Technical Bull
Technical analysis is bullish. These are readings of market internals
such as volume, price, sentiment and momentum. They pay little attention
to fundamentals, such as interest rates and Fed policy. By analyzing
such variables and matching emerging trends with past trends, it is
possible to predict future price move movements, since history tends to
repeat itself.
Market internals, such as the ratio of advances to declines, up-to-down
volume, and investor sentiment are positive in relation to last year's
indicators.
According to prominent market technician Jim Finucan, "The
Nasdaq 100 was chopped in half between the beginning of the year and
April 4. Tech leaders like Yahoo!, JDS Uniphase, and Broadcom all sank
more than 90 percent for their all-time highs. The total value of stocks
in the Nasdaq sank nearly 70 percent. These are drops in a year that
exceed the decade-long slide in the Nikkei. Therefore, we have been in a
bear market. Things are now beginning to turn around."
According to Ned Davis Research (NDR), typically, two rate cuts are
enough to send the stock market higher. The mantra is "don't fight
the Fed on the way up or on the way down." Since the Fed is
lowering rates, stocks will go higher. Going back to 1920, data shows
that beyond the third rate cut, the median maximum gain for the stocks
is 16.8 percent while medium maximum loss is 4 percent. So, the rewards
clearly outweigh the risks.
Signs of a market bottom are a good reason to buy. We have already
hit a bottom.
Many composite technical indicators are now bullish. These include the
NDR Sentiment Composite Index, The NDR Monetary Composite
Index, the Momentum Composite Index, the Long Term
Exposure Index, the Lexi Overbought/Oversold Index and the
Lexi Monetary Index. But note, please, that these tea leaf
readings are just moving into the bull category and that, while they are
aligned in their predictions, they are by no means "fool-proof."
The Federal Reserve Stock Valuation Model, which compares the
competitive yield of the S&P 500 (the earnings of the index divided by
its current price level) to the 10 year U.S. Treasury yield is bullish.
By this measure, the S&P is only 10 percent overvalued after
sinking last month to slightly undervalued. Over the last 20 years,
reading in the range of 10 percent overvalued to fairly valued have
yielded average annual gains in the S&P of 18.2 percent.
Advance/Decline Ratios (the ratio of advancing issues on the
NYSE to declining issues on a moving average) shows some signs of
stabilizing. The advance decline line on the NYSE has dropped
continuously for 32 months from April 1998 to December 2000, showing
most stocks losing value over the period. Most long-term periods of
market breadth have lasted 18-20 months. All have afforded excellent
buying opportunities.
The Ratio of Nasdaq to NYSE Volume (a gauge of speculation in the
markets) has turned bullish. The higher the ratio, the more speculative
the markets. During the Nasdaq run up, the ratio was around 2:1.That is
very speculative. Currently, the ratio is around 1.3:1. That is
considered healthy, and, therefore, bullish.
Been Down So Low It Looks Like Up To Me
In 1967 Richard Farina (the multi-talented singer/songwriter and the
brother-in-law of legendary folk singer Joan Baez) wrote a book titled:
"Been Down So Long It Looks Like Up To Me." Many consider it
the "ultimate novel of college life during the first hallucinatory
flowering of what has famously come to be known as The Sixties -- a
swirl of drug taking and the search for love and the meaning of it
all..." It seems to have affected many of today's analysts who are
tired of the 13-month oppressive bear market and yearn for the good ol'
10-year bull market. The proof is that in the absence of good news,
they are raising expectations on the absence of bad news!
In mid April, Jonathan Joseph, a semiconductor analyst at Solomon
Smith Barney, upgraded the sector to an "outperform" from
a neutral rating. He reasoned that, after March, things couldn't get
much worse. There is no earnings visibility in the sector. There is a
very noticeable lack of new orders. There is an inventory glut and there
is no pricing power. In short, "been down so low, it looks like up
to me..."
Mr. Joseph went on to say, "We are in such a decline that just a
revision to zero growth from negative growth, 25 percent growth, in
the semi sector would be good. We need to talk about picking
ourselves up from the bottom and getting ourselves going again."
But other analysts argue that things can get much worse. Fred Hickey,
publisher of the High Tech Strategist believes that the SOXX
Index is headed lower. Among his reasons is that the Index was 64
percent lower in 1998, which is the last year the industry experienced a
major correction. He says: "The claim is being made that valuations
can't get much worse. But they can get a lot worse."
The Philadelphia Stock Exchange Semiconductor Index (SOXX) jumped 9
percent after Jonathan Joseph's call. Applied Materials (AMAT) jumped
more than 25 percent during the week; Intel (INTC) jumped more that 24
percent and Xlink rose more than 31 percent. Was this the real thing or
just the pangs of anxiety that comes from losing a lover and being
afraid of not finding them again?
Arnold Berman (Wit SoundView) made a similar prognosis during
the first week of May. He said, "After a long spell in which
technology fundamentals were downright horrible, they now have become
merely miserable. The news is no longer all bad, just mostly
bad." This means that tech stocks can probably "stage
another rebound, but probably not another moon shot." It's an
interesting piece of logic.
Rather than "choosing stocks based on 'the next really hot
concept,'" Mr. Berman said, investors will do better with
"bottom up stock picking" based upon valuation, not
business themes.
Is this a case of "getting in" before good news is found so
that (when things pick up) "eventual gains won't be missed? Maybe
that's why they call it "bull..ish."
Don Sussis, the E-Consultant Columnist, is a business and investment
advisor. He is a member of the New York New Media Association Angel
Investment Group and a speaker for California based Tec, a worldwide
association of CEOs. His email is:
dsussis@internet.com
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