Crosscurrents March 02/05
March 02/05
by Alan M. Newman
The top 10 constituents of the QQQQ’s as listed on etfconnect.com no longer include Comcast and Oracle, somewhat confusing since they are quite a bit larger than their replacements of Apple Corp. and Starbucks, but no matter. Sentiment amongst insiders, while a bit better than the last time we examined [Crosscurrents, September 7, 2004], still shows a marked propensity towards selling holdings in massive quantities - as if possession of their companies common shares were associated with the plague.
Of the 16 purchases over the last three months, only
4 represented open market buys, clearly not a confidence builder.
The 186 sales afforded a sell/buy ratio of 11.63 to 1. Should we
be bullish about these results? We don’t think so. There were
still a net of 44.9 million shares sold and we believe it’s a fair assumption
that the proceeds were not invested in any of the other top 10 QQQQ constituents.
That just wouldn’t make any sense at all!
For starters, the average P/E for the group stands
at 32.8 and the average yield is an infinitesimal 0.3%. Worse yet,
the average Price/Sales ratio is 5.6. Valuations are at the very
least, ridiculously high. Given that these ten issues (MSFT, QCOM,
EBAY, INTC, CSCO, NEXTL, DELL, AMGN, AAPL, SBUX) account for an amazing
$1 of every $17 invested in the U.S. stock market, it is not difficult
to extrapolate risk. Why else would insiders run from their own
shares in such huge number?
Remember, there are 610 million shares of
the Quad Qs outstanding and the establishment of the trust and the subsequent
creation of additional shares could only come as a result of demand for
the constituents. How else can one explain the mania that followed
the trust’s inception on March 10, 1999? Nine months later, the
Nasdaq Composite had surged 50% and a year after the trust began trading,
Nasdaq had doubled. All along, insiders sold. They continue
to sell now.
Since Intel is included in the picture for the Quad
Qs, we’re only showing the picture for the top nine Semiconductor issues,
as ranked in the Semiconductors HOLDRs Trust (SMH). Given a lower
overall P/E for the group, we are not surprised that insider activity
is less negative for the SMH, but the reason is obvious; Texas Instruments
(TXN). Take out TXN and add INTC and the ratio of sellers to buyers
is close to 15 to 1 and worse than that of the Quad Qs.
Our view is very simple to understand; if insiders
do not want to buy their shares, neither do we. Case in point, Apple
Computer. In the last six months, there have been zero buyers and
51 sellers of 4.34 million shares. Now that “IPOD” is on everybody’s
lips, it’s time to move on.
While idly leafing through some spreadsheets last week, we came upon the limited data we keep for the Investor’s Intelligence ratio of newsletter bulls to bears. After realizing that the two-year moving average of bulls to bears had surged to 2.5 to 1, we immediately wondered about the last time that had occurred. We asked our colleague, Ian McAvity, the editor of Deliberations (http://www.topline-charts.com/Deliberations.htm), one of the most comprehensive journals relating to the markets that we have ever had the pleasure of reading. The answer was an eye opener, occurring back in August of 1987, right around the highs and less than two months before the crash. There were two other huge bulges in Ian’s charts. One was at the start of 1973 at roughly 2.8, coinciding with the all-time low in the mutual fund cash-to-assets ratio and accompanied by the mentality that the “nifty-fifty” were one decision stocks, just buy and buy some more. From that point, stock averages gave up 50% in the next two years and the “nifty fifty” declined by about 85%. The only other occasion was in the summer of 1977, when newsletter writer sentiment went completely bonkers, soaring to 4.8 bulls for every bear. The Dow topped the week of July 2nd and plunged nearly 20% by the following March. The July 1977 peak was not exceeded until August 1980. It would seem we are again in the stratosphere.
The picture for 20-year annualized returns is absolutely
jaw dropping. The period from the mid-90s has turned out to be the
Mother of all manias, yet is still largely ignored for its potential significance
to the future. Simply put, stocks cannot return 11% annually forever
because other investments would fall totally out of favor. On the
other hand, if yields for other asset groups expanded to compete, then
stock returns would suffer. If the Dow remained level at 10841,
we would not return to “normal” (5%) until March 2015. Even at Dow
8500, “normal” would not be achieved until December 2011.
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ABOUT ALAN M. NEWMAN
Alan M. Newman has been the Editor of CROSSCURRENTS since the first issue was published in May of 1990. Mr. Newman is also a member of the Market Technician's Association and has been widely quoted for years by the financial press, media, and other newsletters and has written articles for BARRON'S.
The newsletter is published 22 times per year and focuses on economic and stock market commentary, often covering controversial subjects. Several proprietary technical indicators are usually featured in every issue accompanied by current interpretation. Broad samples of our work can be viewed at http://www.cross-currents.net/.
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