October! What other month has given market watchers more drama, more excitement, more tumult? Since October began, its given us an Advance/Decline Breadth Thrust, suggesting the Market will be at least 10% higher 6 months hence; Two weeks later, it gave us a VIX “complacency” signal, which suggested an imminent short term correction.
These two signals – one short term, one intermediate term – were followed by today’s stupendous 7.2% GDP number. That 20 year high reading is obviously not a sustainable rate of growth. Much of the gains have come from military spending in Iraq (defense sector), tax rebates (retail), home building (housing sector), and technology.
Historically, the Presidential election cycle has provided good guidance as to the lows and highs of market rallies. The period leading up to the mid-term election often marks a market low; Similarly, market peaks often happen in years when there is a Presidential election (see chart nearby).
If today’s action continues to disappoint – despite the upside surprise in GDP – expect to hear ALOT of technical chatter about the inability of the indices to push through resistance despite the better than expected GDP number. That resistance is starting to look more and more like the market’s nemesis for the rest of this year: On the SPX, sellers appear every time we approach the 1050-54; The NDX top shows similar resistance at the 1960-67 level; Dow Industrials resistance is at 9850 level.
One often hears technical analysis denigrated as a self-fulfilling prophecy. In the present case, that critique could very well be right. Everyone is looking at the same line in the sand, and it is more likely than not to be attacked and defended with great vigor. The resistance numbers mentioned above are potentially the 2003 highs; Even if those levels are breached, unless it is on a very strong volume thrust, we suspect new highs may be short lived.
After this morning’s initial bout of panicky short covering, it appears to us as if the profit takers are starting to take over. If the indices cannot make hay while that GDP sun is shining, than most of the economic recovery has likely been priced already into the markets.
With the Nasdaq now up nearly 45% for the year, we are looking for a bit of digestion at least a few weeks – possibly until Q1 2004. If you are long, it is advisable to tighten your stops. The trend remains upwards, but let the market take you out of positions, rather than “guessing” the top. If you missed this rally, we expect there will be better entry points ahead. Be patient, and pick your spots.