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Today marks exactly four years to the day of the all-time high for the NASDAQ Composite Index as it closed at 5,048 on March 10, 2000. Once the bubble was popped, it took 30 months to fall 3,934 points to the low close of 1,114 on October 9, 2002. Since then, the NASDAQ has rallied 1,039 points to the high close of 2,153 reached on January 26th of this year. It’s fascinating to me that this bear market rally has lasted 15 months, which is precisely half the amount of time it took to fall from 5,048 to 1,114. This counter-trend rally has retraced half the time of the previous fall, but in percentage terms it has only retraced 26% of the overall point loss. At this juncture it appears stocks are headed for a reality check as the broad indices begin to crumble.
As the four-year cycle asserts itself from peak to peak, I see confirmation stocks should head lower by the lack of volume since the beginning of 2004. Note how the Relative Strength Index has turned decidedly bearish, while the On Balance Volume has broken cleanly below its 20-week moving average. The NASDAQ has been rejected from a very strong zone of resistance just above the 2000 level. While there isn’t much that can surprise me anymore with the “managed markets” of the 21st century, I firmly doubt we will see new highs for the NASDAQ Composite for the balance of 2004. If you are long equities, especially the small-cap stocks, it would be most prudent to realize some gains and go to cash on the sidelines. I have taken my clients and my personal accounts to 50% cash as I wait to see where the dust will settle. In the event I am wrong, who can blame an investor for realizing gains in an effort to preserve capital? Sometimes the best we can do is simply get out of the way when stocks appear to be rolling over. Think how much capital could have been preserved back in 2000 if investors had gone to 50% cash! It’s silly to think stocks should continue higher in the face of such weak fundamentals including high P/E multiples and excessive debt. Listen to the Wisdom of the Years! It really is not such a bad idea to go to cash (and possibly in currencies other than the dollar), especially if you take your lead from the world’s greatest investor, Warren Buffett! Mr. Buffett’s Berkshire-Hathaway is sitting on a cash mountain of $36 billion, and has chosen to place more than one-third of the cash in foreign currencies. Mr. Buffett has been pooh-poohed by many of today’s fast-lane momentum investors, but this man knows what he is talking about! On Monday, Richard Russell of Dow Theory fame wrote of the divergence of the Dow Industrials and the Dow Transports, wherein the Transports are not confirming higher highs for the Industrials. Mr. Russell also states, “In the face of all the above, I’ve advised a move to cash and gold with close stops under all common stocks that subscribers still hold. I just went back to see what is happening in the market, and it’s beginning to look pretty ugly. If we get a couple more days of draw-downs tomorrow and Friday, stocks will be headed straight down next week as investor sentiment moves from complacency to outright fear! Today the Dow Jones Industrial Average was pounded for a loss of 160 points or 1.5% to 10,296, even with the good report from Proctor and Gamble indicating an increase in their dividend and improved guidance for third quarter results. The S&P 500 shed 16 points to 1,123 and the NASDAQ Composite was whacked for a loss of 31 points to close at 1,964. It’s time to get out of the way folks! Bigger Deficit, Stronger Dollar? Today the Commerce Department reported a new record trade deficit for January of $43.1 billion! This follows the December deficit of $42.7 billion which was revised higher than previously reported. As it usually goes, the $43.1 billion will probably be revised higher as well. So what’s up with the falling dollar? One would think the negative trade report should send the dollar lower, but no…it rose 0.7% to 89.4 on the U.S. Dollar Index. The weaker dollar should discourage purchases from overseas while making our exports more attractive. The fact is exports actually FELL 0.6% in December and 1.2% in January. For me this is absolute proof we are in for a long-term bear market with the U.S. dollar.
The Bond Gurus Aren’t So Dumb!
Just wait ‘till the Fed pulls an emergency rate cut and catches everybody off guard. Just when the Europeans and the Japanese are complaining about the strength of their currencies, our guys could bomb them with a rate cut to drive the dollar to lower levels! I didn’t think rates could go much lower, but if we get a meltdown in stocks, you will see another flight to safety with money pouring into short-dated treasury debt. This will also serve to re-inflate consumer’s pockets with possibly another round of mortgage re-fi’s. As it stands, 30-year mortgage rates have fallen to 5.34% and are expected to go even lower. Wow, it’s almost like free money! You should fight the temptation and not go deeper into debt. Commodities and Hard Money Gold and silver were held in check today, but that is the norm whenever Treasuries are on the auction block. Spot silver ran to $7.22 in London trading, only to get smacked down at the open in New York and finally went out two cents below yesterday’s close. Gold remained under pressure most of the day, but closed $2.00 off the intra-day low at $399.70. Platinum jumped nearly 3% to $924 spot, and gold and silver would have done the same if politics didn’t play such a big role in our monetary system. The grains were all down today, meats were higher with live cattle gaining almost four percent, crude oil came down a few pennies, but unleaded gas continued its move higher. I wonder what kind of statistical wizardry our esteemed officials will come up with when they finally release the PPI numbers for January and February. They should have been tweaking the PPI components right along with the CPI, and they wouldn’t have so much egg in their face. Oh well, it will all shake out in the end. Make sure you have some protection with real money that can’t be created out of thin air! Governments around the world are increasing the supply of money in the competitive devaluation game, but they can’t increase the supply of gold and silver without actually working for it! I hope you have a great evening! Mike
Hartman
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"Proceed
With Caution"
The dollar
really had no good reason to strengthen today except for my speculation
that the Bank of Japan is up to their old tricks again. My best guess
says they were in the forex market selling yen to buy dollars which
would then be used to purchase U.S. Treasury Notes at today’s
five-year note auction. The Federal Government is borrowing $16 billion
today and will borrow another $11 billion tomorrow with the sale of
ten-year notes. There was no treasury debt maturing today to be
refinanced, so this is all new money in the system. Who needs helicopter
money when the digital fiat money machine is running at break-neck
speed? I hope Mr. Greenspan and Mr. Bernanke have oiled the printing
press, or it could blow up!
I’ve
been scratching my head lately to understand why so much money has been
moving into bonds. It’s now becoming more obvious that the economy is
not nearly as strong as the spin-masters would like us to believe.
According to Atlanta Federal Reserve Bank President Jack Guynn in a
speech yesterday, “Keeping the benchmark U.S. interest rate at the
lowest level since 1958 won’t be necessary once the U.S. economy
achieves sustained growth and hiring.” To rephrase his statement, the
U.S. economy has not achieved sustained growth yet.
