to less than 0.5%. (Not a word about the Transportation index and speculators will be uttered.) While a bit over-zealous with the gasoline price prediction, the year is still young, and we’re almost in the mid-3.00 a gallon range on the east coast. The transports, while not hitting 6,000, have hit their all time highs so far this year. The stock market has held up. (It must be that “New Economy”.)
  

• “There will be a new ETF that covers bulletin board stocks.” While this did not occur, bulletin board stocks may be the only category for which there is no available ETF.
  

• “Terry Bradshaw will author a book on stock trading.” OK; a bit overzealous. But ex all-star centerfielder, Lenny Dykstra publishes and makes TV appearances pertaining to the stock market. Same idea, yes?
  

• “Gold will go to $1,000 per ounce, and silver will go to $50.00 as economists will scream to anyone who will listen that this action is due to “the speculators.” (Not a word about “the speculators” will be uttered about Google.)” OK, a bit overzealous again, but the idea was correct. Precious metals are in a bull market, and the year is not over yet. Even the staunchest bear has stopped chirping about Google’s valuation. Still we hear discussion of “the speculators” with regard to the prices of commodities and precious metals, but not a word about “the speculators” as it pertains to stocks.”

My final prediction from the 22 December 2005 article, “The stock market will crash in the 3rd quarter of 2006.” The third quarter of 2006 began on Monday.

Finally, following is a short term prediction about the current market. The data-dependent Fed will attempt to stabilize the financial markets as follows. If corporate earnings are good, the markets will discount higher interest rates, and this will keep the markets in check. If earnings are bad, the market will discount lower rates and this will tend to keep the markets from crashing. The key word here is “attempt.” In 2000, when earnings were sub par, and corporate outlooks cloudy, the market dropped decisively in spite of future interest rate cuts by the Fed.

Today’s Market

Today’s market is a dangerous place for all but the most agile traders. A case in point is technology stocks. Here are a couple of points of evidence that suggest that “investing” in tech stocks may be the most reckless move one could make. The 3-year weekly chart below includes major trendlines. While the overall trend is up, the price pattern has formed a wedging pattern, which can be bearish. Relative strength, compared to the S&P 500 is a most important parameter to watch. The action this week moved the relative strength of the Nasdaq 100 into new low ground as indicated by the blue arrow. While the up trendline is still in place, you can be sure that if this 3-year old trendline is broken, there could be mass selling that may make the market vulnerable, even if it was counteracted by attempted market manipulation. (If there is such a thing!) I don’t know what the extreme volume seen in the Nasdaq 100 ETF in recent weeks means, but as was conjectured in a past article, something about this smells fishy. One cannot dismiss the potential of an oversold bounce in the Nasdaq 100, and for those playing the trends, tomorrow would be a good entry point for this sort of gambling. But you better believe that if the trendline is broken (decisively), it will be time to head for the exit without wasting any time. I am no genius, but you can bet that there are legions of self-proclaimed geniuses who have this trendline in their heart and mind’s eye. Is there fundamental “value” in the Nasdaq 100? Its P/E is 25 in an environment where their corporate managements take every Mulligan in reporting earnings and the dividends are 0.35%. Here’s what I said a few months ago, and I’m sticking to it.

The market has taken on a defensive posture as indicated by the bullish action of the Consumer Staples sector. What is good for consumer staples is not good for the stock market late in a cycle, and we are late in a cycle. Note that of late the relative strength of consumer staples compared to the Nasdaq 100 is extremely bullish in favor of consumer staples. The RSI momentum indicator shows that consumer staples refuse to become oversold. This is bullish for the market and bearish for the economic cycle.

The market has become defensive, and maybe you should too.

Martin Goldberg

Copyright © 2006 All rights reserved. Martin F. Goldberg, MS, P.E. Market Analyst Expert Page Commentary Archive Email

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