Sand Spring Advisors LLC
More Complex than Before
January 8, 2003
by, Barclay T. Leib
The Chart above first appeared back on October 14, 2002 noting a definite rhythm to the U.S. equity market in 2002 in terms of Fibonacci trading days between significant highs and lows. At the time, we were looking for a November 7-8th high toward 973 on the S&P 500 cash index.
When November 7-8th did in fact yield a high, but a high under our preferred price target zone, we got excited that an A-B-C corrective period could be ending, but were still suspicious that marginal new highs toward 973 on the S&P might linger. New highs did transpire later in November but still failed to reach our preferred Fibonacci target zone.
At this point, an already complex July-November A-B-C corrective pattern appears to have yielded to an even more complex A-B-C-D-E upward sloping wedge formation -- still in the process of completing the E wave. 34 trading days beyond the November 7-8 high, we achieved a low in the December 27-30th window. On the back of "dividend tax cut hoopla," our revised interpretation of this pattern is now that a continued rally into January 29-30 (21 trading days beyond the Dec 27-30 low) appears likely in the short term. This represents a most definite shift in our short term views expressed to subscribers in late December, but nevertheless leaves us generally unwilling to jump aboard recent strength. Despite the short-term changes, and particularly if 973 is finally achieved, we would subsequently remain bearish at least into mid-year.
Overall, this market is clearly being a "big tease." It wore out many bulls' patience and stamina when marginal new lows were made in the S&P 500 Index back in September, and now it is working to wear out the stamina and conviction of the bears. From a symmetry point of view, marginal new highs above the August 2002 high might succeed in doing just that -- particularly if accompanied by something deemed a 'fundamental change' that bears deem too tough to fight against.
Tax cuts on dividends is, at the margin, bullish for this market -- if such changes are actually passed (which we believe too many people have lept to the conclusion they will be, given Republican dominance of both Houses of Congress). But even if passed, people forget that first, companies must have the ability to generate attractive earnings to produce dividends. Besides some one-off cash hoards around at companies such as Dell and Microsoft (that might be partially dishoarded on a change of taxation rules on dividends), the ability of corporate America to really grow revenues at the current time remains poor.
Keep onsides and stay nimble, but don't buy into the concept of a huge up year for stocks.
Non-subscribers are invited to access our December 22nd article, "Various Perspectives on 2002 & Ongoing 2003 Concerns," together with other past articles, by signing up for a quarterly Sandspring.com subscription below.
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