Investing--Paul Cherney, S&P: "Beware the "Real Downside Risk"
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>>> Monday September 25, 2000 (11:47 am ET)
Beware the "Real Downside Risk"
In S&P technician Paul Cherney's view, the stock market is mending -- but it's premature to go long
NEW YORK, Sep. 25 (Business Week Online) - Technical analysts swear by the charts that track stock prices and volume -- and the charts watched by Paul Cherney, market analyst and daily commentator for Standard & Poor's, show "downside risk" in the near term. However, he sees the market in a mending process and mostly moving sideways after the springtime crash in the Nasdaq.
He views that crash as a textbook example of what happens to a speculative bubble in the market. Overall, he recommends that investors be patient and not go long until a more definite trend emerges.
Unlike some technicians, Cherney combines his number-crunching with fundamental analysis. And he has some real concerns about the market after the third-quarter earnings season. He points to Intel's slump after it predicted earnings would take a hit from the fall of the euro.
These were among the comments Cherney made in response to questions at a Sept. 21 investment chat presented by Business Week Online on America Online. He was quizzed by the online audience and by BW Online's Jack Dierdorff and Amey Stone. Following are edited excerpts from the chat.
Q: Paul, can you explain a bit about technical analysis?
A: Technical analysis pays no attention to fundamental assessments of a company's ability to make a product and to sell it. About 80% of price action in a stock is based on fundamental assessments. However, no matter how clean a balance sheet is or how well a company can earn money, if the stock price doesn't rise, a technical analyst is not interested in being long.
Q: The market has been droopy -- what's your take?
A: The springtime crash in the Nasdaq is still in a mending process. There's real downside risk here.
Q: What time frame are you looking at for your "downside risk" -- three months or what?
A: 14 trade days. Downside risk for the S&P is a close of 1398. For the Nasdaq, the worst that I see technically (technical conditions can change) is a 3652 closing basis.
Q: Do you still think we are in a bull market? From what you've already said, I would guess not.
A: I'd said "mending" before, but right now in the very short term, I'm very concerned about Friday's action after Intel's [earnings] warning today. I just looked at Globex futures for the S&P 500, and if the quotes I got were correct, we'll be opening down 26 points on the S&P 500, near 1423. This could be the headline that creates a genuine capitulation, which would ultimately be resolved with a final dip on Monday in the a.m.
Q: How about some easy-to-read material on technical and chart analysis? Any recommendations?
A: On chart analysis...I would say that Stan Weinstein's book, Profiting in Bull and Bear Markets, is very good. For purely technical, Murphy's Technical Analysis of Futures is a bible, but nothing can replace a face in the screen every day (experience, that is).
Q: The market has hit a downtrend from late August to mid-October the last two years, then gone into an upward cycle to yearend. Do you see this happening again?
A: This might sound funny coming from someone who is primarily a technician, but I have real concerns about earnings after the third-quarter reporting season. I think the upside is there on a seasonal basis. However, it could be a labored affair with the Nasdaq unable to spend any time above 4475.
Q: How far do you look ahead generally?
A: I wear two time hats. I feel most comfortable calling intraday moves out at the most five to seven trade days, but longer-term models I run often give me the ability to be positive for up to three months. However, that only occurs during a Fed easing of monetary policy.
Q: How do you differ from other technicians?
A: I use no moving averages, for one. My chart interpretations are based exclusively on sideways consolidations, which represent either support, if they are below current prices, or resistance, if they are above current prices. Other measures that comprise my models run from the VIX [which measures S&P 100 volatility] to put-to-call ratios, breadth measurements, and new lows divided by total issues traded. And about 40% of all my models measure the volume that goes into a price move.
Q: Paul, tell us more about that weight you give trading volume.
A: A price advance which is not attended by VOLUME means that it is the product of a select few believers. Once prices advance, those people look over their shoulder to see volume follow. When volume doesn't follow, they often take their profits, and the market turns on a dime.
Q: Many big-name Internet stocks fell hard last spring and then have basically been flat ever since. What does that tell us about the direction of that sector?
A: The zoom in the dot.coms was a textbook example of a speculative bubble. Eighteen months ago, as we were in all the sound and the fury of the advance, I was asked here how will it end? I said, the same way every speculative bubble ends -- stocks will lose 70% to 90% percent of their value off their highs. The curious irony of this is that the bubble is created by expectation of future earnings. The irony is, once earnings show up, then the companies get valued in a fundamental manner. And then who is really gonna pay 1,000 times earnings for a company?
Q: What strategy do you recommend for investors with this downward trend?
A: I'm perfectly happy to be patient. Rothschild said, "I make money because I never sell at the top, and I never buy at the bottom." With money that's positioned right now, be patient. Don't add to the long side until a trend higher develops. The U.S. is not going out of business.
Q: Paul, how important is the put-to-call ratio?
A: On the p-c ratio, the numbers have changed recently. I like it as a contrary indicator. Put simply, once you see excessive put volume in a declining market, it's a sign that most of the people who were afraid and wanted to get out, got out...
Q: Is it wise to consider buying in the a.m. after a big Nasdaq drop like today?
A: ...There is something to be said for waiting for a trend to develop higher before committing capital, even intraday.
Q: Do you recommend that investors combine fundamental analysis with technical analysis? Or should they stick to one methodology or the other?
A: In the markets, you can lose money half a dozen different ways. If you feel comfortable investing on fundamentals, and that will help you lick your wounds when the stock that looks terrific drops like a rock, well, then stick with fundamentals. As far as I'm concerned, I prefer a combination of the fundamental story and the balance sheet that makes sense, combined with technical price points to add to position or establish new ones or take short-term profits...
Q: Paul, what is your target for the end of this year for the S&P 500?
A: I officially forecasted 1616 for the S&P. However, I also think I was wrong. I think any price north of 1560 would be pretty good. The worst I could see would be a close near 1340.
Q: Is there any way you factor the Presidential election into your calculations?
A: I have taken the time to look at the charts in the Presidential election years, and for September and October, no easily observed pattern was recognized. I can tell you that a study I did a few years back looked at Fed rate hikes in an election year, and when the Fed hikes rates, the incumbent party has a very high probability of retaining the White House. Why? Because the Fed wouldn't raise rates unless the economy was humming, and people vote with their wallets.
Q: It sounds like you see a lot of negative signs in the major indexes. But are there any sectors where the charts look a little prettier?
A: Well, let's see if we can find one -- hold on one second. Medical health care and hospital management. Those are two. I may have more. I'm frantically slashing through my industry groups. Let's see, in the shorter run, some volatile but positive trading could still occur in insurance companies and brokers. But most of the industry groups are representative of the market as you see it in the S&P 500, which is sideways and on the mend, waiting for even a Fed loosening scenario (practically everything goes up then).<<< |
