Latest Barrons interview with analyst says NOVL is one of those dying stock. Remains to be seen how the market responds to the article this week.
Barrons - Sept. 20th/96
Avoiding Seduction
It's Key to Navigating the Dangerous Shoals of a Top
An Interview With Justin Mamis - It's also a character issue with the prominent technical analyst - an issue of the market's character. Which, says Justin, is undergoing an anything-but-monolithic transformation from bull to bear, with all of the rallies and retreats, the volatility and the profit opportunities for the nimble that such a complete about-face implies. The current run-up, Justin opines, is likely to carry to right around election day. And then? Not Armageddon, but a nonetheless nasty retreat that'll occasion a huge sigh of relief when it fails to break through, say, 5200.
The Mamis Letter, Justin's unusually pithy and idea-packed weekly technical commentary, long a fixture on trading desks and ``in portfolio managers' bottom drawers,'' as its author puts it, these days has a new publisher: Justin. He's gone independent, backed up with a soft-dollar arrangement for institutional clients through Reynders Gray & Co., and, the early indications are, entrepreneurship
agrees with him.
- Kathryn M. Welling
Barron's: How do you read the market's mood swings at this juncture,
Justin?
Mamis: The tone, the psychology, has changed dramatically from midsummer. Where anxiety reigned a relatively few weeks ago, now - my impression is - most investors couldn't care less about a quarter-point rise in interest rates. ``It doesn't mean anything,'' they say.
Q: Well, there have been some indications of growing nervousness in the last day or two -
A: But there's a triple-witching involved here - and we did notch new highs last week. The difference in attitudes is palpable. Early this year, I'd make a presentation, and people would say, ``I see the things you're worried about and I agree, but the bull market isn't going to be over until they start raising rates. That's always been the key.'' So I'd sit there and say, ``I guess, but I don't think that
always has to be.'' But now that people are threatened with an imminent rate rise, they're saying, ``It doesn't bother me.'' The same people!
Q: Well, things change -
A: Exactly. They're complacent because they've had a decline - and survived.
Because they think that stocks are doing well all over again; the funds are getting some more money in. This psychology is all rather standard in the latter stages of a broadening top. The market has to seduce people. This explains how portfolio managers who know better - who are basically intelligent and competent - can be totally long going into the top. The intervening rallies are spectacular. They have to be, to suck everybody in. The thing about stocks, compared to commodities, is that they fluctuate.
Q: What? Commodities don't fluctuate?
A: They do, but they tend to move more in straight lines when they get up a head of steam, you don't have the same swingingness as in stocks. Their trends tend to be more consistent. Stocks, by contrast, tend to have considerable intermediate-size fluctuations within long-term trends. And the old-fashioned indicators work best in those intermediate swings. We had the decline into July, which got sufficiently oversold that we were entitled to a rebound. And the market had come down far enough that it was time for an intermediate-size, intervening rally within that downtrend, the kind that usually lasts three to five months. The kind that turns
everyone into believers again. I've been using as examples of this sort of action, the semiconductors and semiconductor-equipment makers. It's sometimes easier to grasp this pattern in individual issues. Those stocks had 50% up moves. I think LSI Logic went from 23 1/2 to 39 1/2 before it went to 17. The same kind of thing with Lam Research. The stocks have big rallies. Then they have a short-term
intervening selloff, then they have a second rally up that sometimes goes to a higher high and sometimes doesn't. One of those stocks, for instance, did - and the other didn't. It's only later that they crater. What has to happen is that people have to look at the developing pattern and say, ``It is holding down there. We have made
the low.'' You can hear talk like that about Micron Technology now all the time. ``We've made the low. We've had a test of the low. We're now in an uptrend and everything is okay again.'' Basically, you can translate that individual stock pattern into the market overview. Essentially, you have to convert the anxiety investors felt at the mid-July low into enormous confidence again.
Q: Which is what is going on now?
A: Sure. That's what the blue chips do. When Intel goes up five points, it makes everybody feel better. Now they can buy Motorola, which has been down. Therefore, gee, it's a bargain. That's what we've seen in the swing this week to the semiconductors and the equipment makers. Novellus Systems, Applied Materials and Lam - all of those equipment makers got strong because of Intel.
And the fascinating thing about this particular conversion from anxiety to confidence is the attitude toward the rates, as I said. If the Fed hikes rates this coming week by a quarter-point - or a half-point, even - it will bother people for maybe 20 minutes.
Then you'll hear, ``Good, that's out of the way. I don't have to worry about it anymore. The air is now clear and I can plan ahead, because they are not going to have to do more.'' A half-point increase will be justified as ``all they need to do.''
Q: It'd be strong medicine, but -
A: Good. People are going to believe that everything is okay. This is the equivalent of sitting in gas lines four blocks from the gas station in October of '73 and not worrying about the negative divergences taking place in the market. People did that. It's an interesting comparison because at that point there were very simple
negative divergences evident. There were no real long-term signals, like the whole damn thing is not confirming a new high in the Dow. It was just that within a three-week span, the Dow made a rally high, sold off, came back up and made a higher high - while we were sitting in the gas lines. But that's when the number of new highs and breadth failed. It was very tiny, but very clear. While the newspaper
was resting on your steering wheel and you weren't going anywhere, you could see in the financial pages that there was this simple failure.
Q: What does this have to with rates?
A: This whole thing about rates is not dissimilar. It's not a perfect comparison, but it is psychologically valid in the same way. ``I don't have to worry about these things because everything is okay; because I need everything to be okay.'' That's what a big intervening rally does. It makes you feel good. And it isn't over until it makes
people feel that way.
Q: So this rally still has legs?
A: Yes. I suspect that's why you probably need an extra swing at it; it's probably too soon to bail out right this minute. People can still say, ``Gee, I'm not worried about the fact that the Nasdaq hasn't made a new high yet, because look how strong it is. It's going to. Or the Russell. They'll catch up.''
Q: Activity has picked up in Nasdaq's more speculative precincts -
A: You know, a very wise portfolio manager at Fidelity - not one of the kids - said something to me a long time ago that he probably doesn't even remember, but it's so true. One reason portfolio managers are still long at the top is that they are making so much money in their own accounts. There are lots who don't buy emerging-growth stocks for their funds, but they sure do in their own accounts.
They manage income funds, but they own those growth stocks. When they run up, it makes everybody feel good. The nature of this whole thing has an odd quality - it's a psychological deception that we've seen before. These people, aside from the 29-year-olds who have never seen a bear market, know better. Yet these same people who have been anxious aren't anxious anymore. Everything seems to be okay again.
Q: You don't believe it's different this time?
A: In many ways, it is. The underlying market has changed from 20 years ago. We have twice as many stocks to look at. And many times more funds. The inflow of money has become so immense. The old-fashioned indicators are not as precise as they used to be. They don't work in the timing sense anymore.
Q: Why is that?
A: Because the whole game is much better, much bigger. It's not enormously different, just different enough to require a more critical look at the numbers. For instance, if I have 221 new highs compared with 200 in May, then with the market hitting new highs, there's no negative divergence. But I wonder. How meaningful
are 21 stocks out of 5,000 now, when it used to be, say, 21 out of 1,500 that we were looking at? Is 21 more new highs significant today? The divergence doesn't need to be glaring. In fact, it needs to be deceptive in some way. I sit here and post 400 charts daily. When you do that, you see how narrow it is. You see that it's
United Technologies or IBM or both together moving the Dow. In the meantime, you have a lot of stocks that don't rally.
Q: But hasn't breadth been improving?
A: Superficially, you might say ``Gee, breadth was 1500 to 800, so they must have been up.'' Well, they were up. But they were up by eighths and quarters, or they were up a point intraday yet closed up only eighths or quarters. So you get this sense of, ``Gee, this is not good.'' Underneath it all, when you do my bottom-up kind of charting, you can feel through your pencil that stocks are not really in good shape.
Q: Looking at 400 charts is enough to tell how the broad market is behaving? A: Yes, though I actually look at a lot more. Those are just the ones I keep by hand. And they include stocks from every sector. So I'm charting three foods and seven oils and three oil-service stocks. That way, I can see when something is trading terribly. I can start asking, for instance, how come Baker-Hughes,
Halliburton and Schlumberger are not going up, when oil is making new highs and everybody is talking about how marvelous Chevron and Texaco are? You start to get a sense that there's a problem. I'm always early, because I get that sense. But the signs are not always negative. The Duracell chart, for example, started looking very positive in the weeks before the deal was announced. Those
people who bought the calls a few days before that should simply say, ``The chart was getting better.'' I had noted it in my letter two or three weeks earlier. There were leaks. You can see the leaks in the chart. You can't keep those things secret.
Q: Let's get back to the market. How long will the good times roll?
A: Into the October/November time frame. And gee whiz, that's the election.
Q: That's supposed to be one of the reasons the market won't fall apart in '96.
A: Let's take a longer-term point of view. Let's say that's reasonably valid - or let's say who cares? Why does the market have to do everything at once? Everybody wants this neatly packaged now. I think that's what technology has done to people's minds. You want it as precise and fast as the computer. But that's probably the deception. Everybody wants everything to happen at once. But life - and the market - aren't so obliging. Look at the early 1970s. Look at how long that took. After the breadth peaked in the middle of '71, it took 18 months before the Dow peaked in January of '73. The Nifty Fifty stocks stood out in November and December of '72 because everything else was junk - so many other stocks were already in downtrends, having made their peaks back in April and May of '71.
Then, the Nifty Fifty went into a big decline from the high in January '73 into late spring, took a couple of swings up that finally ended up in reversals sometime that summer, and only then ran up to their October peak. If you look at the old charts there was a whole bunch of stocks that didn't make their highs until October '73.
There was another bunch - I remember Texas Instruments specifically - that didn't make their highs until January of '74. What I'm saying is that these sorts of major tops are not monolithic.
Q: But where does that leave investors, besides confused?
A: I think we're probably going to have a selloff after the election, but one that holds at the 5200 level on the Dow. So everybody is going to say, ``Gee, 5200, that was the low.'' And you aren't going to break that until the next calendar year. It will just be too soon to break it before then. Go back and look at LSI and Lam on the daily charts. They had rising trend lines from their absolute lows to the
secondary lows they made. And their selloffs, after their intervening rallies, held on those rising trendlines. Which is what this market can probably do, starting just before the election or just after it, through the end of the year. It'll decline, but not break 5200, and so make everybody feel better. That's not an unusual trading pattern.
Q: Then what?
A: After it holds at 5200, it'll bounce again. So now I'm probably into January. Then, when it comes down and finally breaks 5200, on a long-term basis you will have really completed the major top. But going through this whole process takes a long time - at least into the early part of next year. In any event, when you break 5200, you'll finally get people believing that this is serious. Now, I don't know whether that will happen because rates are 8 1/2% or because there really is a recession out there - although I think the charts are in agreement with the latter view. Regardless, breaking through 5200 will touch off an awful lot of mental stops. The fund managers will start doing some selling - and you'll get the chicken-and-the-egg thing. Do you sell to prepare for the redemptions? Then here
come the redemptions, and you have to do some more selling. So you go into the real decline. But it's not straight down. Never is. Sometime next year, after we've broken through 5200 and sunk to probably 4600 or so, you'll get a big intervening rally, like the one in October of '73. And that, most likely, will bring the market back up to 5200.
Q: You're promising that respite when?
A: In the fall of '97, probably. In that rally, you'll most likely see the wild speculation that people have been expecting. That said, my point really is that it's folly to expect any of this to unfold according to some precise prescription.
Q: But clearly, the bear is gaining the upper hand?
A: Yes. That process began with the technology sector a year ago. It began in the run-of-the-mill stocks probably with the February momentum high. And it hasn't begun yet for the blue chips or for some
of the technology names we've never heard of. For those two ends of the barbell, the bull market is not over - yet.
Q: Why do you insist on adding the ``yet''?
A: Intellectually, since the 1974 low and the 1982 breakout, I've had a powerful secular bull market. So I'm entitled to a secular bear market now. And not a simple, cyclical bear market and then it's all better again. The first time it breaks 5200 will probably look like the '69 bear market. A simple 25% down - this time to 4600 or so. Then, like in '71-'72, we'll have an intervening bull market back up
to 5200 - within the bear cycle. Only then will we have a second, deeper bear market like the '73-'74 bear market, taking the Dow down somewhere in the neighborhood of its Kuwait lows - down a little bit more than 50% - to 2400-2500, I suppose. That's what you're looking for if you see a risk of a secular bear market.
Q: Not a pretty picture. But plenty of opportunities for the agile to make money on both sides of the market?
A: Oh, sure. The only rule, whether you believe in something as massive as a secular bear or you're only talking about a cyclical bear market and nothing more, is that the underlying nature of the market has really changed. In the bear cycles, stocks rally only to resistance but break support. So you now get lower highs and lower lows. And good news doesn't last very long. It may last only until the
opening. People want to get out of stocks on the good news, while bad news has an exaggerated effect. You go down 20 points, because your earnings are going to be a nickel lower. The characteristics of a bear market are simply the mirror image of a bull.
Q: Given that, which charts catch your eye?
A: Well, I have such strong feelings about the oil-service stocks; there is something wrong there. Nonetheless, I'm sure you could identify a few natural-gas-related stocks that you would be satisfied with, even though it's not the group it was two months ago. The strongest group - this is the wildest idea that you will have in the
magazine - is the water stocks. Every water stock that's listed on the New York Stock Exchange is a terrific-looking, lively, higher stock. Has been already for several weeks now. There's even one over-the-counter, called Connecticut Water, with a chart that looks great. Even the chart of Elizabethtown Water, the laggard in the patch, is looking good. There's probably some fundamental explanation. But nobody follows the group, so I don't know what it is.
Q: Maybe it's the story we ran last month on the industry's prospects
[``Precious Fluids,'' Aug. 19]. What about some of the other groups?
A: I see the same kind of failing bounces in the HMOs and the health-care group that I've been seeing in the semis. On the other hand, about 90% of what's acting really well, looks old-fashioned bullish, is the software stocks. A lot are names-you-never-heard-of things. Names like ``Clarify'' and ``Remedy'' and ``Rational.''
Q: And that are, therefore, irrational investments?
A: I know nothing about them, fundamentally. But there'd seem to be a story, just in their names! Among the other charts that I look at, stocks in the groups where there has been a lot of takeover activity are looking better. The banks, the insurance stocks are being combed over looking for takeovers. But I don't have any cyclical stocks with positive charts. The papers have been getting better, so if I had to pick some cyclicals - for a shotgun wedding or something - it'd probably be the papers or the forest products. Even International Paper is acting better.
Georgia-Pacific, too. Champion International. There's probably a case to be made for them.
Q: But charts attract you here, absent the proverbial shotgun?
A: If I were a trader and required to be on the long side, I certainly would be in technology stocks. They swing. There are a whole bunch of them with interesting charts. But there are distinctions to be made between them. I wouldn't just buy indiscriminately.
Q: For instance?
A: There are ones that are making new highs; there are ones that are just having big rallies that will fail and there are dying ones that just won't rally. They're being left behind. There'll be a whole new batch of Unisys types.
Q: Which are which?
A: Well, several growth stocks that had extensive corrections - which, at the mid-July low, created spike low ``heads'' - have gotten quite strong, producing or at least nearing breakouts into new high ground. Within the pile of daily charts we post, these popular techs have what can only be called ``hard-to-believe'' upside measurements (because the distance on their charts from the neckline to the spike
low ``head'' is unusually great): Cisco Systems needed to cross its neckline at 59 1/2, which it did this week, so now it measures to 73, Microsoft measures to 144;
FORE Systems' big head-and-shoulders pattern measures to 50, Tellabs, having broken out last Friday, measures to 88, PairGain Technologies' breakout measures to par, as does Cascade Communications'. Some of the strong-looking unfamiliar names I've garnered from looking at the Mansfield and Daily Graphs chart books include ADC Telecom, Aspect Telecommunications, Electronics for Imaging, Encad Inc., Aspen Technology, Ciber, Manugistics, Pacific Gateway, Veritas Software, Viasoft, Vantive Corp.
Q: What are some of the stocks whose charts make you suspect their rallies won't last?
A: Those are the ones of some other techs that also have had notable rebounds - but only toward their overhead resistance levels. This category of potentially failing stocks includes Hewlett-Packard (maybe as far as 51-52); U.S. Robotics (to resistance at 68-69); Shiva Corp. (nearing its 59-60 resistance); Digital Equipment
at 44. Other bouncing but iffy over-the-counter stocks with considerable overhead resistance include Pure Atria, Project Software & Development, PremiSys Communications, Remedy, Access Health, C Cube Microsystems, PeopleSoft, Quintiles and HCIA.
Q: And which are the techs you say are ``dying''?
A: My third category really includes both the lagging and the dying techs. One question - as yet unanswerable except by guessing ``yes'' - is whether the laggards, before this is all over, will be sought out in the final speculative binge. In other words, will Micron finally, albeit temporarily, zoom? Nonetheless, if you've watched Intuit slide during this lively upside action, you'll recognize the danger in nibbling at laggards such as Adobe Systems, Novell, Tencor Instruments, Netcom On-Line, Cyrix, Apple Computer, Borland, Sybase and America Online.
Q: What about outside the techs?
A: A very bad-looking group is temporary services. We've already seen
Manpower slide. The charts on Boise Cascade Office Products and AccuStaff and Core-Staff - anything that has to do with office or temporary help - are just falling apart. Look at Business Objects as well as at the tops in Corporate Express and Employee Solutions. Boise has a parabolic chart, it went from like 20 to 55 and it's
15 now. The whole group is like that. Olsten is down 4 today.
There is something out there - and it must have something to do with the economy. These charts must be telling us something. So must the charts of Federal Express and Airborne Freight, which are trading terribly in here. And if you believe in the Dow Theory, then the Transports are really telling you here that the economy is not
in good shape. It's the truckers and the rails and the airlines, not just one sub-sector, that look awful. On the other hand, there are still some desirable looking energy charts - specifically, Santa Fe Energy Resources, Atlantic Richfield and YPF. And it's still possible to see major differences between the strengthening European country charts and the deteriorating ones of the country indexes for Korea, Thailand and India.
Q: On that happy note, thanks, Justin.
V.K |
