Chart Fissures Suggest Something Big Is About to Happen
by Martin Goldberg CMT. October 21, 2004
Technical analysis is a game of cold calculations, not feelings and emotions. So if I were to tell you that something big in the stock market is about to occur because I feel it in my bones, it wouldn't be the product of a technician – it would just be stray intuition. Yet there have been many fissures occurring in many technical charts over the last few weeks that may provide substantiation for my premonition. I don't know what it is specifically, but it involves lots of debt. I feel it in my bones – something big is about to happen.
Following is a one-year chart of Fannie Mae. It dropped on that "little corruption thing," and then recovered on relatively low trading volume. Now it is heading down again with a loss of momentum and a pick up in volume. Something big is about to happen.
Yesterday Countrywide Financial, a prime beneficiary of the credit bubble, put out what appeared to be a breakaway (down) gap. Late in the session almost miraculously, buyers moved in. Yet it appears that something big is about to happen.
The momentum indicators shouted a warning on Countrywide before it broke Wednesday. When one of the biggest beneficiaries of the consumer credit revolution takes a major stock market hit of 12% in one day it suggests that something big is about to happen.
A leader in the homebuilder revolution – Pulte Homes – overestimates market prices in Las Vegas and then finds that buyers under contract are not coming to settlement. The homebuilder then lowers prices, including discounts for buyers under contract, and makes them sign a contract certifying that they are owner-occupying and not speculating for a price rise and quick turnover. The builder insures investors that this is just a local problem that should not impact other builders. Yet the stock drops and decisively breaks an uptrend that is over a year old.
Two weeks later Greenspan gives a speech where he suggests that levels of homeowner debt are manageable and should not adversely affect the economy. In spite of this, other homebuilders report excellent quarterly results, share buybacks and stock splits. (No insider buying.) Something big is about to happen.
Before they were largely a consumer finance company, it was often said that as General Motors goes, so goes the economy. May be this is still true. General Motors, the maker of the Hummer, has gapped below an important support resistance area on the chart. How are they dealing with the slowing Hummer sales? Are they retooling for vehicles that are more appropriate to the high fuel costs? May be they are, but it appears to me that they are advertising the Hummer more.
The dollar takes out multi-month support, and appears to be in free-fall over the last week.
Something big is about to happen.
Eliot Spitzer is investigating the insurance industry. The stock is suggesting, "If you look, you will find."
As a group, financial companies account for a disproportionate amount of the US corporate earnings. Yet in spite of a rallying bond market, the financials seem to be dropping precipitously. This is shown in the S&P percent bullish stocks (% with bullish point-and-figure charts). A leader of the last rally is suddenly lagging badly.
Something big is about to happen.
There is another reason why I feel that something big is about to happen. That is that something big has not happened since the apparent Market top in January of 2004. This is over 3 quarters. While nothing big has happened, the major stock market indices may have shown their hand by tracing bearish intermediate patterns. Here are the one-year charts of a few of these stock market indices.
Something big is about to happen. And that something probably is not bullish.
The Dow was little changed (9,866), the S&P 500 Up 3 (1,106), the Russell 2000 up 1.1% (577), and the Nasdaq up 1.1% (1,953). The clear leaders were the Internet stocks on the coat tails of Ebay, which reported results that met, so called analyst expectations. Internet stocks were all up including some second tier stocks up double-digit percentages.
Gold was up $4.04 ($424.16), silver up $0.16 ($7.31), the XAU up 0.40 at 102.2, and the HUI up 2.40 at 231.90. The 10-year note was down marginally after a morning rally. The dollar index continued its apparent free fall, closing at 86.06.
I think that most of what is going on in Internet stocks is not about these companies' fundamentals, but about borderline stock market chicanery. (This is not too tough to believe.) Take the case of the fund manager who manages a "value" fund. Although I don't have evidence that is not circumstantial, it seems to me that he likes supplementing his portfolio with an occasional short squeeze to the benefit of his shareholders. This is understandable since there is such precious little of actual value in the stock market to invest in, so an occasional "sure thing" becomes a good performance enhancement. Here is how it is done. A manager of a large fund takes a position in a highly shorted household name stock. Then he will tell anyone asking and those in the media whether they ask or not that this household name is a "good value" and that he is purchasing it in the open market. Such media releases show up often in Internet sites such as Yahoo and Marketwatch.com. The effect is that this so called "value investor" creates a short squeeze with his highly publicized purchases. It is almost a sure thing since by knowing the short interest and where the likely stop losses are, you know just how much buying pressure is needed to make the machine run by itself for the stock to go up to where you can liquidate at a profit. With a big enough fund, you can create the needed buying pressure to create a "sure thing."
What are good candidate stocks for such trading tactics? Eastman Kodak, Amazon.com and Google have seemed to be ideal. Is such behavior by fund managers illegal? Probably not. If anyone asks, they can just chant the bullish case for why Amazon.com is a "value stock." Which brings me to Google. The action in Google stock is reminiscent of the top of the March of 2000 bubble. If this is the echo bubble, then there are similarities between then and now. At that time, the major indices were in clear and consistent downtrends when the Nasdaq topped. This time around, the major indices (including the Nasdaq) are in clear downtrends while the internet stocks may be topping. Tomorrow should be interesting, as the Street loved Google's results (or it could be someone's "sure thing"), but didn't like Microsoft or Amazon's results. After hours Yahoo is trading at its 52 week high, and Amazon and Microsoft are in the tank. Meanwhile shares of Google are up an additional 8% after finishing the day up over 6%. It is either a short squeeze, or there were some great "value investors" on that one!
Here is a side-by-side comparison between the Nasdaq composite's 18-month top in March of 2000 superimposed on the current action of Yahoo, which is representative of the internet sector in general.
Ponder this chart between innings of game 7 of the LCS, and have a great evening.
© 2004 Martin Goldberg