Better late than never: The market’s overbought condition
finally reached the point last week where the buyers became exhausted, leaving
the sellers to dominate trading. While a lot of commentators foisted blame on
Oil, as well as Interest Rates or even Iraq, we find those rationales
singularly unsatisfying: Oil has been
flirting with $60 for weeks, Interest rates have been going up for a year,
while Iraq has been messy for even longer. Pat explanations for the markets’
daily gyrations rarely ring true to us.
As we noted last week,
Mutual funds were running with bearishly low levels of cash on hand. That’s often the fuel of sustained moves higher, and when they
run out of gas, so too the market. But as we also noted, hedge fund cash is
(anecdotally) at relatively high levels, buttressing our expectations that the
consolidation lower remains well contained.
The issue for resolving this retracement may have more to do
with time than price. After the fast move off of the April lows, the indices
quickly got overbought, but never backfilled. All the while, Bullish sentiment
quickly rebounded; With the benefit of hindsight, we can see sentiment went too
far too fast. That combination of Bullish complacency and a technically
extended market condition is what led to the selling – not Oil, Rates or Iraq.
Indeed, since October 2002, Oil has doubled, and with it the
Nasdaq. The inverse correlation many seem so found of blaming the Market’s woes
upon seems to come and go with such irregularity that we hardly find it
instructive to quote Oil as the basis for the selling.
“Imagine,” we were recently asked “where the Nasdaq would be
if Oil were still at $25 a barrel.” Our answer is “probably a lot lower.” Why? Many of the same factors that have
driven Oil higher have also been driving the Nasdaq upwards: Massive government
stimulation, ultra-low interest rates, and increasing Globalization.
At the present juncture, we expect not so much more downside
price-wise as we do a period of consolidation, as mutual funds refill their
coffers with fresh ammo. Before the sell off began, Nasdaq was way above its 50
day ma; now, its only 25 points off.
We wouldn’t be surprised to see the next equity bottom
formed as Oil moves towards $65. Such a peak could correspond with a low in
equities, and fit in nicely with our Bear Trap theme. Watch that price, as well
as the tech index’ support between its breakout point and its moving average
(2000-18) for a good risk/reward entry long point.