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Mad Stock Disease By Don Sussis May 23, 2001 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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