By Todd Harrison Jun 23, 2003 8:32 am
The biotechs should tell the sentiment tail today!
Good morning and welcome back to the land of bickering ticks. With June expiration in the rear view mirror, the critters spent the weekend enjoying some down time on the eastern coast of Long Island. As the calming rain sprinkled on the roof above, the Menagerie sat around the kitchen table enjoying the company of good friends and gentle spirits. The conversation eventually turned to the tape and the relaxed atmosphere afforded them some much needed perspective. It went a little something like this.
Boo: I've gotta tell ya, this market gives me more pause than a kennel club. People are conditioned to believe the last thing they see or hear, and the higher the Minx lifts, the "better" things are. It's wacky!
Sammy: That's behavior science 101, Boo, and it shouldn't come as a shock. You've been doing this a long time and know the herd mentality, particularly when it comes to a rising financial tide. The masses have been mauled since the bull market stalled and it was the bears turn to get a burn. You've been steadfast regarding your big picture view and that's fine -- everybody has the right to an opinion. However, you failed to allow for the potential of bullish phases to be nestled within the larger (bear) cycle. You've learned another important lesson, and that's the need to identify a time horizon in your risk profile.
Daisy: Yes, and he also forgot that the market is a leading indicator. Business may not have picked up yet but by the time it does, the Minx, as a discounting mechanism, will already reflect that uptick. What happens if the economy gets some validation in the way of better earnings or stronger economic numbers? If she's rallied like this on "stabilization," imagine what she'll do with some real ammunition!
Boo: Come on now, this past rally wasn't about fundies. The first quarter earnings were a lot like my ex -- good from afar but far from good. It was all about liquidity and a lack of viable investment alternatives. With rates so low, equities were force-FED and the hydration powered the tape through technical resistance levels all the way up. That, in turn, lifted the collective psychology, which naturally inspired further investment (liquidity) into the system. It clearly achieved the desired affect but when the euphoria evaporates, it does little to solve the underlying problem.
Hoofy: Hey, Mr. Postrationalizer, does it really matter? The goal is to anticipate these developments and remain proactive. I didn't get any sympathy when the market fell off the cliff in 2000, and you won't get any here. This is business and in the market, you're only as good as your last trade.
Boo: Speaking of which, did you happen to notice that the last few trades have been to the downside? Some minor trendlines were broken last week, including the S&P (from late May), the biotechs, banks and brokers. These were the leadership groups on the way up and they've recently shown some cracks in the armor. Further, the entire rally was characterized by an ability to shrug off bad news and climb a wall of worry. In case you missed it, Lehman (LEH:NYSE), Bear Stearns (BSC:NYSE) and KB Home (KBH:NYSE) all had good news last week and traders opened a can of whoop ass on 'em. Pay attention to these subtle shifts in psychology.
Snapper: Big deal, dude. Those names were bound to "back and fill" and as long as they do so without spilling over to the rest of the market, it's pretty bullish. Besides, THE trendlines from the March lows are still very much in tact and as long as that's the case, Hoofy's heroes have a leg to stand on.
Sammy: He's right, Boo, and to add spice to the mix, we've got consumer confidence being released Tuesday, an Elmerfest Wednesday and, perhaps most important, quarter-end lurking right around the corner. Whether fund managers "lock in" or chase performance (sell) remains a question. Plus, there's the issue of "expiration hangover" as a lot of stickiness was potentially removed as a functions of Friday's option adios. I'd pay particular attention to the biotechs. If (big if) the sector gets hit in the face of a merger, that could further Boo's thesis that good news is being used as a source of liquidity.
Hoofy: Perhaps, but as Snapper said, THE uptrend (from the March low) is still very much intact. As long as S&P 975 and NDX 1180 hold (on a closing basis), it's game on, Garth! You can talk about the sentiment surveys, crowded long side, massive insider sales, historically rich valuations or widespread complacency all you want. At the end of the day, the only right answer is found on the bottom line.
Boo: That's fine, as long as you see recognize the risks, you can play anyway 'till Sunday. I would have thought you'd learned something when the bubble burst but hey, you've got to find your own way. Best of luck.
Daisy: Are you guys done yet? We've got all week to freak and if you don't relax when you can, you'll drive yourself batty! Let's keep the gloves on and focus on having some fun. Anyone want to go bowling? Play ping pong? Naked twister?
The critters let out a laugh as, once again, Daisy hit the nail on the head. A little levity goes a long way and, often times, it's easy to forget why we work in the first place. They got up from the table, grabbed their coats and headed out the front door. They weren't quite sure where they were going but it didn't matter -- they were going there together.
Good luck today.
position in spx
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