from the toronto star today...
IBM will help compute market's direction
My scenario of a summer rally is slowly unravelling somewhat, but I still remain cautiously optimistic.
We dodged a bullet last week when the market rallied on Thursday following the Wednesday collapse of some lesser-known U.S. large-cap technology stocks. The shares of Entrust Technologies Inc. and Computer Associates International Inc. lost half their value on Wednesday following the release of news concerning earnings disappointments.
The problem is not the gutting of a few stocks. It's that they are technology stocks, and the tumbles sent a bad message to investors about the stability of the entire technology sector. Investor confidence in the sector is critical if we're to enjoy a broad advance in the stock market over the next several weeks.
I expect a tech rally, and other conditions seem perfect for North American stock markets to rally through Labour Day. A few weeks ago, I pointed out that most bull markets run for about 24-plus months. If we use the lows of October, 1998, as the origin of the current bull market in North American equities, then the bovine should run at least through Labour Day.
History shows that bear markets rarely have their origin in the two years prior to a U.S. presidential election. The Stock Traders Almanac, published by Hirsch Organization Inc. of Old Tappan, N.J., includes a study dating back to 1832, showing election years and pre-election years easily beat the returns of post-election and mid-term presidential years.
Another plus in current market conditions is that most of the big U.S. technology leaders, such as Cisco Systems Inc., never broke down through their long-term up-trend lines during the technology meltdown from March through April.
Normally, I would have considered last week's one-day blood bath in the technology-related issues to be just a speed bump in the path of our third up-leg advance through Labour Day. Unfortunately, one of the stocks caught in the earnings-related selling panic was bellwether International Business Machines Corp.
I always pay attention to the bellwethers of the various stock-market sectors. Here on June 19 a year ago, I noted that the interest-sensitive bellwether stock Federal National Mortgage Association, also known as Freddie Mac, had broken down through a long-term trend line two months earlier. That signal confirmed the direction of interest rates and various stock groups all through 1999. Last year, we had a lousy bond market, and the Dow Jones industrial average and the S&P 500 traded sideways. The Dow transports and utilities declined, as did the Toronto Stock Exchange's financial-services subgroup, which in turn had a negative effect on mutual funds concentrated in the sector. Only the Nasdaq and the TSE 300 composite index were driven to new highs during the latter half of 1999 and on through March this year, driven by the shift in leadership from financial to technology- and oil-related issues.
I view the potential breakdown in the shares of IBM to be an early warning of another leadership change. These leadership changes can be uncomfortable in that they can cause bear markets, or can trigger short, nasty corrections.
Our chart this week shows IBM's weekly closes, plotted on a logarithmic scale to depict percentage changes in price as opposed to dollar changes. The long-term trend line actually had its origin earlier than we're showing, in mid-1993. IBM had been in the dog-house since the stock-market crash of 1987 crash, but since mid-1993 has made a 10-fold advance.
IBM has certainly traded below its current trend line several times over the years, but has almost always made weekly closes above the line. We now need IBM to trade above $110 (U.S.) and more to stay in trend. If IBM were to close below $100 for two weeks in a row, it would be a bad omen for the sector, and, therefore, for our summer rally. |
