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Dow Jones S&P 500 NASDAQ 10-Year Note
10,328.89 1,102.47 2,211.69 35.46
Oil *
73.88
UP
20.63
UP
6.40
UP
31.64
UP
0.59
10 Yr
3.55%
SPDR Gold
108.95
+0.20%
+0.58%
+1.45%
+1.69%
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Dow Jones S&P 500 NASDAQ 10-Year Note
10,328.89 1,102.47 2,211.69 35.46
Oil *
73.88
UP
20.63
UP
6.40
UP
31.64
UP
0.59
10 Yr
3.55%
SPDR Gold
108.95
+0.20%
+0.58%
+1.45%
+1.69%
Data delayed 20 minutes

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Commentary: StraightShooter
*New* Alerts! Please click here...

Stage Is Set for More Meaningful Advance
By Tony Dwyer

6/28/01 11:28 AM ET



We finally got the news we were looking for. Now what? The Federal Reserve lowered short-term interest rates Wednesday by 25 basis points, the sixth reduction since the beginning of the year. The cut's size was within expectations, although many were hoping for a 50 basis-point cut. Actually, a cut from 4% to 3.75% is roughly the same percentage drop as a cut from 6.5% to 6%. Again, there continues to be no sense of moderation regarding expectations. Either way, this rate reduction should be considered another positive for the equity market.

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Be Patient: The Fed Cuts Will Work, Just Not Overnight
The Fed's Rate Cuts Aimed at Reviving Goldilocks May Stir the Inflation Bear
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The Fed Is No Longer Banks' Best Friend

These have been some of the arguments in the media for why stocks may not recover:

  • The Fed doesn't matter. The commentary continues that the Fed hasn't done enough and that the economy and therefore profits continue to drop. The economy and profit picture do continue to be dicey, but it is still way too early to believe the Fed action is not working. It normally takes at least six months for the economy to respond to any interest-rate action. That means that not enough time has passed since the first rate cut in January to take full hold. There were five more after that. Maybe the Fed's action won't work this time, as it always has, but it is still far too early to tell.

  • Higher energy prices won't enable the economy to recover. This has been a consistent argument over the past year and a tough one to debate. Higher utility and gas prices eat into disposable income and probably have a much bigger psychological effect than a dollar-related effect. Once a topic becomes a political hotcake and appears in headlines everywhere, the bad news is probably already discounted in the economy and therefore the market. Oil and natural gas prices have moved dramatically lower since January, suggesting that the only component of inflation that has been worrisome no longer is.

    Oil Slips Down
    Source: Baseline Inc.

    Natural Gas on the Slide
    Source: Baseline Inc

  • The major market indices are not yet oversold enough to lead to a meaningful bounce. Most major bear markets end with a climactic type of low. This one was no different. The lows in late March and early April had all the characteristics of a climactic low. Historically, each bear-market low gets retested. The only one that was different was the bear-market low in 1982. What the markets normally do after a dramatic decline is experience a powerful oversold bounce, followed by a lower volume, a fear-driven retest that brings the market back into oversold territory and sets up the most meaningful advance off the lows. In other words, re-entering deeply oversold territory without making a new low creates a positive divergence. The markets now appear to have successfully retested the climactic lows.

    S&P 500
    Source: Baseline Inc

    Nasdaq Composite
    Source: Baseline Inc

  • The market can't recover without economic or earnings improvement. The four-week average for weekly unemployment claims is now the worst since the early 1990s. That makes one wonder how we could have had a 34% gain in the S&P 500 from the retest lows in 1991. Obviously, a great deal of economic improvement wasn't taking place. During 1991, quarterly earnings for the S&P 500 dropped by more than 15% in each quarter on a year-over-year basis. How could the market recovery take place without the economy and earnings tagging along? The answer is that most of the negatives -- from a broad market point of view -- were already discounted in the bear market of 1990.

  • The Honeywell (HON:NYSE - news - commentary)-General Electric (GE:NYSE - news - commentary) merger may not go through due to European Union opposition. It certainly appeared that no deal would happen due to the political environment in Europe, which would put any future transatlantic deals at risk during a time of global consolidation. It's being reported Thursday morning that a deal may still get done. The EU played hardball, and the markets responded to that before the U.S. government had time to respond. We have a bigger ball, and the deal may yet get done.

    The bottom line is that every aspect of the market looks worrisome, and as a result, stocks are in the process of retesting their lows. None of the negatives is new, and anyone who wants to sell from an investment perspective has probably already done so. That sets the stage for a more meaningful advance. At worst, that should bring the markets back toward the upper end of the trading range -- and at best sets the stage for the beginning of a new cyclical bull market.

    Anthony F. Dwyer is the chief market strategist of Kirlin Holding Corp. and managing director and chief market strategist of Kirlin Securities, its wholly owned broker-dealer subsidiary. Before joining Kirlin, he served as director of research and chief market strategist of Ladenburg Thalmann & Co. At time of publication, Dwyer had no positions in any of the securities mentioned in this column, although holdings can change at any time. He welcomes your feedback and invites you to send it to Tony Dwyer.
    Send letters to the editor to letters@realmoney.com.
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    Sorry, the page you requested could not be found

    Sorry that you couldn't find the page you wanted.

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    Content Search:

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    Dow Jones S&P 500 NASDAQ 10-Year Note
    10,328.89 1,102.47 2,211.69 35.46
    Oil *
    73.88
    UP
    20.63
    UP
    6.40
    UP
    31.64
    UP
    0.59
    10 Yr
    3.55%
    SPDR Gold
    108.95
    +0.20%
    +0.58%
    +1.45%
    +1.69%
    		Data delayed 20 minutes

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    Latest Headlines