Bear Stearns today downrated DELL from Buy to Attractive.
However, I have noticed that despite downrating or downgrades by big brokerage houses, some stocks still keep going up and up as if nothing negative happened.
Below is an article which reports that Robert Prechter thinks the Dow is headed not to 4000 but to 400. What would this plunge have on the POG?
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Money Daily for Monday, Jul 28, 1997
Dow 400? One analyst thinks so
Sure, a 95% correction is way too extreme to take
seriously, but the rationale behind it -- that we're in a
manic market -- is food for thought.
A Briefing Room Special
by Michael Brush
Weekend, July 26-27, 1997
Among the handful of
stubborn contrarians in this
raging bull market, one
stands out for the sheer boldness of his
projection: Dow 400.
No, not down 400. Not even a retreat
to 4,000 from the current level of around 8,000. But Dow
400. Two zeros. As in: A 95% drop that would set the
clock back to 1955.
Sound kooky? You bet. But Robert Prechter, the market
analyst behind the doomsday scenario, makes some
provocative points on his way down to Dow 400.
Chief among them: Today's market, he says, bears the
hallmarks of a dangerous mania. If he's right, we're all in
serious trouble. Why? Because when market manias
unwind, they do so in a big way -- they usually wipe out all
the gains that were earned during the manic phase ... and
then some.
But before we get into whether we're in a market mania
now, it is worth noting that Prechter is not a maniac. His
newsletter, The Elliott Wave Theorist, ($233 per year;
twelve monthly issues plus several special reports;
www.elliottwave.com/index.htm), boasts thousands of
subscribers. Prechter is also the author of a book , "At the
Crest of the Tidal Wave."
Like his book, Prechter's newsletter examines the markets
by applying the principles of "Elliott Wave" theory,
developed by an accountant named Ralph Elliott, who lived
until 1948. Elliott Wave theory is a form of technical analysis
that says the market is characterized by a limited number of
patterns that repeat over time periods as short as minutes
and as long as decades and even centuries.
The upshot of Prechter's gloomy analysis: The markets have
reached an apex in a century-long wave, and are now
poised for a correction that will wipe out virtually all their
gains of the past several decades. Sound far fetched? Join
the crowd.
"That is not even worth a comment," says fellow bear David
Shulman, the chief equities strategist at Salomon Brothers.
Shulman's more mainstream bearish outlook calls for an
advance to 8,500 and then a decline to 6,800 in the near
term.
"I have always found it dangerous to be on the extreme end
of any issue," agrees Hugh Johnson, the chief investment
officer of First Albany Corporation. "And it would be
putting it mildly to say that a forecast of 400 is on the
extreme."
To be fair, Prechter's newsletter, which attempts to forecast
price movements over the upcoming four weeks or so, has
been bullish more often than bearish on short term trends
during the past year or so.
But when it comes to his bleak outlook about the long term,
Prechter sticks to his guns. "I am totally serious about the
retrenchment to 400," says Prechter. "But I can understand
why most people wouldn't be, since it is something that has
happened only once in this century, and once in the early
1700's [in the London stock market] before that."
OK, so Prechter's forecast of a 95% correction is pretty far
out. But his discussion of mania in today's market comes a
bit closer to hitting home.
Your garden-variety mania, according to the dictionary
definition, is an excitement "of psychotic proportions"
characterized by mental and physical hyperactivity,
disorganized behavior and an elevated mood. In short, it is a
kind of madness that takes hold.
When it comes to markets, manias have the following
defining characteristics, notes Prechter.
Assets are overvalued by historic standards.
There is broad participation by the public.
There is a persistent rise in the markets with fewer, briefer
and smaller setbacks.
Manias grow out of long-term bull markets. At a certain
point, the public begins to act as if the markets can go
nowhere but up.
Manias go unrecognized when they are occurring, which
helps explain why they are possible.
During manias, investment professionals are no longer
thought to add value. Indeed, they are judged as obstacles
to investing success.
Finally, it helps if the government has assumed a stake in
the rising market, in some way.
Does any of this sound familiar? If so, again, you are not
alone.
"There are several signs that we have moved form a rational
stage to speculation," agrees First Albany's Johnson. The
biggest sign, he says, is the huge valuations being assigned to
tech stocks like Microsoft, Dell, and consumer non-cyclical
stocks like Coca Cola, Procter & Gamble, and General
Electric. "These stocks are trading at multiples that I just
don't believe are rational."
Other characteristics of mania exist as well. Certainly, there
is widespread public participation in the market, notes
Vernon Winters, the chief investment officer for Mellon
Private Asset Management. More and more, we hear
frustration that fund managers "can't beat the index." The
bull market has been around for years, and corrections are
short and sweet, by historic standards.
And there are indeed some signs that Washington may be
getting a little too close to Wall Street. Recent objections in
Congress to the Fed raising interest rates were nothing new.
But the reasons behind them were, notes Winters. Usually
Congress is worried about the impact of higher rates on
borrowers. This time around, it had an eye on the fears of
voters about the impact of a rate hike on the stock market.
What's more, plans to invest social security money in stocks
would give the government a greater interest in Wall Street,
points out Prechter.
Does all this mean we are in a mania now? Probably not. As
students of economic history know, true manias are rare.
They have probably only occurred three times in history: the
Dutch tulip bulb mania in 1637, the South Sea Bubble of
1719-1720 in the London stock market, and the Roaring
Twenties stock advance of 1921-1929.
Those manias ended abruptly, but not before sending off
some signals that made it clear the euphoria was coming to a
close. Two signs to watch for, says Prechter, are the
following.
The number of stocks advancing falls below the number
declining (known as the advance-decline line). In other
words, stock averages continue to go up because of the
success of a limited number of issues. But the majority of
stocks are drifting lower.
Secondary or small-cap issues lag, while a select group of
blue chips roar ahead.
Before you rush out and sell all your stocks because you see
signs that these two trends exist, consider this. Prechter's
Elliott Wave Theorist has been predicting the Big Fall
since 1983. (In wave theory, "patterns always repeat
themselves, but it is difficult to predict the periodicity,"
responds Prechter.)
Second, if the market is in a speculative phase, it could just
as easily return to more normal valuations by declining
gradually, rather than through a crash landing, points out
Johnson.
Finally, with economic trends so positive, inflation under
control, earnings still coming in strong, and a Federal
Reserve Bank not likely to raise interest rates soon, it is
difficult to find any reason for the market to take a sharp
dive. "I think the market is overvalued and it will fall," says
Johnson. "But I wouldn't bank on it."
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