June 6, 1999
Last week, the Dow Jones Industrial Average was up 240.10 points to a
10799.84 (+2.27%), the Nasdaq Composite was up 7.82 points to 2478.34
(+0.32%), the S&P 500 was up 25.91 at 1327.75 (+1.99%) and the Russell 2000
index of small cap stocks was up 3.65 to 442.33 (+0.83%).
For the year, the Dow is up +17.63%, the Nasdaq up +13.03%, the S&P up
+8.01% and the Russell 2000 up 4.83%. The StockMotions Newsletter Tracking
Portfolio is up 26.85%.
Most of the gains came in the final few hours of the trading day on Friday.
Many of the top tier Internet stocks rallied ~10% in the final half hour of
trading on relatively heavy volume, as did many other tech stocks. It seems
as though we may have seen the lows for now on many of these stocks.
On Tuesday, the market was still in fear mode. Many of the techs and
internet stocks were selling off into the end of the day….possibly setting
up for more margin calls for Wednesday morning. On Wednesday, these two
sectors experienced even more selling on heavy volume. However, that was
followed by heavy buying volume into the afternoon. Even though many stocks
receded on Thursday, for the most part they didn't revisit the “fearful”
lows that were put in place on Wednesday morning. Finally, Friday was
shaping up to be a rather stagnant day with modest gains in the top tier
Internet and tech stocks, until the last ½ hour. There was a flurry of
heavy volume buying activity at the end of Friday's session, not dissimilar
to that of the previous Friday's end of the day activity. For example, AOL
climbed over 10 points in the final 30 minutes on Friday.
What the heck does all this mean?
I think that, for now, we have seen where the lows are in many of the top
tier Internet stocks. The levels reached on Wednesday morning happened with
plenty of “fear” (and probably margin calls, too). Don't forget that in the
previous week, we had a similar morning session (I believe it was on
Tuesday, the 25th of May). In other words, we've witnessed two pretty
healthy “washouts” in the Internet sector over the past few weeks. It is
entirely possible that some sort of sustained bounce is now in the cards.
Is the Internet sector now undervalued?
NO WAY! Many of these companies trade at multiples to revenues. Forget
about earnings for now.
A little something about Internet message boards and Internet stocks (Part
1)
I sometimes spend time reading Internet message boards to get an overall
feeling of how a sector or a stock is being perceived. Usually, a stock's
message board will have its share of bulls and bears. Many times, the truth
is stretched a bit at both ends.
Let's take a look at one situation – the stock that is falling
If a stock is in a correction, or even a free fall, the “eternal bull” is
always there to give his/her theories of
- market maker manipulation
- how the fall is a superb buying opportunity
- what a spectacular business the company has
- institutions just want to get it cheaper (so they short a little to scare
others out and thus get the price down).
- Etc, etc.
Except for bulletin board and low float stocks, manipulating a stock price
of a company that truly has well known growth prospects, in my opinion, is
close to impossible. Institutions and retail investors want companies with
good prospects. This sort of demand on a company's shares is what creates
higher prices and favorable technicals for its chart. A stock that breaks
technical support and/or is having problems is being sold for a reason.
Usually when it has a small rally, it encounters renewed selling. Why?
Because more instititions want out.
My point is - don't fall into the trap of buying a stock just because a
stock message board “eternal bull” convinced you into it. More times than
not, it is a LOSING STRATEGY! You should buy stocks that you are truly
comfortable with. Stocks that you understand. Stocks that have at least
stopped their bleeding. It also doesn't make sense to get in front of a
train that is headed down hill. Sure it may go over a few hills on the way
down, but it will almost always have a steady flattening period before it
returns to favor (if it deserves to).
Also, sometimes the best stocks to buy are those that have very well defined
up trends and have temporarily backed off a bit.
The name of the game is to make money and preserve it. Don't loose sight of
the “preserving” part. Using mental stop losses is a great strategy. If a
stock that you buy starts to fall out of the trading range from where you
bought it, consider taking the loss and moving on. More times than not,
this is a great strategy. It isn't bullet proof, as some will move back up
and leave you behind….but at least you won't end up married to a losing
position, while many other opportunities go unexplored.
Finally, when you do decide to purchase a stock, always try to realize ahead
of time what could go wrong. That is, ask yourself, “what could make this
company hit the skids”. It could be product obsolescence, competition
overtaking its main business, production over-capacity, inflated
inventories, poor management, etc. If these types of issues start to
surface, then your reason for buying the stock is probably no longer valid.
Next week, we'll take a look at the other end of the spectrum – the “eternal
bear” on the thread of a great stock or sector.
Back to the Market
The Dow found strong support at its 50 day moving average. The Nasdaq still
trades below its 50 day MA. However, with Friday's late day push, it is now
within striking distance of that MA. It will be interesting to see if its
50 day MA provides resistance.
The bond market is still of great concern. There isn't much breathing room
left in bonds. A 30-year bond yield much above 6.00% would be a tough pill
to swallow for the stock market.
This week Fed Vice Chairwoman, Alice Rivlin announced her resignation from
the Fed. She will not vote at the next FOMC meeting. Observers have
counted her as one that has helped to keep rates where they are (i.e., she
wasn't a fan of raising rates).
This week the PPI is released on Friday and on June 16, 1999 May's CPI will
be released. April's CPI was up strongly (+0.7%), partly because of gains
in energy prices and apparel. In May, energy prices leveled off and
actually slipped a bit. It's possible that the next CPI number won't be as
bad as April's. The consensus estimate for May's CPI increase is 0.4% year
over year. Anything above that won't be taken lightly by the markets (in
the short term).
Last Friday's employment report had a very small “gain” in jobs – only
11,000 versus a consensus of 225,000 job gain. On the surface, this would
seem to be good news. However, what was left out of the headlines was the
large upward revision in April's job gains. They were revised up from
233,000 to 343,000 jobs gained. This, in addition to seasonal factors in
construction helped to create the large divergence between May's actual and
consensus view. The unemployment rate stayed at 4.2%. Wages rose 4 cents
in May, about twice as much as in April. Anyone think that companies are
having their margins squeezed?
With all of this said, I am starting to lean towards a Fed tightening at the
end of June (the next FOMC meeting). As strange as it sounds, the markets
could take a tightening as good news – “the Fed is fighting inflation” type
of spin.
Back to the Internet sector
Last week, I mentioned:
“I wouldn't be surprised to see another test of the Wednesday's lows. Those
companies with very healthy cash-flows that are the leaders in their
specific areas are the ones that will survive this correction”
It looks as though we got a test of the previous week's lows. Having said
that, if you feel that you want to play these bounces, do so with those
stocks that performed very well on Friday afternoon. Those that didn't are
more than likely going to be left behind. For now, we should have an idea
of where support lies with many of the Internet stocks. For example, AOL is
around 105 to 107 or so. A few weeks ago, we still had no idea of how low
the low was. This is why it is worth having a wait and see attitude with
these types of corrections!
The Major Moving Averages
For those of who are interested in the moving average levels, here they are.
As of the close on Friday, June 6, 1999: The Dow's 200 day MA is at 9288.00,
its 50 day MA is 10567.90. The 200-day MA is in an uptrend and the 50-day
MA is back to its strong uptrend. The Nasdaq 200day MA is 2136.50, and its
50-day MA is 2511.20 (Nasdaq is still below this level). The 200-day MA is
in a slight up-trend, the 50 day MA flattening. If any reader would like to
see the charts that indicated the relative movement of the 50 day MAs on the
Dow and the Nasdaq, please click on
stockmotions.com for the
Dow and
stockmotions.com for
the Nasdaq.
Where Does This Market Stand?
The theme this weekend is that we now have a pretty good idea of where many
stocks have found support. Assuming any pullbacks, it may not be a bad idea
to start nibbling. Of course, many stocks haven't been correcting but are
actually in the early stages of upward trends. These have been great buys
on pullbacks.
Charts on the Website
If any reader would like to see a particular market indicator, interest
rate, CPI, or other economic indicator charted on the website, please feel
free to send along any suggestions. I have a substantial amount of
historical data and am happy to post what readers want to see!
On the Website
Each week, I update the charts on the website to include the data through
the close of Friday. I will always try to have the updates by Friday night.
Please visit the website at stockmotions.com to view them. The
charts are a supplement to the newsletter – please feel free to use them.
Paulo
_____________________________________________________________
Disclaimer: All contents and recommendations are based on data and sources
believed to be reliable, but accuracy and completeness can not be
guaranteed. Please be aware of the risks involved in stock investments. I
may or may not have purchased or sold the securities mentioned in this
newsletter without any further notice. Please do your own analysis before
investing in any stock. None of the companies listed ever pay for any of
the recommendations or mentions.
Copyright: 1999 StockMotions.com |
