Bernie Schaeffer: The Tech Sector Still has Obstacles to Overcome
11/28/2000 9:59:20 AM
I've expressed a number of concerns about the market and particularly
the Nasdaq Composite Index (COMP – 2880.40) over the past couple of
months. In my October 30 commentary on this site, I said "our …
indicators at Schaeffer's Investment Research … conclude that the
buying opportunities are much more concentrated in non-tech sectors
than in tech. Or, put another way, I expect the Dow Jones Industrial
Average (INDU – 10,590.6) and the S&P 500 Index (SPX – 1379.58) to
continue to outperform the COMP (3278.30) until we get sufficient
capitulation on technology issues to support a bottom."
Since October 30, the COMP has declined by 12 percent, while the SPX
is off by just two percent and the Dow is about flat. And I expect
this trend of underperformance by Nasdaq and the technology sector to
continue due to a combination of weak technicals and a lack of
sufficient negative sentiment and capitulation to justify buying in
the wake of these weak technicals.
Let's examine a few charts to illustrate the poor technical condition
of the COMP. First off is a monthly chart of the COMP versus the SPX.
Note how the 50-percent retracement level of the rally from the August
1998 bottom to the February 2000 top (at about 162) held on the May
tech pullback but has now been seriously penetrated. The next support
level on this chart is at the previous highs in the 120 area, which if
reached would imply an additional 15-percent deterioration in COMP
relative strength versus the SPX.
Note how the 1998 decline in the COMP was contained almost perfectly
at this long-term moving average. In fact, the last time this moving
average was penetrated on a monthly closing basis was back in July
1990, and this was followed by a nasty 26.5-percent decline into the
October 1990 bottom. The 40-month moving average is currently at
about 2650, and it will be important to avoid monthly closes below
this key trendline.
What is the best scenario for the ultimate bullish resolution of the
current very weak situation in the techs?
1. A sharp additional pullback to the 2500-2600 area. I'd hope that
such a pullback would wash out the indications of investor complacency
that continue to rear their ugly heads despite the ongoing weakness in
techs. In this regard, I'd like to see at least some sign of
nervousness from the Wall Street strategists who as I write this are
solidly bullish to the last man (and woman).
2. Some indication from the Fed that it is abandoning its insane
"tightening bias" that defies all logic in the face of slowing profit
growth, a credit crunch in the bond market, imploding emerging market
currencies, and an inverted yield curve.
3. A sharp rally off the bottom that takes the COMP back above its
40-month moving average which, unlike every rally to date, is greeted
with skepticism and talk of a "bear market bounce" rather than with
glee and talk of a "bottom."
What is the worst-case scenario? It is one in which we begin to
experience monthly closes below the 40-month moving average as
declines become slow and steady with no major bounces. Under this
scenario, we'd also see the gurus remain steadfastly bullish, thus
denying the market the washout of the bulls that is such a necessary
condition for a bottom. And it would see a Fed that remains fixated
on the wrong indicators – wage inflation and crude oil prices –
as the economy slides into recession.
I consider this worst-case scenario to be unlikely at this point, but
it is a scenario that cannot be dismissed as a possibility. In the
meantime, I would continue to avoid the technology sector and look to
sectors that are showing strong technicals without excessively bullish
sentiment – the drugs/medicals, the biotechs and the oil drillers are
my favorites here. And if you must play Nasdaq, I'd suggest a very
light commitment to beaten-down names with relatively modest market
caps such as Amazon.com (AMZN – 28) and Palm (PALM – 43-1/2). |
