Dow Jones Bungee Jumping
I confess. I have never bungee jumped. But lately the markets have been making a habit of it. Consider the Dow Jones Industrials (DJI) just this week.
The wildest swing was on Monday when the DJI reversed virtually all of the losses. Indeed the massive reversal in the face of a drop of over 400 points on Monday brought out the speculation that the Plunge Protection Team (PPT) (Exchange Stabilization Fund) was in the market. It was taken so seriously that the White House actually put out a note saying that had not convened it top-level working group on the financial markets.
Assuming that is correct there is only one other plausible explanation for the massive reversal. That is that a huge buy program kicked in from institutional buyers (meaning a large fund or funds) that included buying techs and selling resource stocks particularly golds. It also may have been related to the rebalancing of the S&P 500 for Friday. Remember that coming out of the S&P 500 is Alcan Inc. (AL-NYSE), Inco Ltd. (N-NYSE), Placer Dome Inc. (PDG-NYSE) and Barrick Gold Corp. (ABX-NYSE), all resource stocks including two golds. Amongst the replacements were United Parcel Service (UPS-NYSE), Goldman Sachs (GS-NYSE) and Prudential Financial (PRU-NYSE). If Barrick and Placer were hit then the others may have been hit in sympathy despite a rise in gold prices.
Frankly I give more credence to the latter then a foray into the market by the PPT. The market has been falling for good reasons. The ongoing accounting scandals de jour have caused a crisis of confidence that does not appear to have burned itself out yet. Still, while the market has certainly been very volatile there has been no complete collapse like an October 19, 1987 or October 27, 1997 when the market fell 554 points at the height of the Asian financial crisis. While the market has been very volatile there has been no real panic. Hence no real reason for the PPT.
Greenspan spoke this week. As usual he really did not have much to say except to try and calm the markets after Bush speaking caused them to fall sharply. Speaking of Bush, he and Veep Dick Cheney just get deeper and deeper into the doo doo. Seems those shares that he sold with Harken Energy Corp. (HEC-AMEX) were locked up for 6 months and he sold them after 2 months. Mr. Cheney is up to his eyeballs in trouble over the sale of shares of the company that he led before becoming the Vice President. The SEC is investigating Halliburton Co. (HAL-NYSE) over accounting practices during Mr. Cheney's tenure. Seems they may have inflated profits (seems who doesn't these days). But Mr. Cheney cashed out before huge losses were announced. Now Judicial Watch (a conservative Washington watchdog group) is suing Mr. Cheney for stockholder fraud. Whitewater anyone?
We can only dream that Bush will get as tough on fraudulent CEO's as he was on those on death row in Texas prisons. When he was governor of the Lone Star State, they led the nation in executions. But Bush thinks things are fine in the state of the nation. Remember this one for the future. "I want you to know the economy, our economy, is fundamentally strong" - George W. Bush, July 15, 2002. Sound familiar? It should hark back to another age. "The fundamental business of the country, that is production and distribution of commodities, is on a sound and prosperous basis" - Herbert Hoover, October 25, 1929.
Dubya is not the only one who comes up with these gems. Greenspan is the master of the obfuscating quote. He's got his Bush quote as well. Remember it. "The fundamentals are in place for a return to sustained healthy growth" - Alan Greenspan, July 16, 2002. But my favourite was his reference to the greed on Wall Street. His term was a reference to "corporate malfeasance". I suppose we now have "irrational exuberance" leads to "corporate malfeasance"?
But "Easy Al" may not be so easy any more. While in the post September 11, 2001 world the Fed saw that the system was more than sufficiently liquid with money supply as measured by M3 grew at times by 20% of more. But it is now slowing. Year over year to June M3 is only up 7.2% and in the three months ending June 30, 2002 it grew by only 5.1%. Is the Fed tightening? That's relative only in comparison to the rapid growth of earlier periods. We can pretty well be assured that right now interest rates are not coming down any further. With money growth slowing that is another reason for the stock market to fall because its growth is highly dependent on "Easy Al" being "Easy Al" and feeding it money.
All this bodes poorly going forward. While the economic indicators are continuing to appear to be positive the stock market is telling us that a downturn lies ahead. The market discounts everything and a falling stock market presages problems in the economy. Even our own Prime Minister mused about the effects of the falling stock market. If interest rates rise as we suspect then the housing market boom will come to an end. That is one of the last things still holding the market up.
Despite all this the market remains oversold enough here to still get a good rebound. The volatility index (VIX) is now over 40 although it hit as high as 56 on September 21, 2001. Anything over 35 tells us that a bottom could be nigh. The question is what kind of rally would we get. An area that should benefit is techs as they have been leading the market down. Another area is oils as the reason oils are down so sharply here recently is the re-weighting in the S&P 500 with Royal Dutch Shell coming out. There are (were) millions of shares to sell for the July 19, 2002 re-weighting. But after that is done the oils should benefit. Golds and metals should also benefit. See the group above that has been sold hard to accommodate the re-weighting.
We have oft talked about cycles. With the relentless selling it may be useful to once again look at the 70-year cycle of the Great Depression bear market 1929-1932. That market took from top (September 3, 1929) to bottom (July 8, 1932) 1039 days. The current DJI top was on January 14, 2000. So if the cycle were working a low might be expected on or near November 18, 2002. The 1929-1932 collapse took 13 waves to a low. The current count on the DJI appears to be 10 completed and currently working on number 11. Depending on where we make a low a rise of at least 1000 points would not be out of line. That could take us back towards 9000 and at those levels we would expect significant resistance.
There are high risks here. There is a risk of a major default or more scandals. The mid-east or an attack on Iraq could cause further problems for the market. The same for any revival of the hostilities along the India/Pakistan Kashmir border. But these events may still be further away. Clearly the market is very dangerous here but we have achieved a number of targets and we are sufficiently oversold that a good bounce that may last a few weeks may be at hand. But that would only set up new lows later on. Ultimate targets appear to be at least down to the bottom of the channel currently near 7300. We also have some targets down at 6400.
We are in a deflationary period akin to the period of the Great Depression. But each cycle plays itself out differently so this is no suggestion that we are going to see anything as bad as we saw then. The US Dollar has remained very weak but it too is approaching levels where a corrective rebound may soon be at hand. Support there on the US Dollar Index is down to 102.
July 22, 2002
Charts and technical commentary by David Chapman of Union Securities Ltd.
69 Yonge Street, Suite 600, Toronto, Ontario, M5E 1K3 (416) 604-0533, (416) 604-0557 (fax) 1-888-298-7405 (toll free) email david@davidchapman.com
The opinions, estimates and projections stated are those of David Chapman as of the date hereof and are subject to change without notice. David Chapman, as a registered representative of Union Securities Ltd. makes every effort to ensure that the contents have been compiled or derived from sources believed reliable and contain information and opinions, which are accurate and complete. Neither David Chapman nor Union Securities Ltd. take responsibility for errors or omissions which may be contained therein, nor accept responsibility for losses arising from any use or reliance on this report or its contents. Neither the information nor any opinion expressed constitutes a solicitation for the sale or purchase of securities. Union Securities Ltd. may act as a financial advisor and/or underwriter for certain of the corporations mentioned and may receive remuneration from them. David Chapman and Union Securities Ltd. and its respective officers or directors may acquire from time to time the securities mentioned herein as principal or agent. Union Securities Ltd. is an independent investment dealer and is a member of the Toronto Stock Exchange, the Canadian Venture Exchange, the Investment Dealers Association and the Canadian Investor Protection Fund.
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