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FRAUD AND DECEPTION IS THE ORDER OF THE DAY!

I have always believed that the stock market is the heart of the capitalist system. The ability to raise capital by young companies thru the efficiency of the financial markets has enabled our country to achieve wealth unmatched by any other country in the post-Industrial Age. Unfortunately over the past decade, and especially over the past five years, the financial markets have been transformed into a huge casino—and this is an understatement. In a recent email to me, Mr. Martin Goldberg, put it in much more blatant terms:

"...with the stock market appearing like brothel with all the late trading, insider trading, program trading, accounting shenanigans, earnings management, insider selling, and media spin, etc., who in their right mind can hold Exxon Mobil (in a college savings account yet) when it goes to $36?"

"Brothel?" That's a pretty strong word. Yet, it totally encapsulates the disgust of many professionals when it comes to the un-ending  "late trading, insider trading, program trading, accounting shenanigans, earnings management, insider selling, and media spin" that seem to be the order of the day. A good example—in my humble view—is what took place on Friday, May 7, 2004. As many may recall, on that day the bond market plunged and so did many stocks at the NYSE. In fact, that day the NYSE experienced one of the worst breadth ratios ever, 12:1! On that day 256 issues advanced, while 3152 declined and the NYSE fell 119 points.  Interestingly, NASDAQ and most notably the NDX held rather well. The NDX fell just 12.82 points, while the shameless talking heads at CNBC marveled throughout the entire day at the "strength" and "resilience" exhibited by tech, which they immediately interpreted to be a "good thing" for the market! 

At the end of the day, I looked  under the surface to see how much strength there really was in tech. On that day NASDAQ had  832 advancing issues, 2343 declining issues, 587,109,000 shares made up the up volume, and 1,012,777,000 made up the down volume. To begin with I do not think a market with a breadth 3:1 in favor of decliners is a "strong" market, despite the blubbering to the contrary by the spin masters of CNBC and the like. Second, in examining the up volume that accompanied the up issues, this is what I found out:

Just 18 stocks of the 832 advancing ones were responsible for 347,000,0000 shares of the 587,109,000 that made up the up volume. In other words, 2% of all advancing issues were responsible for 59% of all the up volume! Moreover, by some "strange" coincidence, all of those 18 stocks were components of the NDX!

What was the compelling reason for any portfolio manager to pile up on any of these stocks on that particular day? NONE! In my opinion, it was a coordinated effort by interested parties to buy those stocks in order to keep the NDX up and create the illusion that the crowd's beloved NASDAQ was exhibiting "extraordinary strength," which of course had to be "good" for the market! 

In summary, I would like to reiterate what I mentioned last week with regards to tops and bottoms:

Notice the difference in the formation between now and March-April of 2003. Even a novice can tell that last year the A/D had formed a bottom and it was moving up. In that type of environment it made sense to be a buyer, because most stocks were appreciating. However, over the past 3 months, the A/D line has formed a clear top and it is declining. In this current type of environment, it makes sense to be a seller, because most stocks are  depreciating. The two charts on the bottom show the change that investors would want to see, in order to become buyers again.

When the A/D lines stop to decline and they begin to form—once again—patterns that are usually associated with "bottom formations," then we can conclude with a reasonable degree of certainty that a positive change in the market environment has taken place and thus, we should be buyers. Right now, the A/D, and Cumulative Volume lines for all major U.S. Indices are in a free-fall. Thus, it is premature to be looking for intermediate-term buying opportunities. In fact, judging from the current chart pattern, investors ought to be concerned with whether the markets are in the process of completing intermediate-term tops.

Ike Iossif

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