John Murphy's commentary today:
Update for Nov 16, 1997
RESTEST OVER? There's a good chance the retest of the October "selling
climax" was completed this week. The Dow and the S&P 500 bounced off
initial support levels near 7400 and 900 respectively on good volume. Both indexes retraced 50% of their November bounce before recovering. The Dow also survived a retest of its 200 day average. Technology indexes survived a more critical test of their October lows. The Morgan Stanley Technology Index (MSH) successfully retested both its 200 day average and its October 28 intra-day low near 420. The Nasdaq 100 bounced off its 200 day average for the second time. The market still needs to do more to confirm that a short-term low has been completed. Daily indicators are very close to turning positive, but haven't done so yet. The first thing we'd like to see happen is for the Dow and the S&P 500 to close above their 20 day averages near 7600 and 930 respectively.
RELATIVE STRENGTH LEADERS We've been pointing out that defensive stock
groups have been showing the best relative strength. Not surprisingly,
those groups led again this week with several stocks hitting new highs. The leading groups were utilities (water and telephones), retailers, drugs, food, and household products. Individual stocks that achieved bullish breakouts to new highs were American Water Works (AWK), Ameritech (AIT, Bellsouth (BLS), Sprint (FON), TJX, Wal Mart (WMT), JC Penney (JCP), General Mills (GIS), Quaker Oats (OAT). Stocks that penetrated October highs were Johnson & Johnson (JNJ) and Procter & Gamble (PG).
STOCKS TESTING 200 DAY AVERAGES A lot of stocks that have gotten badly
beaten down are in the banking, cyclical and technology sectors. While
we're not that enthusiastic about any of these groups, a number of stocks are testing 200 day moving averages which may provide important support. Here are some of the more prominent stocks with their 200 day values: Bay Networks at 27, General Motors at 60, Hewlett Packard at 59, JP Morgan at 108, Oracle at 32, and Whirlpool at 53.
FALLING INTEREST IN BANKS Money Center Banks took a hit this week. We've already mentioned that JP Morgan (JPM) was testing its 200 day average. We posted a Chart of Interest a couple of weeks ago showing that its October 28 intra-day low near 105 was also testing a three-year up trendline. It's critical that prices hold in the 105-108 region. Two other big banks fared even worse. Citicorp (CCI) has tumbled beneath its 200 day line and is close to retesting its October lows at 113. Chase Manhattan (CMB) also closed beneath its 200 day line at 105.
OIL DRILLERS DROP Oil drillers suffered a bout of profit-taking. A sharp fall in the price of natural gas may have hurt. There's been a close correlation between rising oil service stocks and natural gas since July. Natural gas peaked in late October and broke its up trendline this week. The PHLX Oil Service Index (OSX) failed a retest of its October high last week and fell toward its late October low at 118 before steadying on Friday. The pullback looks like a normal trading range within an ongoing uptrend -- as long as the October lows hold. Those October lows for individual stocks are: Dresser Industries at 39 «, Falcon Drilling at 31, Global Marine at 27, Noble Drilling at 29 «, Reading & Bates at 37, Tidewater at 57, and Transocean at 49. Oil Equipment supports are Baker Hughes at 39, Halliburton at 52 3/8, Rowan at 33 ¬, and Schlumberger at 78.
BONDS AND DOLLAR FIRM A benign inflation report on Friday pushed December T-bonds into a test of its contract high at 119. The short term outlook for bonds may weaken a bit owing to overhead resistance, a rally in stocks, and signs of strength in crude oil. Those potential negatives may be offset by a new 52 week high in the PHLX Utility Index (UTY). The Dollar Index rallied from an oversold condition. While the intermediate trend in the dollar is still down, its ability to rally late in the week may be tied to the stock market rally. The strongest currency is the pound and the weakest the yen, although both are overextended. The ability of the Mexican Peso to stabilize may be a positive sign that the worst is over in Latin America for now.
COMMODITIES WEAKEN All three commodity indexes slipped lower at the end of the week. The CRB Index was hurt by weakening grain prices and precious metals. The Goldman Sachs Commodity Index was hurt by plunging natural gas. The Journal of Commerce hit a new low, hurt by falling industrial metals. Corn and wheat turned lower, and pulled soybeans down with them. Copper, cotton, and gold hit new lows. Livestock markets remain weak. A bearish cattle-on-feed report on Friday is expected to push cattle prices lower on Monday. The commodities that appear to have the best upside potential are orange juice, coffee, sugar and heating oil.
JAPAN NEARING MAJOR TEST It's no secret that the Japanese market has been in a bear market for several years. For the past year, however, the Nikkei 225 had stabilized between 21000 and 17000. Prices fell below 17000 a couple of weeks ago and ended this week at 15000. No one has gotten overly concerned because Japan has had a low correlation to the U.S. market for several years. The Nikkei, however, is approaching a critical test of major support at its 1995 just above 14,000. That test will be important for several reasons. If prices hold in that area, that could be the first sign of a bottoming process. If new lows are hit, the bearish implications could take a negative toll on the world's other major markets - including our own. Some are already talking about the Japanese selling Treasury bonds to raise cash. We'll be watching.
NEED A SHOPPING LIST? The bad news is the longer range outlook is still shakey. The good news is that we may have seen the low for now, and prices may have started their yearend rally. What you do with that bounce is a personal decision. Our strategy is to use any yearend rally to raise some cash. However, short term traders may be able to exploit the bounce on the long side. For those looking to recommit some funds, this probably isn't a bad place to do so. However, we still favor those defensive sectors that are currently leading - namely, consumer staples, retailers, and utilities. The relative strength leaders in paragraph 2 might provide some ideas for a
shopping list.
Copyright c 1997 MURPHYMORRIS, Inc. All rights reserved |
