SAN FRANCISCO -- I'm off to see
the Wizard, who is speaking in Oakland, so my comments on today's action will be limited. But given the ongoing parsing of yesterday's reversal -- its significance or lack thereof -- I thought the following would be of interest.
peaked at 1174.26 yesterday, and myriad observers have noted that the index has topped out at similar levels several times recently. A sustained breach of the index's Dec. 5 intraday high of 1173.62 has yet to occur, making it "resistance" in technical parlance.
In fact, there is a "whole slew of resistance" in the 1174-1179 area, according to Steve Hochberg, co-editor of
The Elliott Wave Financial Forecast
in Atlanta, who noted that the range is the upper band of a "trend channel" connecting the S&P's March 2000 high to its May 2001 high and near its 200-day moving average.
I called Hochberg today to confirm what a reader emailed yesterday: That 1177 marked a 38% Fibonacci retracement of the S&P 500's fall from its all-time intraday high of 1553.11 in March 2000 to its Sept. 21 intraday low of 944.75. (Here's the math: 1553.11 minus 944.75 equals 608.36, 38% of which equals 231.18. Adding 231.18 to 944.75 equals 1175.92.)
Hochberg confirmed this and noted that 1174-1179 is also a 62% Fibonacci retracement of the S&P 500's fall from its May 22 high of 1315.93 to its Sept. 21 low.
"Our basic premise is crowd psychology is patterned -- it's hard-wired in our brains," he said, summing up Elliott Wave theory. Retracements of 38%, 50% and 62% are "natural levels the crowd usually finds as resistance or support. It's the unconscious behavior of the crowd."
Heisenberg's principle suggests that widespread knowledge of such levels -- available through many software packages -- would change the outcome, but Hochberg said that has not proven to be the case.
If yesterday did mark a significant trend reversal -- and this is still subject to debate -- 1088 (a 38% retracement of the S&P's move from Sept. 21 to Dec. 5), 1060 (50%) and 1033 (62%) are key areas of support, Hochberg said, noting that the 50% retracement level has further significance because it's accompanied by chart support.
Conversely, "if we keep moving sideways -- banging up against the
1174-1179 area and are able to bust through on good volume, that'd be a bullish sign," because it would signify there's "underlying strength in the move," he said.
Speaking of which, doesn't it seem the bears have gotten awfully cocky and the bulls cowed by yesterday's move? From a contrarian standpoint, that augurs another rally attempt sooner rather than later.
I say that as someone who's been skeptical of the rally's long-term sustainability and aware that
reported yesterday that bears in its survey fell to 22.7% from 24.4% a week ago.
The New Year Doesn't Owe You Anything
Wednesday's late-day reversal probably caused some market players chagrin, but Thomas McManus, equity portfolio strategist at Banc of America Securities, was probably not among them.
McManus remains a disbeliever in both the resurgent tech group and the commonly held view that stocks are destined to advance smartly this year because the last two years have been tough.
Regarding techs, "Investors will lose patience with stocks that have moved up markedly but still face overcapacity and slack demand," McManus predicted in a conference call Tuesday (the reporting on which was preempted by more pressing market developments).
But it's not just tech valuations that have McManus maintaining a defensive recommended allocation of 55% stocks, 40% bonds (with one-third each in corporates, Treasuries and inflation-protected Treasuries) and 5% cash.
In March 2000, the
price-to-earnings ratio of the S&P 500 was about 25, while the P/E of the Value Line Arithmetic Index was 13: "A historic opportunity in the broad market," he recalled. Today, the S&P's forward P/E is about 23.4 while the Value Line Arithmetic's is around 20, leading McManus to surmise that "the tremendous opportunity is gone," and that it will be "tougher to get gains in the average stock" in the coming year vs. in 2001, when the Value Line Arithmetic Index rose nearly 11%. Additionally, McManus noted that the median average gain for stocks in the S&P 1500 (S&P 500, S&P 400 MidCap, and S&P 600 SmallCap) was 4.6%.
Considering those figures, "I don't think the market owes us that much in 2002," he said. "Observers think because we've had two down years for the most popular averages, the market owes us. I don't think that's the case."
Sort of like the market's version of that scene in the original
, when Adrian yells at her no-good brother: "What do I owe you, Paulie, what?"
In addition, McManus noted the Value Line Arithmetic Index hasn't had a down year since 1994, when it fell less than 1%, and hasn't had a significant down year since 1990, when it lost 17%. "
To all those people claiming it's a brand-new bull market, where's the bear
market that precedes it?" he asked, speaking of the performance of the average stock vs. major indices.
previously, McManus expects low single-digit returns for the popular averages this year.
John Skeen, Banc of America's director of portfolio strategy, followed McManus on the call and got granular, offering the firm's Fresh Money Buy List for 2002.
The offerings for 2002 include what Skeen dubbed "two plays on the tightening natural gas market,"
"Our view is natural gas production is going to be inadequate as the economy recovers somewhat," he said. B of A foresees "looming shortfalls" in the next two to two-and-a-half years due to faster "depletion rates," unless there's a "massive new discovery" or a "dramatic decline" in U.S. electricity usage.
Other names on the list are:
Banc of America has done underwriting for Foot Locker.
The B of A Fresh Money list, which is not static, rose 14% in 2001 and is up 34.8% on a total return basis since its inception in April 1999
Aaron L. Task writes daily for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send your feedback to
Aaron L. Task.