#2 3/21/99 These 5 net stocks will decline 40% as a result of a nasty general market correction caused by rising bond yields and oil prices.
The general market has become extremely vulnerable for a variety of reasons. First, fund inflows for '99 are running at a rate of less than half that of '98. techstocks.com techstocks.com
Second, the breadth as shown by advancers/decliners has steadily deteriorated for the past 2 months, proving that participation in the rally is waning. decisionpoint.com
Notice how current advance decline line is in a nearly identical formation to that of Aug.15th 1981, which was preceded by the deep low in 1980 followed by a 40% rise in the markets. decisionpoint.com Sound familiar? A nasty 20% decline ensued once the A/D line took out the 1980 low. I predict a repeat performance in the general markets as the current A/D line takes out the Oct. 98 low. This spells trouble for the net stocks, which have been the market leaders.
So what are the events that pushes this market off the edge of the cliff, which is where the A/D line suggests it is? The key items to maintaining a healthy bull market in stocks are strong fund inflows and declining bond yields/rising bond prices buoyed by lowering inflation expectations. The rug has been pulled on this scenario for the short term, as OPEC continues to get its act together. Oil prices will rise substantially over the next couple weeks, as panic buying materializes by end users and finally disbelieving shorts. With oil prices up 60 to 80% over their lows just a few months ago, inflation expectations will begin to rise... and the scenario for disinflation/deflation will temporarily be aborted. Those in the know are well aware that low inflation expectations provide much needed fuel for a rising equities market. This "fuel" will be replaced by lead and the balloon will collapse, as bond prices tumble to new recent lows on the change in inflation expectations.
The trump card behind this prediction is the fed meeting on March 30th & 31st. With these conditions worsening into that meeting, and anecdotal evidence of rising wholesale and consumer prices going into the meeting, the equities markets will see panic selling into and through the meeting, worried that Greenspan will now finally realize that the "insurance" purchased last fall to protect against a deflation related depression is no longer needed. Quite the opposite, as Asia shows further signs of recovery and the American economy continues to grow at an above trend level.
As the long bond inches toward 6%, market players now begin to realize that bond yields have risen 27% off their 4.7% lows, making equities 27% LESS valuable than they would be with a 4.7% yield. But what did equities do while the bond yields rose 21%? (4.7 -> 5.7) They rose 43.3%!!! (923 -> 1323 SPX). This has created much tension on valuations.
Since this will be a valuation correction, the most overvalued stocks will be hit the hardest. Net stocks have probably gotten ahead of themselves a bit <g>, and many investors are sitting there with huge gains. Profit taking driven by the collapsing general markets will bring the all important 40% correction to fruition.
Do not be surprised if many Wall Street Brokerages who missed the huge run up in net stocks now come out and downgrade or recommend outright sells in order to bring the stocks into their buy zone.
David |
