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Market Lore, Virgin Territories and Apple’s Geometry
Wall Street is full of colorful trading lore. In today’s hyper extended economy of paradoxes this market lore may be the last valid reservoir of wisdom we have left for evaluating the novel historical situation we’re living through. Bull markets climb a wall of worry, as they like to say on the Street, and bear markets fall till people get really scared. On Friday, the Dow finally fell back below 10,000 for the first time since last October and many of the US economy’s premier blue chip stocks are near 52 week lows. The Dow is clearly in a bear market now. Across the board many more stocks are down than up, but there isn’t enough ‘fright’ to go around yet for a proper bottom. Meanwhile, on the Nasdaq, a hand full of the New Economy’s anointed ones trundle ahead, ever higher, like climbers on Mt. Everest, starved for oxygen and reason. The trend of the divergent indices continues, much to the chagrin of every market observer. The divergence is now so great that even old Wall Street hands have to admit we are in virgin territory. The financial press is peppered with statements of resignation, like this one from Sam Burns of Ned Davis Research, "The way the market is now is remarkably different from any time in the past 30 years." Or from the Bernstein Research, a study of the last 45-years of stock valuations, "The current era exceeds any in our database in both concentration and valuation, making the risk of this setting unprecedented." Both quotes are from the Wall Street Journal. No one alive has ever seen anything like today’s market dynamics up close and in real life. There is just too much novelty to make accurate predictions about what the stock market will do in the next five months, much less the next five years, although optimism is at epidemic levels. Never bet against momentum. History Bytes So far, understanding history has been counter productive to analysts trying to forecast the market direction this decade. There has never been anything like the Internet. There has never been egalitarian access to global equity markets before now. There has never been a steady pace of upwardly trending productivity. There has never been an economic boom that lasted so long without engendering inflation. There has never been a period in history so dominated by technological innovation. History is full of stock market equity bubbles, yet none is anything more than a remote analogy to what is going on in today’s global market. Nevertheless, be forewarned: Every major market bubble–going back to ancient Rome in the west and the Japanese rice commodity markets of the 1500’s in the east–has ended badly for, at least, the investors left holding the bag. Bubbles pop, but you can never call the top. (More trader lore) Last week I pointed out that it’s not particularly useful to assign a fundamental price value to a stock. "The real value (of a stock certificate) is determined at any given time solely, definitely and inexorably by supply and demand." says the TA guru, Robert Edwards. The fact that a stock’s price is not primarily a function of its intrinsic value is probably the most important and counterintuitive point for beginning investors to swallow. The price value of biotech, Internet, semiconductor and wireless technology stocks are soaring ever higher, while blue chips on the NYSE are languishing because investors are a forward looking–if media driven and unimaginative–bunch. It’s easier to imagine how Akamai, Amgen or Yahoo will grow exponentially than to envision how Coca-Cola or Merck will leverage their businesses with innovative implementation of digital technologies. Tech stocks are soaring merely because the demand for them is soaring, whatever their price. There is no complex analysis going on here. Just as the Neilson ratings for Who Wants to be a Millionaire? say nothing about the quality of the show, many investors buy what is sexy not what is wise. Until just recently the conventional wisdom was that no more than about 10 percent of your investment capital should be tied up in volatile tech stocks. Now, the standard thinking is no more than 10 percent of your investment capital ought to be in any one technology sector! As tech stocks peak and the blue chips bottom investors may realize they have over looked the most obvious effect of the digital revolution. A sustained surge in productivity gains and earnings growth should eventually come from the old blue chip franchises as they finally tune their operations into the paradigms new economy. When the current fashionable demand for tech stocks slacks off–even just a bit–the danger is that investors holding rickety, highly extended positions will rush for the door, as if someone yelled fire in a crowded theater. Surely, all logic would dictate that such a scary market correction has to–even needs to–happen on the Nasdaq. (Market lore: Logical investors are broke investors.) Until then the sky is the limit, remember bubble tops are incalculable. My market weather forecast remains the same: Heavy volatility with an increasing chance of market downdrafts and continued spotty irrational exuberance in some tech sectors and IPOs (Barron’s hyped cell phones connecting to the Internet as the next big thing). Investors keep the wallet on the hip. Traders: Have fun, but don’t take an eye off the tick by tick action. This highly networked market can turn on a dime. Update on Apple’s Ascending Triangle Last week I made much ado about Apple’s ascending triangle chart pattern. AAPL magically traded within the triangle all week, venturing up to the supply line at $119 and finally retreating to the demand line at $110 in a late Friday afternoon slump. The big break out never came and now the price is stuffed tightly into the apex of the triangle. AAPL, by virtual of sheer geometry, has to break out this week. But will break out be to the upside? That brings to mind another old trader’s myth: Downdrafts never culminate on Fridays. Without some reason provided by Apple to spark a surge in demand, Apple will follow the market. By my reckoning the Nasdaq has no right to go higher. But hey, what do I know? Knock on wood. Your comments are welcomed. |