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Today's Market WrapUp 05.17.2007 Mon Tue Wed Thu Fri Goldberg Archive A
Young and Rational Trend
There is a young and bullish trend developing in the US stock market which is compelling from a value investing perspective. I’m not describing precious metals, or commodities, or commodity stocks. This investment has had its glory days in the past (about 7 years ago) and if this investment were held for a little over 2 years before being sold, it would have returned 400% without any trading. If you held this investment beyond those 2 years, some of that gain would have been given back to return only 280%. Yet since that time, the chart of this investment has been in a healthy bullish basing pattern and it appears that another profitable “run” is in the making. For this reason, the chart warrants careful strategic evaluation. The next “break out” from the base could be equally powerful as the one a few years back. A good thing about this investment is that is it not dependent on what the Fed does or any of the so called “awash in liquidity” nonsense that is so often referenced in every media outlet from TV to the internet. It is also likely (but not a sure thing), that this investment will not be affected by whether the market is in a bull or bear phase in the next few years. This investment seems to follow the general rules of technical analysis. This would enable one to judge the investment while setting appropriate stop losses to keep your risk relatively low. Finally, this investment pays dividends approximately equal to that of the Dow Jones Industrial Average. The “investment” is a play (long-short) on the relative long term performance of the Dow Jones Industrial Average versus that of the Nasdaq 100 ($NDX). The chart depicts the relative performance dating from 1992 to the present. As you can see, in the secular bull market leading to the top of the technology stock bubble, the NDX outperformed the Dow by a sizable amount. This culminated at a time when it was a total waste of time for speculators to spend much time evaluating the Dow. When the entire US stock market went into the tank from 2000 to the 2002, owning Nasdaq 100 stocks was pure folly as they were creamed by the market. It appeared that some type of rationality was taking hold of the market. Yet when the bull market resumed, Nasdaq 100 again outperformed.
This out-performance of Nasdaq 100 stocks continued albeit at a less frantic pace through New Year's of 2006. Yet since that New Year's day, the relative performance of the Dow has traced a bullish cup with handle pattern and it now appears to be poised for breakout. The chart below depicts a shorter term time frame of seven years. While there is some question as to where to draw the long term down trendlines, it appears clear that the secular trend favors the Dow Jones Industrials over the Nasdaq 100 as indicated by the Up trendline.
The 2-year chart below shows the triangular pattern traced by the Dow to Nasdaq 100 relationship with a clear breakout of the triangular pattern favoring the Dow.
In a stock market with precious little in the way of value, a play on the relative value of the Dow to Nasdaq 100 could be worth a look. Today’s Market The Dow finished down a negligible amount while the Nasdaq traded down 1/3 of 1 percent. Volume was light. So the referenced trend is consistent with today’s action. The bond market put in a lousy day and the 10-year note is threatening a one year old trendline. This is important as higher interest rates will be one more headwind to the new bear market in housing.
How about that J.C. Penney! They reported better-than-expected earnings, just as I had expected and the stock whipsawed the bears that saw the head-and-shoulders reversal. Nothing has changed for now on Wall Street. Times up. Talk to y’all later. Martin Goldberg Copyright © 2007 All rights reserved. CONTACT
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