August 21, 2011
“The investor’s chief problem – and even his worst enemy – is likely to be himself.”
— Benjamin Graham
Technically, shares did what they had to do last week. The first index to test its Aug. 9 intraday low, the Nasdaq Composite, did so Friday on lower volume with fewer 52-week lows than on the initial low, a plus. This despite Friday’s negative wash-and-rinse action.
On Friday, the following chart of the Industrials shows 16% of NYSE issues to be in long-term uptrends, defined as trading above their 200-day. This compares with just 7% of stocks on the initial low. This indicates that the average stock held up better on last week’s test than did the blue-chip average.
Another measure of the average stock, the number of 52-week NYSE lows, is shown below. It corroborates the message of the prior two charts: The weakness in the averages masks a better underlying tone to the broad market.
As they say, the charts don’t lie. Regardless of what one’s preconceived notion of what might or might not transpire in coming weeks, the test looks good, so far.
Having said this, the fact of the matter is that if the economy goes into recession, the market should experience further downward revaluation from present levels. In other words, a recession is not baked into the cake, in our view. Attempting to predict whether growth firms, lapses, flat-lines, or is nonexistent is something for economists. We can only use the market as our indicator, which, fortunately, is all that is needed.
Of critical import, indeed more so than anything else in this report, is the action of the liquid glamours. Baidu (BIDU), as good of a proxy for institutional sentiment as there is outside of Apple (AAPL), began selling off last Monday (Aug. 15) to kick off a new leg down one day before the Naz began its own leg down. In itself, this was telling.
BIDU sits 23% off its high. This should not be surprising. The stock ran up 1,551% since its December ’08 low and is entitled to more than just a minor pullback.
Apple, the last of the Mohicans in this cycle, is holding up the best among the glamours, off 12% from its high. It held its 50-day two weeks ago, unlike BIDU. Like the Nasdaq, the volume on Friday’s test was less than on the prior low of Aug. 8.
There is little else to say from the standpoint of the long-only participant. We would not try to guess at where the bottom is/will be. We would only note that when it arrives, whether next week or next year or some other time, it will no doubt be accompanied by much negative sentiment among participants. This is how bottoms are formed.
In summation, the averages test of their Aug. 8 lows is thus far a positive one straight out of a textbook, and shows that the broader market holds up better than the headline averages. Even so, there is no sign that large participants are ready to drop their liquidation campaign of growth stocks.
Cash is king.