TODD MARKET FORECAST
Prepared by Stephen Todd
Fed To The Rescue
(January 3, 2001) As we were writing this edition Wednesday morning, the Fed, in a major surprise to Wall Street, dropped the fed funds rate by one half point. This caused some panic buying. The long suffering NASDAQ responded by tacking on its largest point gain and its largest percentage gain on the largest volume in its thirty-year history.
We heard talk that the 1/2-point drop was so extreme and surprising that perhaps the markets would worry that the Fed knows that something ominous is on the horizon.
Forget it. In the first place, the Fed has shown repeatedly that it knows nothing. It's members have wrongly predicted the imminent onset of inflation year after year. In 1996, its chairman suggested that the stock market was irrational at Dow 6300.
The last time the Fed surprised the "Street" by dropping rates between meetings was in October of 1998. We have shown the recent raises and lowerings on the chart.
Federal Reserve Raisings And Lowerings
The white down arrows show rate decreases while the up arrows show increases. The down arrow with the curled arrow pointing it out is the last time the Fed dropped rates between meetings and you can see what happened after that. Historically, regardless of the reason, rate decrease by the Federal Reserve is very bullish for the stock market.
Just to give you a little longer perspective, we have inserted a smaller chart with a longer time period. The first up arrow is the first rate increase for this sequence and the second up arrow is the last one in May of this year. Note that after the first increase, the remarkable rally from late 1994 stalled and the New York Composite began to trend sideways.
Simply for your edification and viewing pleasure, we have also inserted five-week RSI to show overbought and oversold points since late 1997. We became oversold (black area) just recently in October.
The oversold condition hasn't resulted in much because of the uncertainty created by the election, numerous earnings downgrades and a continued bias toward tightening by the Fed.
We think it's interesting that the New York Composite, the most broadly based index, consisting of roughly every stock on the New York Stock Exchange, has been going sideways with all the bad news. Look at the chart again. It doesn't look much like a bear market does it? Just think what this index may do with a dose of good news.
In the meantime, the short term should give us some pleasure. The chart shows our Composite Gauge. The five-day m.a. has been above the bullish 14 level three times since mid November without much to show. We suspect that it owes us something on the upside.
S&P 500
Composite Gauge Five-Day Moving Average
When the news came about the rate cut, our charts were already printed so we drew in the rebound to the upside with a pen. We are happy that the S&P closed above the previous high which made an upward zig zag on the chart pattern.
This is a bullish chart pattern and one we like to see.
The chart below is interesting. While the S&P has been going down, the number of stocks making new yearly highs has been going up. A very unusual phenomenon to say the least.
S&P 500
New Highs
We think that this is interesting there are some indicators that look extremely overbought. We have long held to the belief that oversold and overbought are not necessarily opposites in the stock market.
Oversold is usually a time to look for a bottom whereas overbought can be a sign of strength under the right conditions. We suspect that this is one of those times. However, in order for this to be the case, we really need to see this market follow through to the upside immediately. Weakness over the next few days would be a major negative. There are simply no excuses left. We have a friendly Federal Reserve, lots of cash on the sidelines and favorable seasonality.
Bonds And Sentiment
The Consensus Index of Bullish Market Opinion from Consensus Inc. of Kansas City, MO has, after a brief flirtation with a less bearish reading, gone right back down to levels that have had a strong tendency to start a rally lasting a number of weeks and sometimes months.
New York Composite Last 200 Weeks
Consensus Index Of Bullish Market Opinion Stocks, 5-Week Moving Average
This is kind of amazing when you consider that the most broadly based listed index, the New York Composite, has basically been going sideways for most of the year. Obviously, the debacle in the NASDAQ has been a factor.
Sentiment is still a mixed bag overall since the Investor's Intelligence figures don't agree.
Bonds, on the other hand, are showing a bit more bullishness, but even here the levels are not indicative of a top in spite of the nice run for bonds.
Bond Futures Last 200 Weeks
Consensus Index Of Bullish Market Opinion Bonds, 5-Week Moving Average
The put call ratio, five day m.a. was recently at a very high level and we did indeed get a bounce (arrow), but levels that high should have given us a bit more for our money.
S&P 500
CBOE Put Call Ratio 5-Day Moving Average
This suggests one of two things. Either the market is in a bearish trend and is ignoring normally bullish indicators or it owes us something on the upside.
Because of other technical and fundamental considerations mentioned elsewhere in this letter, we will choose the latter. However, in order for this to have a bullish resolution, the S&P needs to rally in short order. If we are still wallowing around a couple of weeks from now, the former interpretation would seem to be the correct one.
The London Market
The FTSE 100 is currently acting very much like the S&P 500. In other words, there is no leadership either from this index or for this index. We suspect that they will soon rise together.
FTSE 100
News And The Market
(1) On July 20, Fedhead Greenspan hinted at an end to the interest rate spiral in testimony before Congress.
(2) On July 28, the GDP for June came in at a much stronger than expected 5.2%.
(3) On August 4, the jobs report showed more people without jobs than anticipated.
(4) On August 22, the FOMC held rates steady.
(5) On September 1, non farm payrolls again showed few people employed than anticipated.
(6) On September 5, Intel was downgraded by Piper Jaffray.
(7) On September. 14 and 15, the PPI and CPI were benign.
(8) On September 29 Apple Computer warned of significantly lower earnings.
(9) On October 11, the Middle East again erupted into violence.
S&P 500
(10) On October 18, market seer Louis Navalier opined that the selling in the market and especially the high techs was not over. He recommended oils and oil services.
(11) On November 3, non farm payrolls came in lower than expected, but wages were higher and this caused a bond drop.
(12) On November 10, Dell guided earnings projections lower and Intel was downgraded.
(13) After the market closed on November 21, the Florida Supreme Court ordered that certain hand counts must be accepted by the Secretary of State.
(14) After the market close on November 29, Gateway predicted lower profits going forward.
(15) On December 8, the Florida Supreme Court ordered a recount.
(16) On December 13, Bush was finally declared the winner.
(17) On December 20 the Fed painted a grim picture of the economy, but left interest rates unchanged and this disappointed the markets.
Nova Ursa Ratio
The Nova-Ursa Ratio, which compares the dollar commitment of the Rydex Ursa Fund and the Rydex Nova fund is again oversold after a very brief flirtation with a bit of over exuberance.
S&P 500
Rydex Nova Ursa Ration 5-Day Moving Average
The New York Composite Index is the most broadly based of all indices, roughly consisting of every stock on the NYSE and it doesn't look like a bear market to us.
New York Composite Last 200 Weeks
The Weekly advance decline line is continuing to make new recovery highs. After many months of under performing the averages, breadth is now out performing and this is normally a good sign.
Weekly Advance Decline Line
This gauge is still not bearish enough according to some and we somewhat agree, but look at the NYSE on the graph. Usually, bearishness comes along with declines.
Bears Minus Bulls Investor's Intelligence
The Investor's Intelligence Oscillator, which measures the percentage of NYSE stocks above their own 10-day m.a, looks to be somewhat neutral after flirting with an oversold condition.
Investor's Intelligence Oscillator
The New York Composite is basically waffling sideways. If it is doing this with all the bad news, what it happen if the news gets better? We see this as a sign of strength.
New York Composite Last 200 Days
O.K. We don't know what to make of this. We have never seen it before. The Big Block Ratio is overbought. That's all we can say. There is certainly a lot of institutional interest.
Big Block Ratio 10-Day Moving Average
The corporate 20 bond average has surged to a new high. This says something about the health of corporations in spite of what you may have heard about a recession.
Corporate 20-Bond Average
The corporate bond advance decline line is, I think, suggesting that bonds and stocks have a date with higher prices.
Corporate Bond Advance Decline Line
Not much to add here. The New York Composite is just slopping around midway between support and resistance.
New York Composite Last 100 Days
The Money Flow is very overbought at present. Is it a negative?
Money Flow 5-Day Moving Average
Supply Demand is showing a neutral at present so we aren't getting a lot of guidance here.
Supply Demand 10-Day Moving Average
The advance decline ratio is currently very overbought.
Investors's Intelligence Oscillator
Gold, Oil, The Dollar, Etc.
For decades, a rising bond market has meant a rising stock market. That hasn't worked for a couple of years, which continues to amaze us. Just look at the way bonds and Eurodollars have appreciated which means that both short term and longer term rates have dropped considerably over the past few months.
S&P 500
Gold
In the past, the stock market has ignored dropping interest rates for only so long then equities would have a melt up. Will it happen this time? Stay tuned. We believe that the interest rate environment is very healthy for stocks.
The U.S. dollar is having a remarkable downtrend, no doubt based on anticipation of a recession.
The Euro currency, after making people believe that it was in a permanent decline, has had a very nice rebound and still looks to be in an uptrend.
You really have to hand it to gold. The yellow metal. It has really, really tried to mount an uptrend, but in the end, it looks like the other miserable attempts that have been made during the 20-year bear market.
We don't look for gold to drop precipitously from here, but we feel that the glory days of the past 5000 years are behind it. There are just too many interest paying alternatives for hoarders, bankers and speculators.
Additional Commentary
With the markets in this country struggling, several people have asked us about opportunities in foreign markets. Our advice is, "don't try it." In many foreign countries there is no effective rule of law. The law is whatever local elites say it is.
There was an article recently in the Wall Street Journal recently about an American investor who had put a large amount of cash into Shandong Huaneng Power Development company. On the surface, it made sense. There is bound to be a surging energy demand in one of the world's fastest growing economies.
Trouble is, Shandong was integrated into another company, Huaneng Power International for a fraction of its worth.
Our intrepid investor was left holding the bag with virtually no options. The Chinese court system? Good luck.
The U.S. has a $10 trillion stock market with all kinds of investor protections and fair disclosure. Why do you need anything else? Sure our market goes down and disappoints from time to time, but it has a very good record. Unless you're John Templeton with vast resources, we would advise you to keep your money right here where there are still plenty of ways to get into trouble, but at least you're protected by the fairest of all legal systems.
January 3, 2001 Stephen Todd The Todd Market Forecast 26861 Trabuco Road, Suite E 182, Mission Viejo, California 949-581-2457