In With a Whisper, Out With a Thud

That tinkling sound you heard up and down the Street was the shattering of illusions. Its seems to have occurred to a few people that the profit curves for most the market darlings won't be quite as hyperbolic as they hoped. These are just companies after all, and no matter how well run, they all get to a point where exponential sales growth just isn't reproducible. That is clearly hard to swallow for many and more than a few of them are voting with their feet. You've probably all seen one version or another of these charts in the past week or two. There's no getting around it; they're not pretty. Although we're not surprised by the way the markets have behaved in the past month (we have been cautioning about them since April) we were a little befuddled by the June Rally. At the time we were at a loss to understand what the Wall St. Mavens were seeing that was so encouraging. That's all become clear in the past couple of weeks; we just weren't listening to the right whispers. Our bad. There were many cheered by Thursday's turnaround from big losses. One of the few things the markets do have going for them is a number of institutions with (relatively) strong cash positions who really do not want to see the large indices posting new lows. That sort of thing is just plain bad for business. Whether through belief or just fear, they have been willing to step into the breach from time to time and buy the "bargains". The real question is, are those stocks really bargains in the first place? Our opinion is that they are not in most cases and that it's far, far too early to be chasing most companies, especially on the tech side. A look at these charts shows number of common elements, most of them negative. All three charts show a pattern of lower highs since early this year, though both the Dow and S&P have some falling to do before they also show a series of lower lows. All three charts display indices that have fallen through both the 50 and 200 day moving averages, something that has not happened, to all three simultaneously, since the markets bottomed last year. We feel the breakdown of the S&P below it's 200dma was particularly telling since this has been a much more stable measure than its counterparts and managed to bounce off that level during the last two pullbacks. That's the simple technical picture. While it makes a convincing case for a bearish view, our concerns are based on psychology as much as charts. Markets, at the most simple level, are about belief. If enough people agree that a market will rise and act on their convictions, then rise it will. It's become increasingly clear in the past few days that it wasn't any real valuation bias driving stocks last month but a conviction on the part of traders...

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