August 30, 2002
DJIA: 8,671

There ain’t no long side, there ain’t no short side . . . you’d think it was August. Not every August is this quiet, take for example August 1982 when the bull market began. Then, too, August can be August. And with its end could also come an end to the volume drought and an end to the stagnation. With the market averages themselves holding together pretty well and the Advance Decline Index actually outperforming, it’s easy to be complacent. Still, something’s not quite right here, even if it is August. For sure, it’s hard to make money, long or short.

This inability to make money for us means stocks just aren’t trending. The strong stocks, the positive patterns, aren’t strong and many have become suspect. A stock like H&R Block, for example, is what we would call a strong pattern. The correction in the stock back to the top of the base is a little more than we would have liked, but it’s acceptable. However, it’s down to it. As a rule of thumb, stocks that pull back into a base after breaking out usually aren’t going to work. As a trading rule-of-thumb, sell half. Many stocks have this HRB look which leaves the market in a bit if a critical position. Even worse, however, unlike HRB a number of stocks already have pulled back too far, that is, back into the base after breaking out. Ecolabs (45), Carlisle (44) and UPS (64) are examples there. If the strong end of the market isn’t strong, if the strong end of the market already shows signs of weakness, it’s hard to argue July was a good low.

The lack rally in the strong stocks also shows up in a stock like MMM (125). 3M is a stock you can love or hate and unlike HRB MMM never actually broke out. And in this case, that’s the point. MMM has acted well for months, the news has been good, it’s the only Dow stock close to an all-time high, you’d think it would be the first one out. Fortunately we wait for stocks to break out but how is it the stock isn’t even able to do that? Again, it simply becomes hard to argue that it’s a strong market when a stock like MMM, a stock that has been strong right along, can’t break out.

Then there’s the weak side of the market. If it has been hard making money on the long side, it has been difficult to make money on the short side, and so it should be in a good market. When there’s a good turn in the market most stocks turn too. Not every stock becomes a market leader but every stock pretty much stops going down. That’s what happened after the July low and with still fewer than 100 stocks making daily New Lows over the last two weeks it’s hard to argue there’s a whole lot of weakness. But here, too, there’s a worrisome change. Tech stocks have had pathetic rallies, and now many are teetering around their July lows. In a strong market there shouldn’t be this kind of weakness.

Since they’re both Dow stocks it’s interesting to look at two tech stocks like IBM (77) and Intel (17). A few weeks ago the patterns weren’t all that different but that soon changed – IBM was able to rally and complete a decent little base pattern while Intel failed and fell back into its trading range. Intel could yet rally back across the trading range but any real rally there now looks a lifetime or two away. Here again, though, you would think the stock at least should be able to hold the lower end of the trading range. In a market that’s "made a bottom," you wouldn’t expect Intel to be going to new lows. IBM is still a good pattern and as such you would expect IBM to come out of this little flag pattern and make a new high. Provided, of course, this is a strong market. IBM still has a chance but even a good pattern like this is beginning to give up a little too much.

The rhyme and reason to this market may simply be what we’ve suggested all along – we’ve made a low but it’s not one followed by some new bull market. It’s a low that’s followed by a trading range – a prelude to a good rally, or a trading range that’s part of a bear market napping. For many techs, maybe the nap already is over. When the volume returns so too should some clarity. A couple of decent up days with real volume, a couple of breakouts in stocks like MMM and IBM, and August could become just a distant memory.

Frank D. Gretz

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