The Chart du Jour

Target on Capitulation

February 7, 2001

By, Barclay T. Leib

Chart constructed using Advanced GET End-of-Day

"Whereas deteriorating fundamentals has normally been the signal to sell stocks, the last few weeks has seen a bizarre pattern emerge. Most stocks are not going down after reporting earnings that are not simply worse than expected, but in some cases are much worse. Many companies, faced with the most difficult environment in the past 3 years, are also lowering earnings guidance for the next few quarters. And yet the stocks do not go down, and in some notable cases they've gone up dramatically as investors are willing to bet on the hope of an improved outlook in the second half of 2001."
So wrote one eloquent long-short fund manager to describe the market action in January. When stocks don't go down on bad news, sometimes that means something technically prescient and favorable is transpiring. But it can also mean that the market is in a stage of dangerous denial, hiding behind the false hope that two Fed rate cuts will somehow change the bearish environment.

But with consumer spending never having actually slowed down markedly, lower rates will likely cause little demand elasticity. The problem has not been with the consumer -- charge cards are still actively in hand. It has been with corporations that over-spent on investment, and over-borrowed to pay for it. As pointed out recently by Ray Dalio of the Bridgewater Group, what two rate cuts have already brought us (and will continue to bring us) is simply a renewed surge of corporate debt issuance to add to already leveraged balance sheets. The Fed may have offered business a momentary helping hand, but longer term, it is likely pushing on a stagflationary string.

So it is that we present above our Chart du Jour today as to where this market could head -- looking at the Nasdaq 100 Fibonacci price rhythm -- if denial of the fundamentals turns to investor capitulation. Recently the Nasdaq 100 has been stuck between its 200-day moving average support down near 2,300 and its 100-day moving average resistance just above 3,000. For all we know, it could stay bounded within this range for some time. But if there is a risk of any breakout at present, it is all to the downside.

Should the Nasdaq 100 fall to our anticipated low near 1735, George W. Bush will be facing the same recessionary quagmire his father faced back in 1990-1991. The only difference is that a decade of further massive debt build-up has transpired since the elder Bush reigned. It seems Bill Clinton will have gotten the Bush family both coming and going. How unfair life can be at times -- even to the well-intentioned.

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