Welcome to the Bates Motel
The stock market has looked positively serene recently -- but so, too, at times did Hollywood's patron saint of schizophrenia, Norman Bates. Now that investors have gotten what they wished for in the form of an irrationally lugubrious easing by the Fed, perhaps they have good reason to be nervous. Will lower borrowing costs cause the economy to surge later this year, as the Abbey Cohens and Homer Simpsons of the world expect? Or will the growth effect be fatally undermined by inflationary pressures on long-term rates, as is already starting to occur in the mortgage markets? Whatever the question, it is a quintessentially post-modern leap of faith to believe that tinkering with the monetary levers will allow us to postpone yet again a day of reckoning for the cosmic credit blowout that occurred during the last decade.
Meanwhile, the market's technical signs continue to be very Norman Bates-like. On Thursday, Da Boyz attempted to effect the cheapest, easiest route higher by viciously gapping stocks on the opening through short-term resistance levels that had been noted herein. When this ploy works, the averages usually don't look back; they simply head up, up and awaaaay until the last short has cried uncle. On Thursday, however, the induced rally lasted all of five minutes before stocks began to recede for the remainder of the day. And yet, they did not collapse as we might have expected, but instead settled mostly in the upper reaches of the previous day's range. Stochastically speaking, you might say they defied gravity. Can they do it again? Hard to say. But each additional day that stocks fail to get pushed lower makes an upside resolution potentially more powerful. It is at times like this that we look to buy straddles, since the bearish case is at least as compelling. Need I mention that straddles are priced in the ozone?
Point and Counterpoint
One reason for the upward drift of put and call premiums is that the averages have been far too coy lately to second-guess. While there are plenty of technical reasons to suspect that we've witnessed the final throes of a middling bear rally, we cannot rule out the possibility of a short-squeeze that would shred its way past immediate resistance in mere minutes. One factor that has kept me moderately bullish over the last couple of weeks, despite ominous stochastic readings for each, is that neither Microsoft nor IBM has reached the respective bullish targets I'd projected for them a while back. Microsoft's objective is 2.5% above current levels -- easily reachable in a day – while IBM's is about 8% higher. I should also mention that a third stock, America Online, has been playing footsies at an important trendline for the last three days. As such, it is probably an even better telltale for the very near-term than either IBM or Microsoft. It's obvious that short positions are being accumulated in the stock near 52.50, but those doing the shorting presumably have no better idea than we about whether the resistance will give way. Also, AOL's stochastic readings have hovered for most of the last three weeks in the extremely overbought zone above 80, giving bears yet another reason to short aggressively. They will likely have a big winner if some piece of bum news hits Wall Street in the next day or two. If not, however, with a boost from a firm tape, the stock is spring-loaded and ready to punish the pessimists brutally.
As counterpoint, I should note that on four of the last six days, the S&P futures have rallied to kiss a trendline that connects peaks going all the way back to September -- an important trendline, to be sure. In some respects, this game of cat-and-mouse is similar to the one being played out in America Online. But there is one striking difference that points toward a bearish resolution -- a difference that is manifested by the pattern of descending stochastic peaks for the S&P futures. They diverge from ascending price peaks going back to mid-April, and this is a clear danger signal that we should heed. For if the June contract breaks down from here, it will not find traction until it has fallen to at least 1122.80, a support identifiable by my proprietary methods.
Wall Street's Shills
Looking at a bigger picture, sentiment numbers are hardly encouraging, implying as they do that many millions of investors are probably as bullish as some of the relentlessly and shamelessly self-aggrandizing Wall Street shills that hold forth daily on CNBC. Even so, one recent survey disclosed that Americans have actually lowered their expectations for stock market returns over the next year to a supposedly more realistic 8.7%. Compared with last year's expectations, that outlook would probably qualify as abject pessimism. In fact, we would all retire as millionaires if we could achieve 8.7% returns consistently over a working lifetime. Stock market gains over the last century, through bull and bear markets, have averaged closer to 5%, notes Alan Newman, editor of Crosscurrents. A reality check, to be sure. But who's paying any attention.
May 14, 2001
Author/analyst Ackerman forecasts stock, index and commodity futures prices for market professionals in his daily newsletter, Black Box Forecasts: www.blackboxforecasts.com