*AV*--This was embargoed yesterday I believe so I think it is ok to share today. Not an original piece of work on my part but rather a very interesting view to share. All views on this market are welcome.
In a period when 2/3'rds of the stocks in the US are down at least 30% from their 52-week highs, and 25% are down 60% are more, and when Merrill Lynch immediately lays off 5% of their work-force only 31 trading days after an all-time record high was reached in the S & P 500 is a small indication of the devastation that has been done to the emotions of the investment community in a very short time. In this same period, the Federal Reserve has moved from a bias toward tightening monetary policy, to now dropping interest rates, albeit a teeny 1/4%.
Speaking of emotions, as you regular readers know, our studies started to alert us at the end of August that historically peak levels of fear had been generated, and if history was a guide, those type of fear attacks typically presented buying opportunities. Our experience also told us, however, that the buying opportunities would not be a unilateral "throw a dart" type of opportunity. Traditionally, the bottom would be forged one sector at a time, and those signals presented a time to watch for emerging trends very closely. Almost always the new "emerging" sectors would be a total surprise, often coming from areas that fundamental factors actually appeared to be deteriorating the most. I always have to remind myself that the stock market is not based upon current headlines, but those that will be printed in the next 6-24 months.
....Some charts in some of the technical areas are very surprising. If you haven't observed this, look at the chart of Intel that made a very significant low back in June, 1998, a higher low in the August sell-off, and then another higher low in last week's panic attack. Intel started its decline far ahead of the rest of the market,
peaking out over a year ago in August, 1997, and even though it has not yet broken out into the clear yet, the surprisingly good earnings numbers released after the close might be what the doctor ordered. A move above 92 in the rally that we expect in the next couple of weeks would be the BIG signal that Intel is back.
Speaking of being "back," have you observed the chart of two big disappointing stocks of the last few years-Motorola, and especially Novell. The upside momentum of Motorola peaked out way back there in 1995, and has been a massive disappointment during the best years of the last bull market. It is certainly too soon to say, but the
failure of Motorola to make a new low last week certainly bears watching. And then there is Novell. Do you remember Novell? Judging from the price action in the stock since 1992, not many people remember this old favorite. BUT, look at the tremendous bottoming formation in Novell for the last nine months. It is not there yet either, but if Novell is able to break out above 14 in the weeks ahead, it will really light up a lot of screens.
We don't want to push this theme into triteness, but you have to be amazed at the charts of Alcoa, and Reynolds Metals. In a world that is obviously on the brink of massive depressions, and when metal prices are making multi-decade lows, why in the world is Alcoa and Reynolds Metals stocks looking very bullish? Both stocks were down yesterday which might mean they have a little more consolidating to do, but if
Alcoa breaks above 79 it would mean a new 52-week high-Wow! And if Reynolds Metals can move above 57, it would be a break-out of a beautiful bottom formation. Both stocks are far above their low-water mark made in late August as we received our first sign that the fear quotient had reached levels that typically motivate the Federal Reserve into an economically friendly atmosphere.
.....But based upon our improved psychology and monetary composites, it pushed us "kicking and screaming" into this new cautiously optimistic phase. We suspect that these daily reports are going to become a little trite in the months ahead, as we try to generate exciting new daily inputs, even as the market appears to be stuck in a volatile sideways pattern for the next six months-until March of 1999. The action of the Dow is expected to remain 3 steps upward, from bases formed each time the McClellan oscillator reaches deeply oversold levels, and each time the put/call ratio increases to panic "buy" signals, but the rallies will then start a 2 1/2 step decline from peaks made with those same two short-term indicators reaching vulnerable levels. ....change in strategy. Those changes should be used as a buy or prune opportunity, as the zinger might indicate. One of these buy signals was given in the middle part of last week, as the put/call ratio moved to extremely bullish territory, and the McClellan oscillator coincidentally dropped back to those very bullish oversold levels. With our investment barometer still above +2, we remain in the buy mode, probably for a few more days.
Andrew
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