U.S. Stock Market Outlook: Ralph Acumpura
Near-Term
Since the beginning of our secular bull market (November, 1994) we've had many occasions to talk
about market set backs; to help us guide our clients we created our own set of definitions:
* Normal Correction = 5% to 10% loss (to be expected at any time and for any reason(s))
* Nasty Correction = 10% to 15% sell off
* Very Nasty Correction = 15% to 19.9% decline
* Bear Market = 20% or more
What clouds these definitions is breadth (stock participation or lack of stock participation during
market set backs). For example, the leading averages (the Dow and the S&P 500) could have a
normal 5% to 10% correction and most stocks (the majority) drop in excess of 20%--I call this a
stealth decline. During the summer of 1996 (May/July), the Dow lost 11.2% (intraday figures) while
the real carnage was in the OTC market-70% of all OTC stocks dropped more than 20%, while
33% of the issues on the NYSE dropped more than 20%.
Here we are again-a market set back-and here is how we are addressing it:
1) We started talking a couple of weeks ago about negative groups: airlines, autos and drugs. We
highlighted several negative Dow components like American Express, McDonalds Corp. and
General Motors, etc.. Our purpose was to identify toppy stocks instead of making a market call.
2) Yesterday we purposely tightened up the levels on the Dow and S&P 500 so that we could
emphasize the normal correction bands. Our new Dow support was 10,700 and our new S&P 500
support was 1310. Both of these levels were broken.
3) The question is why this decline is taking place? Our immediate response is "Why not?" So many
large cap and internet stocks experienced enormous gains and are due for a pause. For example,
over the past 6 months, Yahoo was up 713%, America On-Line gained 872% and Amazon rallied
1000%. Therefore, any sell off, even if it is painful, should not come as any surprise. The main
reason for the decline, as we see it is-portfolio adjustment. Rotation-shifting from the over owned,
over valued large cap stocks into the under owned, under valued secondaries. This is normal activity
and we encourage it.
4 - This current decline reminds us of the summer of 1996. Stocks like Iomega and Prestech were
very over extended (they were the speculative issues of their day). The bubble popped and these
stocks collapsed. The Dow lost 11.2% (intraday) over 40 trading days. It was very painful and
scary but the bull market never ended. It was a necessary pause that extended the life of the secular
bull market.
5) What could we be in for now?
A - This near term decline is not over-the market is not very oversold.
B - The high flyers (be they internet stocks or many of the recent big winners like financials, drugs
and technology names) will remain under pressure as investors scramble to nail down whatever
gains they already have.
C - Expect very sharp counter-trend, intraday rallies. We do not expect them to be sustainable. If
you are short term oriented, take advantage of them to lighten up positions. For those who are truly
long term investors, we suggests that you ride out the volatility because we are still long term
bullish.M
D - Other areas of potential weakness: consumer cyclicals, building materials, insurance brokers
and retail/food stores.
E - Conclusion: we believe that the market is undergoing a normal correction (5% to 10%). The
range on the Dow is 9,990 low and 10,545 high. On the S&P 500 the range is 1238 low and 1306
high. It is not out of the question that we could repeat the summer of 1996 and take the market
slightly below the 10% (11.2%). This is all part of our long term bull market forecast. We are still
maintaining our target of 11,500 for the DJIA.
Here are the technical levels that we believe, if broken, will indicate further upside or downside
momentum:
Dow Jones Industrial Average
Primary Support
10,000
Secondary Support
9063.26
Primary Resistance
None
Standard and Poors 500
Primary Support
1283.64
Secondary Support
1205.46
Primary Resistance
None
Nasdaq Composite
Primary Support
2329.87
Secondary Support
2224.21
Primary Resistance
None
Russell 2000
Primary Support
435.50 (01/20/99)
Secondary Support
381.96 (03/24/99)
Primary Resistance
492.28 (04/22/98)
Source: Bridge Data Service
Intermediate Term
The recent sentiment data suggests that there is too much optimism regarding the stock market.
When combining this observation with the fact that too many stocks are above their longer term
moving averages, the conclusion is that the overall market is most likely going to establish (trace out)
a trading range. This is not a long term negative for the market but rather a signal that individual
stocks will mean more to investors than a market call. The technical statistics must right themselves
and this will take time-hence, a choppy, sloppy trading period is upon us for awhile.
Long-Term
We have been receiving many calls regarding our 1999 Dow target of 11,500, especially from the
media. They are asking when will we change (update) this target. Our official response is that we
will wait until the actual target is met because we want to see exactly how broad the leadership is at
the time. Of course we will raise the target if we can, but to what degree will we push our target(s)?
Will we want to go out just until the end of 1999 or will we be comfortable going out until the end of
the year 2000? Stay tuned... |
