by Jeffrey Saut, Chief Investment Strategist, Raymond James
In âParsons Pleasure,â a short story by Roald Dahl, a greedy London antiques dealer dons a clerical collar, drives to the country, parks his car, and walks from cottage to cottage requesting old furniture, under the guise of collecting for the Society for the Preservation of Rare Furniture. His mission, of course, is to winkle the bumpkins out of treasures they donât know they have. He can scarcely believe his luck when he is promised a chest worth thousands of pounds. He buys it for a song, saying he wants the legs and dismissing the rest as firewood. He fetched his car and drives back to find that his benefactors have carefully removed the legs and chopped the chest into firewood.
. . . âWinkling the Bumpkins and Other Tales of Greedâ, Patricia OâToole, Lears, March 1992.
Greed is always hard to measure. Certainly we have seen some signs of it in the Big Bio-Bubble and the new issue market. Putting the latter into perspective is Michael Milken, who was featured in an exclusive cover story interview in the March 16, 1992 issue of Forbes:
The stock market is certainly voracious today for stock offerings. Itâs beginning to look like the 1960s again. Or 1983 or 1986. These times donât go on forever. Anyone who isnât selling equity today should have his head examined. The window is WIDE open. Window? Itâs the Grand Canyon.
Many of his observations rang true back then and they ring true today as well. Milken goes on to note:
I have often been told, âYou keep harking back to 1974. You were just a kid!â I was 100 then. Iâm 200 now. The year 1974 taught me that leverage can decimate even the best company when its access to capital is cut off. It also taught me that most people have short memories. Thatâs why most financial people have five-year careers; one market cycle. All those geniuses who bought stock in the mid-1960âs thought they had some divine touch then it all stopped. It hadnât occurred to them that they looked good because virtually everything was going up. In 1983 Drexel published a paper called âThe $55 Billion Misunderstanding.â Thatâs how much was lost by people following Nifty Fifty growth stocks. It was a trend, and trends end.
Wow! Do I remember the 1974 period. From the bull market top on January 11, 1973 at 1051 . . . all the way down to December 6, 1974 at 577. Ugly, and awful for almost two years with every rally a trap set up by the bears. Day after day the market went down. It seemed as if it would never end. As Jimmy Wheat Sr., of Wheat First Securities, would say, âWe are being pecked to death by pelicans!â
Listen to Peter Lynch in the January 20, 1992 Barronâs âRoundtable:â
LYNCH: Taco Bell went from $9 to $1 in 1974. They made money and they never had a down quarter. I mean, you get one of these big drops in these overpriced stocks, like you had in â87, in â74; you get one of these major corrections of these growth stocks and everything goes down.
Or, listen to John Boland in a November 1990 issue of Warfieldâs âEasy Moneyâ Column:
Anyone who was active in the market through the 1973-74 collapse will remember that at the bottom, when the process were at once-in-a-lifetime lows, buying stocks held scant appeal. Reasons for shunning the bargains were abundant. The days when people made money in stocks were gone. The economy was in a bucket going to hell. If you bought stocks today, you would lose money â because you had lost money every time you bought stocks in the last two years.
. . . Back in 1974, (our friend) had a favorite stock, with about $15 (per share) in cash in the till, a book around $20. He started buying at $10 (and) bought it down to $6 and change. The shares sank to $3.75, but my friend was out of money. Thatâs a bear market. The bulls arenât just morally beaten. Theyâre broke.
. . . The bleak mood has a tenuous bridge to reality. Perception, intensely felt, creates minor reality. A trader, brutalized for every optimistic thought he has, stops having them and drops out of the market. The absence of his bids causes prices to fall further. This feeds on itself only for a time, but while it does, anyone stuck in the stock market would be much happier sitting in T-Bills in Acapulco.
The bear market that ended in December 1974 did such damage to investor psychology that it wasnât until the mid-â80s that stock ownership became chic again. And, a number of weeks ago the âwindowâ was wide open again with a plethora of IPOs and new ETFs. Yet we were writing, at the time, the stock marketâs internal energy is TOTALLY used up on a short-term basis, leading us to believe a trading top was at hand. We wrote, âEither the SPX will fail to make a new all-time high, or make a marginal new all-time high, before succumbing to a pullback.â Clearly, the anticipated âpullbackâ is at hand, leaving current investor psychology just about as bleak as it gets, which is pretty amazing with the S&P 500 (SPX/2079.65) only 2.6% below its intraday all-time high! Still, as expected the 2110 â 2112 level didnât hold, and neither did the 2090 â 2100 level. In fact, in Fridayâs Fade the SPX decisively closed below its 50-day moving average (DMA) of 2102.26, bringing into view its 200-DMA at 2063.64. With the NYSE McClellan Oscillator vastly oversold on a short-term basis (see chart 1 on page 3), it would not surprise to see a rally attempt off of the 2050 â 2065 level. Quite frankly, however, I think that 2050 â 2065 zone eventually gives way to a more formidable pullback to the 2020 â 2030 level, and maybe as low as last Decemberâs lows of 1970 â 2000. In response to one of our financial advisorâs questions of how will you know when we bottom, I said, âItâs kind of like pornography, you will know it when you see it!â I will say, however, the selling in the energy complex borders on capitulation, as do commodities in general!
The call for this week: The NASDAQ has failed to sustain a breakout to new decisive all-time highs seven times recently. I donât know the precedent for that, but I will bet it is legion! Moreover, there were 33 âbuying climaxesâ on the SPX last week, the most since last Marchâs short-term âTrading Top;â as well, the SPX also experienced the candle-stick chart pattern of a âbearishâ engulfing pattern last week (see chart 2). Accordingly, we have been in âcorrection modeâ for the past few weeks: and, we still feel that way even if we get an oversold âthrowback rallyâ in the short run. Indeed, 10% corrections tend to occur about every 26 months, yet it has been 45 months since the last 10% correction. And, the three previously longest such periods led to 10% pullbacks. I donât know if that is the case here, but it sure was in China overnight as shares fell an eye-popping 8%! Of course that has our preopening S&P 500 futures off around 6 points as the sun rises over Vanderbilt University here in Nashville Tennessee. Firewood anyone?!
Copyright © Raymond James
