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800-528-0559(March 6, 2002) STOCK INDICES: It will be important to see if my projected stock market turning point for March 7-8/11 is a top or an acceleration up. There is an 80% probability of a top. And certainly the U.S. stock market is now overbought technically and psychologically, as well as into resistance, from the 9/21 low. Effectively we have rallied from fall equinox to spring equinox. The weekly bar chart of the DJIA shows the "C" leg-up of an Elliott Wave ABC corrective rally. Technically this "C" leg could carry the DJIA up to 11,500. The S&P 500 could rally to 1225 to 1250, the NASDAQ back to 1700-1800. The NASDAQ is the weakest of the bunch, the DJIA the strongest. March NASDAQ should find significant resistance beginning at 1550; March S&P resistance at 1175-1200; March Dow futures resistance at 11,000. I am continuing to monitor the retail stocks closely since consumer spending represents over 70% of U.S. GDP. A downturn in the retail stocks could be forecasting another slump in the economy. There has been a pickup in IPO's which is constructive for the stock market, as is the $2.3 trillion earning nothing on the sidelines in money market funds. Over two-thirds of investors are still holding on to their stocks even though they have not increased their retirement wealth at all since 1983. Until these investors sell, support is latent in the stock market. The shift has been in favor of old brick and mortar stocks and out of virtual economy/new economy stocks. That is why the DJIA is so strongly outperforming the NASDAQ. I just can' t help but wonder if sometime here in the March turning point time frame, another "big ugly" corporate problem, like Enron, where there may be fraud in accounting, real profits and real earnings reports, reemerges. Price/earnings ratios are still out of sight. How do we get around the fact long term that although Enron lost $63 billion in market cap, 10 other firms have lost between $155-$453 billion in market cap according to Fortune? How do we get around that NASDAQ 100 companies lost $82.3 billion in the first three quarters of 2001 alone, more in fourth quarter? Are corporate earnings really overstated by as much as 20%? Are the price/earnings ratios really twice as overpriced as they were at the March Y2K peak? Probably so. The NASDAQ 100 is trading for over 73 times last year's earnings. The DJIA is over 70% above its historic average. When do we get down to real values and real oversold technical and psychological conditions which mark major market bottoms? We are not there yet. Accumulative volume on the NYSE in terms of net advance/decline volume as a percentage of NYSE volume peaked back in 1997. What about the fact that real trust and investor confidence are lacking? In January, only $1 billion flowed into equity mutual funds. Stock market household wealth is down to 50% from the high of 57%, with the average historically being 25%. This suggest we have a ways to go on the downside. Would it be surprising to see the stock market turn back down as early as March 7-8/11, and no later than mid-April? No. So, enjoy the uplift while it last, but color this a bear market rally.
RECOMMENDATION--Futures investors who purchased put options in June S&P--hold. Only add to purchased puts on scale-up strength. Future investors short March NASDAQ on scale-up strength above 1500 exit the trade. Futures investors may sell June NASDAQ short on scale-up strength with 1811 open protective stops (a high-dollar risk trade) looking for a break below 1000.
R.E. McMaster, Jr.
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