The Boom Town Rats
By Todd Harrison Jan 26, 2004 8:03 am
Europe is taking a slight trim this morning.
Good morning and welcome back to the track. With last week's rest and the Minxy digest, the tape took a break from its strong upside quest. Hoofy the bull (with an "S" on his chest) had been on a tear like a bull who's obsessed. "Try as they might, try as they can, " (he dribbled a bit as his statement began) "they simply can't stop my bullish brethren and our jiggy assault on our grand master plan!" Is it true--can it be?--that this team won't be stopped? Or will this new bubble get popped, dropped and flop? It's a spankin' new week in the city of critters so let's settle in and shake off those jitters!
The bulls narrowly missed their quest for a nine-peat as the Dow Jones slipped marginally in the holiday shortened week. It was the slimmest of slim victories for Boo's crew--anything short of tire tracks is, these days--and we power up for another action packed and earnings filled five session jam. We've spoken at length about the current crosscurrents (both ways) but in the interest of education and for the sake of clarity, I thought it might be helpful to walk through our primary metrics. Here goes:
Earnings, by and large, are clearing the analyst limbo line and corporate America is offering pretty optimistic outlooks. If perception is truly reality, the realists now perceive that the worst is in the rear-view mirror. While objects (or objections) may be closer than they appear, fundamentals have always been governed by the theory of relativity. In other words, we're still on the upward slope of the "beat the numbers" game and that's all that matters to the immediate gratification crowd. I still believe that the recent (pre-bubble) boom reset the standard and skewed the basis of comparison such that our expectations (of return and valuation) are unrealistic. That is, however, an evolutionary process that will only be learned (and relearned) through a repeated series of eventual disappointments.
While many oscillators and internal measures are overbought and some "parabolic panics" are troublesome, the preponderance of chart work is constructive. The financials (arguably the most important sector) have broken out to all-time highs, a litany of market leaders (General Electric (GE:NYSE), Citigroup (C:NYSE)) are acne prone, time (rather than price) has been the common thread of the corrective process and the internal breadth has been (for the most part) minty. Near-term levels to monitor are S&P 1137 (trendline from Dec 10), S&P 1150-1160 (50% retracement of bear market decline), SOX 525ish (triple top support) and NDX 1515 (multiple January bottoms).
The giddy city has been a pity for the bears, many of which have been wasted on the way. I continue to sense that this is one of the biggest bubbles out there and, as such, the collective psyche is susceptible to a shock. In the meantime, and in the absence of an exogenous event, bulls continue to pile into the parade and sentiment surveys are (and have been) overwhelmingly one-sided. This is clearly the driver of momentum and it's always difficult to gauge when that will abate. One thing for certain, higher prices are intoxicating and it's sucking in believers (and money) with each passing day.
There is a decidedly two-sided backdrop in this regard. The corporate bond market and electoral agendas both bode well for the emboldened bulls. Professor Reynolds has been spot on with his educational analysis and his contention is that any trouble will show up first in the fixed income arena (no flags yet). On the flip side, there are an abundance of red flags that will be most obvious and quite apparent with the benefit of hindsight. Big picture concerns have been given the benefit of the doubt (literally) and that shift, when it occurs, will likely be accompanied (preceded) by a turn in psychology.
As it stands, conventional wisdom dictates that the dynamic in play will continue through the election. Folks seem resigned to the fact that the laws of inertia will pave the way to a continuation of recent trends. George Soros, speaking at the World Economic Forum in Switzerland, opined that "while (stocks) may be overvalued, they can get a lot more overvalued" as a function of momentum. Further, he offers that "everything has been geared up to make things look good, and be good, prior to the election." Alas, the savvy (and guitar signing) Hungarian isn't as sanguine thereafter. "A lot has been borrowed, literally, with the tremendous budget deficit, so I would imagine that there will be a price to pay for it afterwards."
This, of course, leads to the crux of our dilemma and the basis for our task at hand. If the universal consensus is that it's full systems go through (at least) the first half of '04, who's going to get in the way? More importantly, and in the vein of the Minx traveling the path of maximum frustration, a more intriguing question is thereby posed. As we manage our risk relative to expectations, I'm left to wonder when was the last time that everybody was right? Just something to think about as we trudge forward today and play in the fray.
Good luck today.
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