Market Changing Character

by Martin Goldberg
January 06/05

Leaders such as Internet stocks are suddenly lagging. Yahoo lives below its 50-day moving average, while Google fails in its IBD cup-with-handle breakout, and Amazon makes a textbook bearish island reversal. There is technical failure in the Generals that finance (Electric and Motors). Formerly leading transportation companies are starting to break down. With heavy volume, homebuilders give up a big chunk of their December vertical rally. There are three Investors Business Daily (IBD) distribution days for the Nasdaq with legions of IBD disciples waiting for its hot guru to give the “sell” signal. Countless numbers of short-term performance chasing hedge fund managers are looking to agilely move from the bull to bear side at “just the right time”. Extremely high daily volume suggests that something is afoot in the stock market. Is it time to panic? Maybe not yet, but it is surely time to wake up, forget the stock market wives tales, and smell the realities of fundamentals. Tonight I’ll show you with charts why it is time to look out.

Internet Stocks

While it is too early to say for sure, it appears that internet stocks may be showing signs of tiredness. Is the round number of 200 the approximate end of the line for Google’s bull run? Management has already publicly stated that the growth rates they are now achieving are not likely to be sustainable. But the market has ignored Google’s management, apparently on the basis of management’s lack of wisdom in taking $90 per share in the IPO for a stock that the market now thinks is worth more than double that amount. Google is a stock that is trading purely on the basis of emotion and short-term sentiment as evidenced from the average turnover rate of a floating share of Google, which is less than 15 trading days. Let's examine the chart from the perspective of the hot guru.

Google appeared to have made a distinctive cup-with-handle pattern. Although it was showing high volume down days in the early part of the “handle” formation, it recovered and was showing good action throughout the formation of the later portions of its handle from late November through December ‘04. It tried to break out on the first trading day of the year where it closed at an all time high on heavy trading. Yet the breakout was not decisive and it may have failed on Tuesday and Wednesday. If Google continues to head downward, it would suggest decisive failure of the breakout and it would likely test support toward the bottom of the “handle”. Yet as with all Internet stocks, the stock is also one Wall Street analyst upgrade from breaking into new high ground where it would enjoy legions of IBD breakout buyers. I wonder how much this stock will rise when it is announced that Google will become part of the Nasdaq 100? When enough insiders sell and they split the stock 5 for 1, the float will be sufficient for Google to be admitted into the S&P 500 also. As I recall, that was worth a tremendous run in Yahoo stock in 1999. Whether to speculate in this company, long or short, is a matter of personal preference, the action Google, a household name, is likely to have implications for the entire speculative stock market. Therefore, Google warrants careful scrutiny in the near term.

Yahoo!

While it's too early to panic, it is worth noting that a leader of the 2-plus year Bull Run currently resides about 3% below its 50-day moving average. The momentum players largely responsible for stock market prices generally don’t like owning momentum stocks that are below their 50-day moving average. In summary, they like their momentum stocks to have some momentum. If the recent swoon in Yahoo stock is not a whipsaw, it will have serious and bearish implications for Yahoo while its momentum owner’s head for the exits. Yahoo is a stock that trends (either up or down) most of the time. The action of Yahoo could also have implications for the overall market since Yahoo is also such a popular “name”.

Amazon.com

The short-term technical implications for Amazon.com are much clearer than either Yahoo or Google – Bearish. Amazon just completed an island reversal as shown in the chart below.

Ebay

Ebay is the Internet stock that has the most visible and best business model. They have no significant competition in their core business, and probably never will. Whether it is worth a market cap of 73 billion is another question. Ebay is testing its 50-day moving average as shown in the chart below.

While this company is in an excellent business, a look at the longer-term chart suggests that there may be no one left to buy this stock. Below is a long-term monthly chart of Ebay. Note that each successive rally has come with less and less volume.

Because of their unique business model, and lack of serious competition into the foreseeable future, Ebay is likely to hold up better in a bear market compared to other Internet stocks. Yet “hold up better” is a relative term. Ebay could be halved while the others are quartered.

The Generals – One Bearish, and One Holding On

General Electric, the company with the largest US capitalization that also owns the largest media outlet for business entertainment and news, has always been a market leader. After rallying with the market, it is in a short-term downtrend and is “holding on”.

In spite of reaffirming its earnings guidance a few days ago, GE is trending downward and now sits on top of its 50-day moving average.

The chart of General Motors is bearish in the intermediate term. As shown in the 2-year daily chart below, the short-term support/resistance line has been broken via a breakaway gap in October. GM challenged the gap but appears to have failed to fill it. This likely confirmed the gap as a breakaway gap. Similar to GE, General Motors is sitting on its 50-day moving average and if it is breached decisively to the downside, GM could go to long-term support at about 30.

Transports – Some Breaking Down

The Dow Transport sector has been a leader of the stock market, whereas in late December they were all firing on all cylinders; the New Year has brought two prominent members of the Transports that are breaking down – GATX, and Ryder. In addition, most of the transports are showing ugly short-term action. As shown in the one-year weekly chart, the tide for GATX has turned quickly. This week’s action (as of Wednesday night), bearishly engulfs the previous 8 weeks, decisively breaks the 50-day moving average to the downside, and also violates the high made in June of 2004. The current uptrend beginning in March of 2004 is also in Jeopardy. GATX may be breaking down. This is clearly shown in the 1-year weekly chart below.

Whereas GATX may be breaking down technically, Rider has already broken down.

Homebuilders

While they haven’t yet broken down technically, the homebuilders are showing recent weakness. Homebuyers tend to shop in earnest after Super Bowl Sunday. If buyers fail to materialize as planned, it could be a long way down for the homebuilder stocks. Yet the last 15 years have shown us that there is no upper limit to pricing stocks based on valuations, as long as the steady stream of good news continues. There’s no telling when this stream will end for the homebuilders. It is hard to believe that after a 5-year run of the Homebuilder’s index from 100 to over 800, Dow Jones still considers this industry to be “cyclical”.

Bonds

It is not easy to lose focus on what’s happening with bonds, given the periodic yet short-lived rallies. A look at the 2-year weekly chart of the 10-year note seems to clarify the long-term direction of bonds, which is price down, interest rates up.

At this point, it seems as if the only thing that moves the bond market to the upside is negative economic data. So to summarize, the fed is raising interest rates, bonds are going down, and interest rates are going up in an economy that is extremely leveraged. All that helps the bond market is dismal economic data, and stocks are historically rich in valuations, while trading volumes are at or near all time highs. Speculative leadership stocks, some with triple-digit P/E’s and trading every few days on average, are breaking down, along with the transports and General Motors. Is there cause for concern? Of course not…. this year ends in a “5”!

Wives Tales, and Once Upon a Time

Having listened to some financial broadcasting over the holidays, it seems as if there is yet one more topic that has surpassed valuations as worthy of airtime discussion – stock market wives tales used to predict market direction. I’ve heard wives tales about January performance reflecting the entire year, and bullish performance occurring because the year ends in a “5”. I’ve heard nothing about a market’s propensity to top around New Year's, though. Yet once upon a time, one of the most famous bubbles bursting market tops occurred on the very first trading day of a New Year – Japan’s Nikkei 225 in 1990. Similar to what we have seen this year, the closing high was on the last day of the previous year (1989), and the all time high on an inter-day basis occurred on the first trading day of 1990. Who would have thought at that time that 15 years later, the Japanese Nikkei would be trading at about 25% its 1990 New Year’s high? Is there anything to be gleaned from the New Year's top that is relevant to our current market? Of course not. Just as there is nothing to the “year that ends in a 5” wives tale.

Today’s Market

The stock market was little changed today as the Nasdaq finished down a fraction; the S&P 500 was up 4 (1,188), and the Dow up 25 (10,622). The S&P mid-caps were up 0.43%, and Russell 2000 small caps were up 0.4%. Internet favorites Google, Yahoo, Ebay, and Amazon continued their newfound downtrends. Yahoo in particular seems to be very comfortable below its 50-day moving average. The two featured transports staged feeble rallies, and homebuilders staged a rally albeit on less intense volume as their recent sell offs. General Electric and General Motors staged rallies of 0.8% on unimpressive volume.

The XAU and HUI were down 0.35, and 0.23 percent, respectively, while gold was down $4.70 ($421.80/oz), and silver was down $0.08 ($6.43/ounce). The 10-year note finished little changed, as did the 30-year.

Today’s most significant action was in oil and the dollar. The dollar was up today, finishing well above the widely watched 50-day moving average. Light sweet crude oil was up over 2 dollars today, finishing at $45.56 per barrel. As you can see, the long-term uptrend of oil is well intact.

Those with a short-term viewpoint may want to look at the recent candlestick pattern for oil. Note the preponderance of bullish candlesticks over the last 7 days or so (those where the market closes at a higher level than at the market open). It looks as if there is short-term support above $41, and oil wants to go higher.

Similarly the $US dollar has crossed the much-watched 50-day simple moving average. It's looking short-term bullish, but longer term I must defer to the fundamentalists.

Tomorrow’s action is likely to center on the release of unemployment statistics by the government. If the statistics are good (unemployment down), that will hurt the bond market; if they are bad that would boost the bond market. Technically, considering the action in the bond market last month shown below, you can see the importance of this government statistic release.

Have a great evening!

Martin Goldberg

Martin F. Goldberg, MS, P.E.
Market Analyst
email mdelmgoldberg@comcast.net