Commentary--Elaine Garzarelli for September 29, 2000...
garzarelli.com
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Edited for ease of reading.
>>> Stock market analysis for September 29
The current stock market weakness should be used as a buying opportunity since our indicators have more than doubled recently to 61.3%. A level of 65% is a buy signal.
Historically, a final stock market drop generally occurs when our indicators are rising from below the cautious 30% reading, thereby giving investors an opportunity to buy into weakness.
The declines in some tech stocks are causing analysts to lower EPS expectations. Thus, less negative surprises in the future. Our S&P 500 EPS growth is 7.5% next year compared to a double digit gain forecast by the consensus. This downside revision is in process and analysts may swing to extreme bearishness making earnings upside surprises more likely in the future.
One of the indicators we follow has surprising remained neutral through the current stock market correction -- the number of bullish investment advisors. We look at this ratio of the percentage of bullish investment advisors based on data compiled from Investor's Intelligence. It is a negative sign for equity prices when more than 70% of investment advisors are bullish on the stock market over a four-week period.
Prior to the 1977 and 1984 drops in stock prices, 85-90% of investment advisors were bullish -- an historical high. Less money is waiting on the sidelines ready to enter the market when bullish sentiment persists. This week's number stands at 64.7% -- the highest level since the end of April (the 4-week average is 62%). Should this level decline to below 40%, it would be bullish for stocks and raise our indicator composite by 6.2 points to bullish.
Reported this week, the economy grew 5.6% in the second quarter -- stronger than previously estimated. Although these are strong numbers, we do not worry about the economy growing too fast and further tightenings.
There have been over 130 central bank tightenings over the past 15 months around the globe. We believe there is a worldwide slowdown unfolding with UK housing declining, French consumer spending weaker than expected, declining Japanese department stores sales, and slower Taiwan employment gains.
Our strategy remains to be fully invested in beverages, energy, financials, foods, homebuilders and building materials, some technology, tobacco, and utilities.
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Interest rate/bond market analysis for September 29
The recent pullback in the stock market supports the view that the soft landing outlook remains in place.
Interestingly, the Fed funds futures contracts are beginning to price in some risk that the Fed may even ease policy sometime early next year.
There is talk of possibly higher government spending following the election which has worried the bond market lately.
Nonetheless, we continue to recommend bonds as part of one's asset allocation. We forecast a downturn in long rates (10-year bond) 5.2% to 5.4% by the end of next year. Currently the rate is 5.82%.<<< |
