Market Outlook & Commentary

Short Selling

Swing Trader
4 مايو 2002
For the week, the Dow lost 66.71 points to finish at 9939.92, while the Nasdaq fell 12.18 points to close at 1600.85. The S&P dropped 19.23 points to end at 1053.91. Volume was fairly strong overall relative to what we have seen this year.

Other than a huge rally on Wednesday, it was another disappointing week for the equity markets. Wednesday the major averages were able to achieve a monster rally in which the Nasdaq surged 7% alone. Of course, after the rally the pundits were out saying that the bottom was in. Then on Thursday and Friday, the markets were sold-off rather aggressively, which likely means that Wednesday's rally was largely due to short covering. It should also be noted that the technology leaders which fueled the bull market of the late 1990's were the leaders of Wednesday's rally. Incidentally, these are the same stocks that contain the most short interest, which is a typical element of a bear market rally.

Wednesday's rally was in fact the eighth largest rally in the history of the Nasdaq. Another startling fact is that nine out of the ten of the largest rallies ever for the Nasdaq have taken place since this bear market began in March of 2000; the other rally came just after the crash of 1987. With that said, it's rather obvious that Wednesday's rally was another dead cat bounce from deeply oversold conditions.

Looking ahead, several potentially market moving earnings reports are on the upcoming week's schedule. Most notably, reports are due out from Hewlett-Packard, Dell Computer, Applied Materials and Wal-Mart Stores. These are pretty much the last batch of reports before the markets go into a period of limited news. Therefore, it's essential that some sort of positive news comes out of these reports in order to help bring some confidence back into equities.

Take note, the Nasdaq looks to be in a phase where investors are pretty much throwing in the towel. While we don't think the Nasdaq is at a bottom yet, the current environment is certainly indicative of what often takes place near the end of a bottoming process. At the same time, I feel that for solid bottom (a level that will be able to hold for years) to be put in for equities, the bluest of the blue chips (e.g. MMM, BAC and JNJ) need to see panic selling. Until this happens, it's quite possible that we could see the "slow bleed" continue where the markets basically remain in a trading range with a bias to the downside. As such, overall, we remain cautious towards the equity markets moving forward.

All right then, that's it