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Finding A Floor?

My earliest mentor in Technical Analysis was Guy Ortmann. He's is a pure technician, and now works for Capital Growth Financial as their Technical Analyst. Early in my career, when I was the Research Assistant to the Chief Technology Strategist at Prime Charter (now Oppenheimer), Guy rescued me.

Guy opines today that "recent events have established a SIGNIFICANT FLOOR in the equity markets on a technical basis that is also supported by a major fundamental indicator. The major support levels for the various indexes as described on the above charts are 10,400 for the Dow Industrials, 1210 for the SPX and 2100 on the Nasdaq."

Similar to the chart I showed Tuesday, Guy looks at the recent up-trends and support levels:

Dow Industrials
click for larger chart

SPX Industrials
click for larger chart


Guy observes:

"What we believe is of primary importance is HOW THE MARKETS HAVE RESPONDED to the recent events surrounding Katrina. The week prior to Labor Day weekend was laden with some of the most horrific news stories in terms of human tragedy, and potential economic impact since 9/11/01. With the fear of a loss of a major oil off-loading port, loss of a significant percentage of oil drilling and refining capacities, and the potential costs of rebuilding an entire city THE MARKETS FAILED TO BREAK DOWN IN THE FACE OF ONE OF OUR COUNTRY’S WORST NATURAL DISASTERS OF ALL TIME. As far as the markets are concerned, what is frequently more important is how the markets RESPOND to news events as opposed to the news events themselves. The fact that the averages were able to withstand the pressure of the news with such strength and resiliency is, we feel, an indication of the underlying health of the markets. Fear was extremely high as expressed by a large increase in put buying on the averages prior to the Labor Day weekend. Yet, upon our return to work the following Tuesday, the markets enjoyed on of their best performance days of the year. The crowd was again on the wrong side of the fence."

That's a persuasive argument; the only disagreement I have with Guy is the "Why?"

Guy believes its a question of valuation; He favors the IBES valuation model (also known as the Fed Model) which compares the forward earnings yield of the S&P 500 to the yield on the 10 year Treasury note.

I, on the other hand, believe the market was in good technical condition prior to Katrina -- the Valuation side of this is all but irrelevant to recent action. Further, I don't see how the IBES methodology can explain why the Market got shellacked from January to May, when rates were lower and prices were higher. Just because something is cheap, don't mean it won't get cheaper.

Regardless, if you buy the Technicals argument -- his or mine -- then you would expect the markets to find support at the trend lines shown above . . .

Thursday, September 15, 2005 | 07:15 PM | Permalink | Comments (9) | TrackBack (0)
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Comments

Some parts of the market wrongly or rightly believes that the "Greenspan put" will prevent a meltdown after any major disaster.

The appropriate strategy then is to load up on risk right after a disaster since you get the upside with downside covered. This would explain why the last two run-ups started right after the London bombings and Katrina.

Law of unintended consequences?

Posted by: Dean N. | Sep 15, 2005 9:30:04 PM