Waiting . . . And Waiting

Where IS that dip I’ve been wanting? The market has been so insistent on going higher that I was forced this week to place a protective stop on my hedge position against a tech reversal.

The market doesn’t feel right, I’ll tell you that. It feels that something’s got to give. It feels that we should go down before we go up.

People here in Japan aren’t as sanguine about the Fed and the U.S. economy as U.S. investors are. Just today (it’s 5:30 p.m. Friday in Japan as I write) the Nikkei fell 0.5%, down 1.3% this week. Why? Because everybody’s taken inflation and the Fed off their list of worries. That means any tiny sign of inflation will be a bad news surprise. That doesn’t mean we’ll get it, of course, but that’s what traders in Tokyo are worried about.

Michael Kahn, the technician over at Barron’s, doesn’t believe in this latest tech rally. He wrote on Wednesday, “The Nasdaq, with its heavy representation of technology stocks, is the only major index to have broken its long-term trendline to the downside. That suggests that this technology-driven strength is more of a reaction rally rather than the emergence of leadership.”

Seattle hedge fund manager Bill Fleckenstein is friends with Fred Hickey of The High Tech Strategist. They both think today’s situation among tech stocks is like the one we saw in semiconductor stocks in August 2000 before the great implosion. Mr. Fleckenstein wrote on Monday:

. . .to see tech stocks rally so hard in the last three weeks — with even the data from the no-news period being weak on a bottoms-up (micro) level and ugly on a top-down (macro) level — I can only conclude that the buying had been by beta chasers (and perhaps uncomfortable shorts), as the risk/reward for stocks in general and tech in particular hasn’t been this poor since the fall of 2000. Yes, valuations were much higher then, but the economic risks are much greater today, given the leverage.

What we have is a recipe for enormous financial losses. I believe the countdown into when we start to see more data points in the form of bombs should be measured in days, not weeks.

Some will conclude that he just got up on the wrong side of the bed because oil prices are dropping for good and soon we’ll even see the Fed start reducing interest rates.

Do you really think oil is down for good? Have all the world’s energy problems disappeared because Chevron’s Jack 2 well might be able to provide up to 15 billion barrels of oil in the Gulf of Mexico in five years time? Keep in mind that it’s 175 miles off the coast of Louisiana and at a depth of 28,000 feet. A development well for that kind of operation will cost somewhere around $120 million. Even if we haven’t tapped all the world’s oil yet, we’ve certainly tapped the easy parts. Plus, last I checked, China and India were still planning to keep growing and demanding oil.

It’s probably a bit early to sound the end of high oil prices, even if they are dropping at the moment. Keep in mind that Philip Verleger, who just called for $15 oil in the Seattle Times, is the same Mr. Verleger who called for $100 oil on July 24. That fact prompted Birinyi Associates to write, “Verleger’s strategy might be to choose a dramatic landmark far in the direction of whichever horizon the market appears headed toward.”

One thing we know, according to Randall Forsyth at Barron’s, is that, “Financials and techs, the sectors that are key to the stock market, are a bit slower out of the box initially after an oil slide, but they wind up leading the rally after six months.”

Maybe there’s just a wee chance of my getting a short-term dip buying chance ahead of a longer-term tech rally.

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