U.S. Stock Market Outlook
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.
What to look for today:
Failure to capitalize on Wednesday's sharp reversals in the Dow
Industrials and NASDAQ composite yesterday underscores the
weak technical position of this market on a near-term basis. Some
bargain-hunting appears to be returning to NASDAQ issues,
particularly in the semiconductors though the strength is certainly
not broad-based at this juncture. Cyclicals remained weak pretty
much across the board and are now well into correcting the sharp
gains experienced through March and April. Financials remain weak
and are anticipated to remain under pressure. In sum, despite
being modestly oversold on a very short term basis, we believe
that recovery rallies may remain short-lived. For today, we would
look for some recovery but will not anticipate a sustainable move
at this juncture.
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
1257.46
Secondary Support
1205.46
Primary Resistance
1376.00
Nasdaq Composite
Primary Support
2329.87
Secondary Support
2224.21
Primary Resistance
2677.76
Russell 2000
Primary Support
426.04 (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... |
