STOCKMARKET CYCLES
Prepared by Peter Eliades
The Cycles
(May 12, 2000) There are perhaps some among the bull market promoters who would have you believe nothing very serious has occurred over the past several months. On December 30th, 1999, when the stock hit a high of 119.94, the capitalized value of Microsoft was approximately $624.3 billion. On April 24th, 2000, Microsoft hit a low of 65. In less than four months, over one-quarter of a trillion dollars in value had been lost. Just in the unlikely case any of our subscribers have lost track of exactly how much value that actually represents, here is a list of the companies whose combined value at current stock prices is less than the 285 billion dollar loss in value suffered by Microsoft in less than four months: Maytag, Hilton Hotels, Goodyear Tire, American Airlines, Raytheon, Archer Daniels, Dow Jones, Con Edison, Aetna Insurance, Staples, Fedex, Caterpillar, International Paper, Sara Lee, Fox Entertainment, Apple Computer, J.P. Morgan, Texaco, Anheuser-Busch, and MMM. We submit to you that it should be clear that much damage has been done. If all of those stocks combined fell from their current value to zero, it would represent a loss of the same magnitude seen in the Microsoft loss over the period from December 30, 1999 to April 24, 2000. There is no truly meaningful way to understand the magnitude of the gains and losses seen in a single day's trading on Wall Street recently. CNBC has taken to showing a daily wrap-up of the big winners and losers of the day among the nation's CEOs. It is not unusual to see gains or losses of over 400-500 million dollars in a single day, and on some days those gains or losses are over a billion dollars. We submit to you that within a few years at the most, this lunacy will be a thing of the past. What better sign of an economic extreme than to see portfolio gains and losses of some CEOs in a single day that just a few decades ago represented the total net worth of some of the world's most wealthy individuals.
It is beginning to look more and more likely to us that the high registered on January 14th, 2000 on the Dow Jones Industrials could prove to be a very important one. It has been our contention for several months now that a cycle of approximately 6-1/4 years in length was due to resolve in the period between September 27, 1999 and April 4, 2000 . In our newsletter published on March 31st, 2000, we allowed for the possibility that the cycle could extend out as far as June 4th, 2000. From June 14, 1949 to October 4, 1974 was 9243 days . Adding another 9243 days to the October 4th, 1974 low takes you to January 24, 2000. So far, the all-time high for the Dow Jones Industrials was registered on January 14th, 2000, just 10 calendar days away from the calculated cycle date of January 24. As we said in our newsletter published on March 31st of this year, "That makes it more likely that the January 14th date this year could be a final Dow high, but using the alternate date of December 9th, 1974 as the resolution of the cycle in 1974 means the we have to allow for a resolution date in the current time period as late as June 4th, 2000."
We wrote an article, a little over a year ago in Barron's, speculating that the Dow Jones Industrial Average might have a very difficult time convincingly penetrating the 10,000 level. Since then, of course, it is closed as high as 11,773. But now, over one year later, the Dow remains only marginally above the 10,000 level. It was our contention at the time of the article that the 10,000 barrier could well turn out to be an important barrier, not only over the following several months or years, but perhaps even over the next decade. Many viewed it as heresy at the time it was written, but we believe the article has a good chance of gaining more and more stature over the next several years. As the saying goes, however, only time will tell.
Technical Indicators
Despite the incredible fundamental anomalies in today's stock market, the period of the past several years will almost surely be remembered more for its technical anomalies than its fundamental ones. By now most of you are aware that the Dow Jones Industrial Average has not closed below the low of the previous year for 18 consecutive years. The prior record was eight consecutive years from the 1921 low to the 1929 high.
Here's another technical anomaly for you. Since July of 1999, the Dow has actually lost a few hundred points, classifying the direction of the past 10 months as basically sideways to slightly down. Over that same period of time, the NASDAQ Composite has gained almost 30 percent, even after its dramatic decline of the past few months. Over the time span of the past 207 market days, five of every six days has ended up with more new 52-week lows than 52-week highs on the New York Stock Exchange. We believe that this is testimony to the relentless selling that has been taking place while fewer and fewer stocks have been advancing. The popular market averages have been masking a very ugly underlying market picture. Invariably in the past, when this has happened, it has been ultimately very negative for the stock market.
Look at the chart. It depicts the phenomenon discussed in the above paragraph. Notice how the Dow Industrials are basically unchanged over the nine- to ten-month period depicted. Now look at the cumulative new highs minus new lows line. There is virtually no time span from July of 1999 through the present time when this line was rising. The best it could do over the past nine to 10 months was to move sideways over some very short time spans. We should explain to those of you who have not seen this chart before that, although the cumulative daily advance decline line has a definite downside bias, the cumulative new highs-new lows line has had no such downside bias over the past several decades. We believe it is simply another sign of the market's massive internal deterioration.
Stockmarket Cycles a been continually published for almost 25 years. Our silver anniversary is only two months away. Over that period of a quarter of a century, we have seldom strayed from a strict technical and cyclical analysis of the stock market Over the past two years, however, even though our passion for technical analysis has not abated, our direction has been turned more often to some of the market's fundamentals. Our colleague Jim Stack of Investech Research is an excellent technician whose newsletter is replete with fundamental data. Jim has one of the finest collections of historic articles and quotes relating to the economy and the stock market. In his latest newsletter, he has a quote from a Business Week article dated November 2nd, 1929. The title of the article is "What the Wall Street Crash Means," and we believe its application to the current time period is remarkably apropos:
The recent collapse is the climax, but not the end, of an exceptionally long, extensive and violent period of inflation in security prices and national, even world-wide speculative fever. This bull market did not begin in 1929, but in 1923. This is the longest period of practically uninterrupted rise in security prices in our history. The rise was more rapid than has ever been seen, and its speculative attraction influenced the larger part of the public than ever before. The psychological illusion upon which it was based, though not essentially new, has been stronger and more widespread than has ever been the case in this country in the past.
This illusion is summed up in the phrase "The new era." The phrase itself is not new. Every period of speculation rediscovers it...During every preceding period of stock speculation and subsequent collapse business conditions have been discussed in the same unrealistic fashion as in recent years. There has been the same widespread idea that in some miraculous way, endlessly elaborated but never actually defined, the fundamental conditions and requirements of progress and prosperity have been changed, that old economic principles have been abrogated, that the country has entered upon a period of unprecedentedly easy and rapid expansion, that all economic problems have been solved, that industry has suddenly become more efficient than it ever was before, that prosperity has become universal, that production and trade have been growing at an exceptionally high and permanently accelerating rate, that business profits are destined to grow faster and without limit, and that the expansion of credit can have no end.
Those two paragraphs would have been all the more remarkable had they been written one month earlier. Bubbles are always easier to discern after they have burst. But the fact is that the psychology encapsulated in those two paragraphs is, to us, so descriptive of the present situation that we thought it was important for subscribers to read it. In many ways, the argument can be made that the current situation is potentially worse than the economic situation in 1929. At that time, the United States was the greatest creditor nation in history. Currently, the United States is the greatest debtor nation in history.
COMPQ Daily Single MAV
The chart of the NASDAQ Composite has been updated from the chart we showed in our April 21st newsletter. The concept behind this chart is of crucial importance in the current market picture. The chart shows the NASDAQ Composite accompanied by a 506-market day moving average (two years) with an envelope bounded by lines 17.5% above and below the two-year moving average. As we have pointed out often in the past when we have used the same parameters to show the Dow Jones Industrials, in normal market times the day-to-day moves of the stock market usually occur well within the parameters of this envelope. When the market moves above the upper boundary of the envelope, we can make the assumption it is an unusual move. As long as prices remain above the upper envelope, we can make the assumption that the market is over extended to the upside on an historical basis and is due to move back within the parameters of the envelope that has historically contained price action. The point that we tried to make in our last newsletter is that, despite the dramatic and record-breaking decline of the past few weeks, the NASDAQ composite index remains above its upper envelope and continues to indicate a market index that is extended beyond the historical norm. As we are writing this section on Friday afternoon, the NASDAQ Composite remains more than 10% above the upper envelope. Show this chart to the next person who tries to convince you that the NASDAQ Composite is no longer overextended. As we pointed out in our last newsletter, at the October 1987 top just before the beginning of the crash, the NASDAQ Composite was around 1.3% above the upper envelope. Its current position more than 10% above the upper envelope places it in a more overextended position relative to these moving averages than it was prior to the crash in 1987.
Market Projections
We believe the most important index to watch now is the NASDAQ Composite. Over the past few days, it has come very close to confirming significantly lower downside projections. A preliminary nominal 40-week downside projection to 2,445.70 +/-300 points has been given. All that was needed was a close below 3500 on Friday of this week (May 12th) in order to confirm that projection. Since Wednesday of this week, the NASDAQ Composite has done what it had to do in order to avoid a confirmation of that downside projection, so as of May 12th, the projection has not been confirmed. For the week ending May 19th, a close below 3550 would confirm those downside projections.
Mutual Funds
On April 25th, we placed a special update on the telephone updates recommending the sale of our Rydex Ursa positions. We sold the fund at 7.79 for a loss of 4.7% on the trade. On Wednesday May 3rd, a special telephone update around 3:20 p.m. Eastern time recommended a 50% position in Rydex Ursa Fund and a 50% position in Rydex precious metals. We purchased Rydex Ursa at 8.14 and precious metals at 20.03. Fidelity Select switchers bought Fidelity Select American Gold at 10:00 a.m. Eastern on May 3rd at a price of 12.24.
May 12, 2000 Peter Eliades Stockmarket Cycles P.O. Box 6873, Santa Rosa, California 800-888-4351