HM has some nice points about the market, the graphs are nice to bad, they loss something in the translation to the SI world. -g-
When Bears Turn Bullish
By Helene Meisler
Special to TheStreet.com
6/22/99 9:40 AM ET
June 22
As I watched Ron Insana interview an analyst yesterday afternoon on CNBC, I was speechless. Ron explained to the audience that this analyst had been bearish for quite some time and had recently changed his opinion to become bullish. Since I love that sort of stuff, I watched intently.
This analyst was billed as a technician, but he began his speech with a discussion on valuation. OK, I thought, sometimes even market technicians speak about fundamentals. While I'm not quite sure what his point was on valuation, he did mention something about how stocks didn't want to go down any more last week, so he had changed his opinion. OK, fair enough, I thought.
Then came the one-two punch. A chart he had brought along went up on the screen. And what did it show? Specialist's unhedged short ratio (while I'm not exactly certain what this is, I assume it is a derivation of the Specialist short ratio and therefore a sentiment indicator). It was at a peak similar to the one seen in 1987. Just below it was a chart of the Investor's Intelligence bullish percentage smoothed in some fashion. It too was at a peak last seen in 1987. It seems the last time these two indicators were simultaneously flashing the same signal was 1987.
When Insana inquired what exactly is bullish about this chart, the analyst went on to say that this was not a bullish chart, but a bearish one. (He did not provide much explanation to viewers, so I will take the liberty of explaining that these two charts showed bullish sentiment at an extreme not seen since just before the crash of '87 -- that's quite bearish.) Not to worry, the analyst glossed right over these two glaring charts and proceeded to tell us that we should be buying stocks. And what stocks did he like? Oh, anything that happened to be on the new-high list!
Talk about throwing caution to the wind! What was this guy thinking? He brought along a very bearish chart (which, of course, I'd love to get my grubby little hands on!) and told us to disregard the chart and just buy stocks! This is ludicrous! This is not analysis, but herd mentality. And that's just one reason I remain cautious in here.
It is true that many stocks did not want to go down any more last week. When that happens, stocks rally. And while I expect the rally will continue for about another week, I also expect this current rally will be full of nonconfirmations and negative divergences.
The market is entitled to rally now, just as it was in June of 1998. Even back then, the Nasdaq and the S&P were outperforming the Dow Jones Industrial Average. The DJIA eked out a marginal new high while the Nasdaq and S&P soared past their spring highs. But take your eyes off those averages for a minute and see what else was going on internally in the market.
I have marked last year's spring highs with a letter A on the charts and the 1998 summer rally with a B. Notice how the S&P, Nasdaq and DJIA all went on to new highs last summer. But the transports didn't, nor did the utes, nor the cumulative advance/decline line, nor the number of stocks at new highs. The overbought/oversold oscillator also showed a lower peak despite the move to new highs in the averages. These were all glaring nonconfirmations of the summer rally.
For this year I have marked the spring highs with a letter C, although in the case of the A/D line and the overbought/oversold oscillator, I have used C1 and C2 to denote the peaks that were made last November as well as this spring's highs. (This spring's rally failed to surpass the peaks of the rally off the October lows.) I then used the letter D with a question mark to show how I believe this current rally will end: with the averages at higher highs and the indicators at lower highs, showing yet another nonconfirmation.
S&P 500
Nasdaq
Dow Jones Industrial Average
Overbought/Oversold Oscillator
Cumulative Advance/Decline Line
New Highs
New Lows
Transports
Utilities
Now I know fundamentally there are differences between last year and this year. There always are. However, the one really big difference is that last year, interest rates were falling. They were in the process of moving from just over 6% to just under 5%. There will be none of that this year: Rates are rising and have been for nearly nine months now.
Yield on 30-Year Treasury
Where does that leave individual stocks? In the DJIA, the cyclicals and oils have come down and will be OK again once they settle down. For now, AT&T (T:NYSE) is OK to buy, and General Electric (GE:NYSE) will likely hold 104 and look buyable down there.
Elsewhere, Chase Manhattan (CMB:NYSE) is the best-acting bank. Don't chase it; buy it into a pullback. Colgate (CL:NYSE) is buyable here around par. Gannett (GCI:NYSE) is still a good chart, but I hate that the newspapers have gotten so much press and still have not broken out to new highs.
In techland, Motorola (MOT:NYSE) is still my favorite, but I would not chase it up here; buy a dip. Lucent (LU:NYSE) is also a pretty picture. I debated writing down Cisco (CSCO:Nasdaq) as it has moved sideways for so long and looks ready to go. However, every other time it has looked like this, it has merely eked out a new high only to fall back down.
On the negative side, McDonald's (MCD:NYSE) has rallied enough for now. 3M (MMM:NYSE) managed to sidestep yesterday's cyclical decline; I'd consider it an opportunity to sell. Johnson & Johnson's (JNJ:NYSE) action is quite poor as well. And why can't Boeing (BA:NYSE) rally on the heels of the Paris Air Show?
Elsewhere, Anheuser-Busch (BUD:NYSE) tried its hardest to hold and rally but to no avail. Delta (DAL:NYSE) is a sale at 62. Merrill (MER:NYSE) is a sale at 82. Pepsi (PEP:NYSE) is not looking very good these days, either.
This rally will likely continue for another week, at which point the market will once again be overbought. I don't mean for this to sound so bearish. It looks more like a choppy market that was unprepared to rally in a sustainable manner. When this rally has run its course, I expect stocks will come down and retest their lows once again.
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