2005 started poorly, and then got worse. The year-opening
market malaise has led to a sell off that’s given the Bulls a winter chill.
Blame Oil, earnings nervousness, a tightening Fed, and a hot end to 2004 for
the recent buyers strike.
But all is not completely ugly: A few factors provide some warmth to those betting that this
market still has some upside left in it.
Despite all the teeth gnashing, the retracement of gains off
of the August lows has been relatively modest. Nasdaq gained a trough to peak
total of 441 points (1750 – 2191) for a rise of about 25%; So far, markets have
given back about 101 points (on a closing basis – 2171 – 2070). That’s less
than a 25% giveback of gains - at least
On the Dow, we ran from 9,708 to 10,867 – about a 12% gain.
So far, the give back (closing basis) is 349 points -about 30% of the rally.
The SPX gained 157.2 point (15%), and has returned a little over 42 points -
for a near 27% retracement. After a
strong move up, markets can retrace 38% or even 50% before resuming an upward
What other reasons are there to maintain a positive bias?
The year-end rally created an excess of Bullishness that needed correcting. The
sell-off accomplished that nicely. Investors become Bullish only after they
buy; too much optimism suggests everyone is already at a party where the last
man to arrive pays for the beer. By rebuilding the proverbial “Wall of Worry,”
Mr. Market creates an environment where risk gets rewarded, a necessary (but not
sufficient) component for markets to go higher.
Further, Internals continue to be only modestly negative.
Volume on most of the selling days has been on the light side – on the last
down day (1/13) we saw about 1.1B shares change hands on the Nazz, and only
1.5B shares trade on the NYSE. Up/down volume was a modestly poor 2 to 1
negative; Similarly anemic readings were seen on the Advance/Decline line (down
for the past 4 weeks);
The bottom line is that the 2004 rally stole some gains from
2005. We got ahead of ourselves last month, and the past few weeks has been a
process of working off that excess bullishness.
These factors – plus some salivation over the impact of
social security money, both on fees and the positive impact the fund flow will
have on the market – should be heartening to the Bulls. Once this consolidation
runs its course (to ~SPX 1166), the next leg is likely to be up.
Last month, Jim Cramer ripped Edward Jones a new one; While I agreed with what he said, I didn’t bother to follow up because I assumed Ed Jones had come clean.
From today’s WSJ:
"Edward D. Jones & Co. received $82.4 million in secret payments from seven mutual-fund firms in the first 11 months of 2004, through a lopsided fee structure that in some cases gave the brokerage firm more compensation for selling poorly performing funds than for selling stellar performers.
The disclosures were posted yesterday, on Jones’s Web site as required by its $75 million agreement to settle regulatory charges that it failed to adequately disclose the payments to investors. They are by far the most detailed figures ever made public on the industry practice of mutual-fund companies paying brokerage firms to induce them to sell their products, an arrangement known as revenue sharing. Unlike front-end sales commissions, which are widely disclosed to consumers, revenue sharing has been largely secret."
That’s pretty egregious behavior. I used to think well of Edward Jones as a firm. Non mas. . .
Here’s Cramer’s comments:
I’m not sure I agree with Paul’s statement that "until January 2005,
Apple had no iPod that served the mass market" givent he enormous sales
numbers the Pod has rung up. But the broader point of targeting the new devices
at truly mass entry level (i.e., cheap) is valid.
click for larger graphic
Check out the full size graph here:
Nice work, Paul
Apple’s Tipping Point: Macs for the Masses
Nixlog, January 12, 2005
Alan Farley is a colleague at Real Money. He posted a terrific list of mental errors that traders sometimes make.
Its worth perusing:
Fighting Mr. Market. There’s nothing worse than trading a trend in a choppy market or sideways choppiness in a trending market. Make sure you know which one you’re jumping into before hitting the enter button.
Loving the bad. It’s hard to admit it when we’re wrong. Rather than cutting losses, we try desperately to transform our worst trades from lemons into lemonade. Sooner or later we find out how easy it is to turn a small loss into an absolute disaster.
Hating the good. Sometimes we know it’s a great trade, but only at the subconscious level. For some reason, we can’t handle our good fortune and jump out with a small profit. Minutes later it takes off like a rocket ship without us on board.
Just last year, one PC analyst at a bulge bracket firm suggested Apple sell itself to Sony. Another suggested that Apple start producing Windows machines, or use Intel chips.
This is part of a long term misunderstanding of Apple by the Street. Most of them don’t “get” Apple; They certainly haven’t been able to figure out Steve Jobs. And since all but one (that I know of) work primarily on a Windows machine, they never really understood what the fuss about the Mac was all about.
Until the iPod came along. Apple created a category killer by engineering a marvelous piece of user friendly technology made from essentially off the shelf components. The secret sauce was their terrific user interface. That forced some Analysts to start getting clued into what the cult of Macintosh was all about.
But what about this new Mac mini?
Understand what Apple is doing with the mini:
1) It’s a Windows replacement machine;
2) Geeks like it!
3) It’s potentially the centerpiece for a Home theatre
4) It’s a cheap 2nd Apple for faithful MacHeads
Let’s focus on #2 today (#1 will be the subject of a Street.com column later this week).
In the old days, geeks recommended Windows because they were a “standard,” they let admins under the hood pretty regularly — and they were cheap.
Indeed, the original name for Windows 95 was “the IT department full employment act.”
It was buggy, difficult to maintain, vulnerable and crash prone – but
it was the industry standard. Any IT guy you spoke to in the mid 90s
would tell you how much cheaper the Wintel machines were to buy, how
much more software there was for it.
he didn’t tell you was how much higher the cost of ownership was –
namely his salary. Its eventually became his entire support staff’s
The result of that “bias” has been costly to maintain PC networks in most offices, and unsupported PCs in most homes. Every home PC user who has ever had a major Windows headache – security issues, virus infections, corrupted ini files, missing dll library – is desperate for an easy to use alternative.
Here we are a decade later, and a new generation of younger IT employees have inherited these headaches from their predecessors. And, to judge by the geek blogs and websites, they are none to happy about it. From Malware to spam hijacking to Explorer vulnerabilities, keeping a windows network running – or even a single internet connected machine – is a time consuming, frustrating job.
For what most people use their PCs for – email, internet surfing, music playing / CD burning, word processing – this is all the machine they need.
And Geeks like it! They really like it! — And they are key influencers of purchases by many people . . .