Matthew Kerkhoff, options expert and editor of Dow Theory Letters, continues his 14-part educational...
Ten Bullish - Ten Bearish Factors
05/09/2003 12:00 am EST
Few advisors deserve as much respect as Jim Dines, editor of The Dines Letter, which has been consistently published for 42 years. His accuracy in making long-term market calls, on stocks, bonds, and gold places him among the nation's most successful newsletter advisors. Says the advisor, "It seems that the Dow has taken to oscillating about 9% on either side of 8,150--with rallies halted around the 8,000 level and declines met with buyers around the 7,400 level. Currently, we are roaring towards the top of this range, the third such effort to crash through the supply area above the market. The very fact that the market has been so balanced for so long usually means that there are plenty of both negative and positive factors, with neither predominating." Here's his current overview of the bullish and bearish factors currently impacting the market:
- The market has been rallying.
- There has been a resurgence of mutual fund buying.
- Earnings have been better than expected.
- The Iraq situation is over.
- The bad economy has wrung costs so severely that profits will go up no mattter what.
- The Fed is promoting a weaker dollar to help US exporters.
- Terrorism is essentially over; they did nothing when they could have.
- Bush's re-election campaign has begun and will produce a tax cut.
- Last October's lows are holding in what is a possible head and shoulder bottom formation.
- Bush sounds as if he wishes to re-elect Fed head Greenspan.
- It is a tenuous, weak rally, already getting overbought and the major downtrend is still intact.
- Mutual fund cash reserves have been steadily declining since October 2003 from 5.1% to 4.3% at the beginning of March 2000, the date of the major top. Funds can't buy much more.
- Expectations have been extremely low and stock prices in relation to those earnings are still historically too high.
- Past endings of wars have tended to precede bear markets.
- Earnings are nonetheless less, and the crash in the travel industry has yet to fully express itself in layoffs.
- Helping US exporters will come at the expense of other nations, which will come back at us. The euro is strong near $1.10 and this could lead to a currency upheaval.
- Terrorism still lurks.
- Tax cuts
have yet to be passed by Congress and meanwhile nearly all states
are raising taxes and fees.
- The highs of leading averages are holding at the top of this trading range, and nearly all individual stocks remain in major downtrends. Also there is huge overhead supply from stale longs which should inhibit rallies.
- The Fed's on the verge of creating an environment of hyperinflation.
"What is our overall assessment based on these factors? The market's very flatness for around nine months suggests that the markets will stay in this horizontal trading range until there is a decisive upside or downside breakout. Percentages favor a downside breakout, but we have to have an open mind to an upside breakout as well. Even then, however, we would look for a profit-taking pullback before recommending new positions.
"Aside from a lurking currency crisis, business worldwide looks terrible and staggering stock market losses are beginning to show up in capital-weakened bank and insurance companies, while residential real estate looks overpriced enough to rank with Internet stocks three years ago. As such, we are not prepared to alter our ultra-conservative stance, which we've held since 2000. We continue to counsel prudence and caution until there is a clear reason to reverse that position."