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(March 30, 2002) STOCK INDICES: For the holiday-shortened week, stocks edged lower. The Standard & Poor's 500 index declined 0.1 percent, while the blue-chip Dow Jones industrial average 0.2 percent. The NASDAQ lost 0.3 percent for the week. For the first quarter, which ended on Thursday, and the year to date, the S&P 500 inched down 0.1 percent, while the NASDAQ composite lost 5.4 percent. In contrast, the Dow average gained 3.8 percent for the quarter and the year so far. All together, the stock market is just going nowhere, which has to be expected in a post-bubble area.

Stocks are still shockingly expensive. Despite consecutive down years, the Dow is currently only 10% off its all-time high. Using a formula based on a combination of both historical and projected profits, the S&P 500 trades for a lofty 24 times earnings; the index would have to fall 29% to return to its median P/E multiple since 1957, which is 17. No bull market in history has started with P/Es this high. With analysts predicting a tech earnings rebound of 137% in the third quarter and 74% in the fourth, there is no chance that companies can even meet those numbers. The next blow may be the realization that profits just aren't going to grow as fast as they did in the 1990s and that such high P/E are unjustified.

Furthermore for markets to ignite, interest rates generally need to be falling (when rates fall, bonds become less attractive, and investors are willing to pay more for a company's future earnings). After 11 rate cuts last year, the Fed can't go much lower. In fact, following the raft of positive economic news in February, many believe Fed chairman Alan Greenspan could raise rates as early as May. The biggest threat to the bulls is rising interest rates. Currently futures contracts on the federal funds rate are pricing in about a 50 percent chance of a quarter-point rate hike in May but have almost fully priced in a 25-basis-point hike by the end of June.

Our technical analysis for the S&P500 June futures contract has not changed. The market is in a trading range between 1,080 and 1,180 and the 1,180 resistance seems to be almost impossible to break. Following last week’s recommendation, we went short Monday around the same level. If you are not short yet, expect a rebound above 1,160.

Jean-Jacques Chenier

www.alterama.com

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