Get Off the Bull Train: Quote for Quote, the Chartist Locks Horns
Helene Meisler
07/13/01 - 09:10 AM EDT
"The Microsoft (MSFT Quote - Cramer on MSFT - Stock Picks)
news changed everything." "Everyone is bearish." "Don't you know that Nasdaq short interest is at an all-time high?" "Don't fight the Fed 
."
These are just a small assortment of quotes from the emails I received after Thursday's rally. Seems folks are just dying to have me jump on board the market's bull train.
Of course, I've made my own little list of quotes, taken from some recent earnings reports.
"The worst is not behind us" came from Juniper (JNPR Quote - Cramer on JNPR - Stock Picks) during its conference call. The stock was up on that news. "Revenue could be down 10% to 15% in the third quarter, which could result in a loss" came from Advanced Micro Devices (AMD Quote - Cramer on AMD - Stock Picks). The stock was up after that news. "This Argentina situation is actually good for the U.S. The flight to quality will bring more money to the U.S. from the emerging markets" came from a CNBC report Thursday.
All this brings me back to my theme for the week: sentiment. Many people seem to think the
Investor's Intelligence numbers aren't a good indication of the sentiment; instead, they believe a lot of bearishness is out there. If that's the case, then why does everyone seem to be ignoring the bad news? Does that signal too many bears out there?
Sure, it could very well be that the bad news is already in the stocks, but why did so many stocks have more volume Wednesday than they did Thursday? (Actually, two groups broke from that volume trend: drugs and biotechs. Those sectors had higher volume Thursday than Wednesday, but then again, they were down Thursday.) If Microsoft's news is so fabulous, then why, on such a big up day, did it not manage to surpass its intraday high, made when it got a reprieve from its legal problems?
What about breadth? Thursday provided us with a net differential of positive 773 on the
New York Stock Exchange, while the
S&P 500 tacked on 29 points. Compare that with the S&P's 29-point drop last Friday, when the advance/decline line lost 1,031. The math makes it easy: If we compare the two days, the S&P is flat and breadth has lost about 250 issues. I prefer breadth to expand, not contract. Then again, when folks buy tech stocks, they tend to do so at the expense of other groups, so this is typical action for breadth during a tech-led rally.
Let's dust off that
Dow Jones Transportation Average chart once again. It's been about a month since I showed the comparison, and it still bears watching. As a refresher, when this average came off its bear-market low, it rallied about 30%, about the same percentage by which the
Nasdaq rallied off its April low.
After their rally, the transports saw a huge sideways move, within about a 10% range. We're not looking at an exact replica when we compare the Nasdaq to the transports, but the transports are a useful guide.
The transports backed off after their two attempts to exceed that initial 30% rally (points A & B on the chart). That decline actually made a marginal new low (point C) before heading back to the upside, similar to the Nasdaq these past few months. But that lower low did not lead to a huge upside breakout. Instead it took us right back to the top end of the trading range. I suspect that the rally we're seeing right now will also stay within its trading range.
The statistics, namely breadth, aren't great. I don't believe sentiment was bearish enough for this to have been a great bottom in the market. It seems to me that this rally just kept the trading range theme alive.
Overbought/Oversold Oscillators
For more explanation of these indicators, check out The Chartist's
primer. 
