Interesting stuff from Bill Carrigan
Little birdies tell me tech rally may be coming
A few weeks ago, I stumbled upon a peculiar advertisement in a local magazine. It was a clever ad placed by a financial planner that had the look and style of an editorial.
The author went on and on about the same old stuff — trust, reliability, experience and the setting of goals. Near the end, the warmth disappeared when I discovered that you need at least $250,000 to get involved with this guy.
I was about to pass it off as a harmless pitch for high-net-worth clients until I read his following commitment: "My financial recommendations regarding your decisions to buy and sell are driven by individual client needs, including tax consequences, estate considerations and the day-to-day economic situation personally, nationally and globally."
In this case, the adviser's decisions to buy and sell are not based on the merits of the security but, rather, on the merits of the client. All investors, regardless of their circumstances, should adopt a buy-low and sell-high approach to investing in equities.
Is a client better served by postponing a sell of Nortel Networks Corp. at $110 because of the tax consequences and then holding the stock down to $10? Is the same client now going to give up the stock at $10 in order to lock in a capital loss for 2001?
I wonder how many Nortel shareholders are now going to make a second investment error based on tax consequences by selling the stock at precisely the time it should be bought. Perhaps the client should get a technical and fundamental opinion on the stock before making a trading decision.
The technical analyst can help by applying two important tests to the stock. We need to know if the stock is trending upward or downward, and we need to know if the stock is at or near a turning point.
In the case of Nortel, the stock has been in a downtrend since August, 2000. An average bear phase can persist for about 12 to16 months and so Nortel, at 14 months, has done its time with the bear. There are several other reasons for a technician to conclude that Nortel may be at a turning point and about to begin a new bull cycle.
A technical analyst is always seeking out strong stock groups relative to the broader indices. I call this the "birds-of-a-feather" approach.
In the case of poor market conditions, I look at the stock groups that fall the least during market declines. A good example is the recent strength in the technology sector where many stocks refused to post new 52-week lows following the Sept. 11 terrorist attack.
The simple way to apply the birds-of-a-feather approach to stock selection is to examine the components of a relevant index. In the case of technology, I chose the TSE-listed XIT, or the Information Technology Index. The index contains about 23 TSE-listed technology companies.
Our chart this week is that of the daily closes of the XIT component BCE Emergis Inc. This stock is displaying two important technical conditions that would make it a leadership candidate for a pending new bull market in the technology sector: it is trading above the Sept. 11 and its prior, April, 2001, bear-market lows. IFM.to daily chart
stockcharts.com[w,a]diclnymy[dc][pc5!c21!b50!b100!h.02,.20!i!b200!f][vc60][iut!Ul14!Lc20!La12,26,9!Lh14,3!Lb14!Lg]
A look at the XIT components reveals that 17 out of 23 stocks are now trading above their pre-Sept. 11 prices. Of this group, eight are above their prior, April, 2001, bear-market lows. XIT.to daily chart stockcharts.com[w,a]diclnymy[d20010314,20011031][pc5!c21!b50!b100!h.02,.20!i!b200!f][vc60][iut!Ul14!Lc20!La12,26,9!Lh14,3!Lb14!Lg]
Almost one-half of the components are displaying positive 10-month momentum numbers. Only six out of the 23 components are in hopeless downtrends, and Nortel is not one of them.
Follow the lead bird and enjoy your flight.
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Bill Carrigan is an independent stock-market analyst. His Getting Technical column appears Sundays. He can be reached on the Internet at gettingtechnical.com.
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