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MARKET > Commentary Wednesday, February 28, 2001
by: S.P. Brown

We're No Angells

And thank goodness for that. Imagine the loss of credibility if we were to say a stock had a 60 percent chance of rising one day and then an 80 percent chance the next. Then, imagine the loss of credibility if we were to say, "only kidding," if our stock tanked instead.

If you can imagine such tomfoolery, then at least you can empathize with Bear Stearns chief economist and former Federal Reserve governor Wayne Angell. If you'll remember, last week Angell, with the backing of fellow Stearns economist John Ryding, said there was a 60 percent chance that the Federal Reserve would cut the fed funds rates by 50-basis points this week. He then fortified his prediction on Monday by saying there was an 80 percent chance.

Of course, we still have two more days for Angell's prophesy to come true; however, today was considered by many market watchers to be Angell's window of opportunity because of Federal Reserve Chairman Alan Greenspan's testimony before the House Financial Services Committee. And if you missed Greenspan in action, you missed him bursting Angell's balloon. The Fed chairman said that while consumer confidence has indeed weakened and "will require close scrutiny in the period ahead," the data suggest "that consumers have retained enough confidence to make longer-term commitments." Translation: Things are bad, but they're not that bad.

Thanks to Greenspan's House testimony, Angell now believes that there is no chance of an inter-FOMC meeting interest rate cut this week (given the former Fed Governor's powers of prognostication, don't be surprised if the Fed cuts rates 50- basis points tomorrow).

Despite Angell's undressing today, the market had rallied Friday and Monday on speculation that a rate cut would be forthcoming, but then sold off yesterday on a weak consumer confidence report, which is now off 25 percent from its peak last spring. The selling continued today as interest rate hopes faded.

Not surprising, most of the selling occurred in the New Economy. The Nasdaq Composite Index (COMPX) tanked another 55.99 points, or 2.54 percent, to 2,151.83 - a level not seen in 26 months. Moreover, for February, the COMPX dropped 22.4 percent, its third-worst monthly outing in its 30-year history.

With today's capitulation, the COMPX is now a full 100 points below former key support at 2,251, which was the January 3rd low. Many technicians are now eyeing 2,000 for support. Psychologically, this is an important level because many market traders instinctively look to round numbers. What's more, 2000 coincides with a base formed in December 1998.

Much has been made of the fact that the COMPX is now trading at a 58 percent discount to its March 2000 high of 5,132, but keep in mind, the selling didn't fully kick into gear until early September. Over the past six months, the COMPX has seen 48 percent of its value evaporate.

Cisco Systems (Nasdaq:CSCO), Dell Computer (Nasdaq:DELL) and Microsoft (Nasdaq:MSFT) not withstanding, much of the COMPX's woes can be attributed to its semiconductor components. Xilinx (Nasdaq:XLNX), Applied Materials (Nasdaq:AMAT) and Rambus (Nasdaq:RBMS) are all trading at 60 percent discounts or more to their 52-week highs. Not surprisingly, most of this loss of market value coincides with the September 2000 through February 2001 COMPX sell-off.

Among the semiconductor issues, though, Intel (Nasdaq:INTC) has extracted the largest chunk of COMPX flesh. Since September 1, 2000, the chipmaking giant has shed $312 billion of market value, falling from an all-time high of $75.82 to today's close of $28.56.

Unfortunately, traders spooked by the New Economy today could find no sanctuary in the Old Economy. The Dow Jones Industrial Average (INDU) finished down 141.60 points, or 1.33 percent, to 10,495.28 after trading higher 45 points in anticipation of a cut in the fed funds rate. But once it become obvious that none would be forthcoming, the INDU sold off through the remainder of the session. Of the 30 INDU stocks, only seven were able to close in the black. And of the seven, the largest dollar gain came courtesy of pharmaceutical giant Johnson & Johnson (NYSE:JNJ), which closed up a paltry $1.38 to $97.33.

With today's close, the INDU is once again trading below supposed support at 10,500 and at an 8 percent discount to its 52-week high of 11,425.

So, with the COMPX down 58 percent and the INDU down 8 percent, are we now officially in bear-market territory? According to the final arbiter on such matters, the S&P 500 Index (SPX), that depends (sorry, for being so wishy-washy). With today's close of 1,239.94, the SPX is trading at a 20 percent discount to its all- time and 52-week high of 1,553, which means we are in a bear market (a bear market being a 20 percent pull-back).

However, if the drop in the SPX is calculated using closing prices only, we're not in a bear market. Based on closing prices, the SPX is trading at a 19 percent discount to its 52- week closing high of 1,527.

You make the call. To me, it feels like a bear market.

One place where investors and traders did find sanctuary today was the bond market. Despite the disappointment of no fed funds cut, the 10-year Treasury note finished up 12/32 to yield 4.91 percent while the 30-year government bond moved higher 9/32 to yield 5.335 percent.

Over the past six months, 10-year note holders have seen their investment appreciate roughly 7 percent while 30-year bondholders have seen their holding's appreciate roughly 8 percent (not the most exciting returns, to be sure, but it beats a 48 percent loss any day).

On the economic docket today, fourth-quarter GDP was revised downward to an annualized 1.1 percent rate, which marks the slowest GDP growth rate since 1995. Not surprisingly, personal consumption slowed during the quarter to a 2.8 percent annualized rate, the slowest since early 1997.

Tomorrow traders will be eyeing the National Association of Purchase Managers Index (NAPM), which is a monthly composite index based on surveys of 300 purchasing managers nationwide representing 20 industries regarding manufacturing activity. An index value above 43.9 generally indicates an expansion of the overall economy. Don't look for that number on Thursday; the market is expecting a reading of 42.4 percent.

Okay, so what's a trader supposed to do? I know at least a few of you are still expecting an inter-FOMC interest rate cut. I wouldn't hold my breath. The fed funds future market is priced for a 4.93 percent rate in April, which means traders are expecting at least a 50-basis point cut for March. However, for those folks holding out hope for a cut between now and March 20th, the futures market is priced for a 30 percent chance of that event occurring. In other words, there isn't much of a chance.

Nevertheless, that doesn't mean all is lost for traders long this market. Many market pundits are calling for the COMPX to bottom between 2,000 to 1,800, or 7 to 15 percent below its current level of 2,151. Let's face it, in this market we could be there by the end of the week given recent pessimism. But I think this translates to a risk/reward scenario that favors the long trader, at least the longer-term orientated long trader.

Because of overwhelming market pessimism, I'm becoming more bullish. I think the market needs a sufficiently high wall of worry to get back on the right track, and I think we now have that wall (as faithful readers of this commentary are undoubtedly aware).

Finally, I like this market just for the fact that some semblance of normalcy has return. In 2000 traders had a penchant for treating bad news as good, and vice versa. Remember when traders would sell on a particularly strong employment report or buy despite a company reporting accelerating losses? Now, many of us have come to our senses and realize that marginally higher unemployment curbs consumer confidence, and, therefore, consumer spending, while growing losses and earnings disappointments are indeed an economic negative.

With that said, after a two-year hiatus, I think we are finally re-entering a market that favors the rational trader, so trade rationally.

S.P. Brown


Copyright 2001

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