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HIGHLIGHTS 2001
Our approach early in the year was to look for the pressured stock
groups to capitulate (the corporate bond market did so at the end of
November). The ChartWorks called the sharp rally in the Nasdaq and the top
in the Dow which, until then, had been playing opposite to each other.
There was a probability that the Naz could outperform as the DJIA
declined to our end of March target. Instead, its plunge took out the
techs and set an important bottom near the end of March.
March 21, 2001: Bottoming A Process Not An Event
The stock market is close to bottoming. This washout includes most
senior indexes and is accompanied by widespread dismay. Even the optimists
are becoming downcast.
Our Research
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The ChartWorks
unique election model on the DJIA
expected as much as a 20% decline to be completed by the end of this
quarter. This is virtually in. (See editions dated January 17, February
21, and March 13.)
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With a 24% decline, the
S&P exceeded the 22% plunge rule whereby the first week following sets
up a tradable "buy". (See March 13)
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The list of "exhaustion
alerts" on individual stocks has grown to about 50, which is an
indication of dismay. (March 16)
Outside Research
Financial Side
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Our Bank Trading Guide has
stabilized at a multi-year low. (See March 16) The Guide is usually
coincident with lows and a favourable "test" is developing.
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Corporate bonds and the future
have accomplished a targeted price and the former is at a high momentum
RSI. A rollover could be associated with an improving stock market.
Our March 16 Pivotal Events concluded,
"Fortunately, this acute phase of liquidity distress seems close to
concluding."
The bottoming process could take a couple of weeks. A tradable rally
within the bear market could follow. [Nasdaq
Low 1639 April 4]
May 25, 2001: Checklist For A Top
[THE HIGH WAS ON MAY 22]
A
recovery in the "good stuff" has been possible from around
November until around April. Within this, the DJ bond index was likely to
set a significant top in March (4).
The other items include the stock market, base metal prices, and narrowing
credit spreads. That they are in line close to target merits a (4).
Are There Signs Of
Speculative Enthusiasms? Yes! The
media have been faithfully reporting them.
How Sound Is The Fundamental
Story? There seem to be 3 aspects:
the strong stock market and recovering commodities are anticipating an
economic recovery later in the year. Policymakers can turn the economy
around and, more specifically, this is guaranteed by the
"vigorous" cuts in the discount rate.
The doubtful aspect of this is that proponents and policymakers did not
anticipate the contraction.
Both the enthusiasms of market participants and the confidence in
policymakers are remarkably similar to their equivalent in March-May,
1930.
Technical Confirmation:
Our May 4
edition noted the rapid return of complacency and, within high volatility,
its attendant hazards. The conclusions were that, while objectives
determined in the gloom of March 21 were being achieved, it was
appropriate to let the favourable trends run to excess. Perhaps this has
been accomplished.
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- Historically, important bottoms that cleared the liquidity problems
with a high volume day of 4 times average occurred in October, 1929 and
1987.
- September 17 trading volume was 2 times.
- At significant bottoms, the ratio of downside to upside volume can
get to 9:1. Yesterday, it was 6:1.
- The "news" could not be more devastating.
- This is within a cyclical bear market within a probable period of
financial distress from September until around November.
- Stability, then a brief rally within the negative period seems
possible.
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