<OT> Jim Willie Acampora>
Analyst Corner Q & A
Prudential Securities' Ralph J. Acampora, CMT
Ralph J. Acampora, CMT
Continuation of the DJIA Rally
A few weeks ago the Dow hit a new all time high. The high represented a technical nightmare for technicians because nothing confirmed it once it had been made. This new high was what we call a negative non-confirmation, the last time I have seen something similar was in January 1973.
Because of this we put everyone on support watch last week, we were concerned with the Dow, Sears Roebuck (S: research, earnings) and the breadth on the NYSE and the OTC markets.
With recent events in the market we are going to begin emphasizing a top down approach to the market, for months we have been focusing on a bottom up approach. We are changing our approach because we now believe that we have positive non-confirmation in place. This occurred because the Dow recently made a new low and the Industrials did not. That is a very positive sign. The second piece of non-confirmation news was the breadth numbers, all of them, NYSE, ASE and OTC made new lows but the leading averages did not. We believe that this is a typical bottoming action. We think that we are in the process of double bottoming, not a major one, but enough of one to continue the summer rally.
E-Mail: kcivhd@idt.net
Name: Dexter C. Hinton
Regarding the current environment "double bottoming", what are your expecting (or looking for) to confirm your original perception? Are there any specific indicator(s) or movements that could make you reassess you original observation in conjunction with the "negative non-confirmation" in the short-term past?
Ralph J. Acampora, CMT: The double bottoms I am referring to in this current environment are present in the S&P Small Cap, the S&P Mid Cap and the Russell 2000 indices. They all held above their August 10th lows when they dropped back on August 31st. I need upside breakouts above their respective August peaks-all three of these indices did so last week. If I am correct, and these lows hold, then we could witness a rally in secondary stocks over the next several weeks. I am not using technical indicators, just the price performance of these averages. As far as the "non-confirmations" are concerned-they bother me a lot!! However, we can still get a near term rally in these small and mid cap stocks even with negative breadth divergence. But these disparate trends cannot go on for very long or they will be ominous longer term.
E-Mail: kangath@one.net.au
Name: Ram
Do you think the traditional weakness in the month of October be repeated this year? and this year will there be an extra sting in the form of heightened Y2K concerns (if not in the USA at least in Emerging markets & Japan)?
Ralph J. Acampora, CMT: I respect the seasonal aspects of the stock market. I am watching very carefully to see if important weakness materializes-if so I will act accordingly because October has a very nasty history. I agree that the Y2K problem is ahead of us. I think that this problem will not manifest itself in a major way until the months of November and December. But all of us must be flexible and react accordingly to the seasonal tendencies that prevail.
E-Mail: wjshaw2@juno.com
Name: Wm. J. Shaw
The work I do as a technician (amateur at best) is telling me that the OTC has been slightly out performing the Dow and NYSE. Am I correct, and is there any significance if it has?
Ralph J. Acampora, CMT: The Nasdaq Composite is surely outperforming the DJ Industrials these days. The main reason for this is the fact that technology dominates the major component stocks within the OTC average. The Dow Industrials only has two tech stocks, IBM and Hewlett Packard. Also note that there are no Internet stocks in the Dow.
E-Mail: michelo@ctv.es
Name: Peter K. Michl
Mr. Acampora: What is your take for the Advanced/Decline Ratio. Only a few companies are driving the market. The mass lags behind. Do you see a broadening market situation upto this year's ultimo?
Ralph J. Acampora, CMT: The breadth problem can not be over looked-it means that there are a hand full of stocks that are leading this market. Now, having said this, it is still possible for the leading averages to move higher without an expansion of new names. So far there is only a slight broadening in the market place. Keep you eyes on critical support levels on individual stocks-this is very important.
E-Mail: pcgoyal@bechtel.com
Name: Pcgoyal
What are the technical indicators you follow to anticipate the direction of the market?
Ralph J. Acampora, CMT: When it comes to market direction the most helpful indicator is MOVING AVERGAES. They are by definition "trend followers" Of course I use sentiment to confirm whether the trend is accepted or not by the majority. Sector activity is another means of viewing the trend-looking for shifts to occur so that I may confirm or negate the current trend.
Name: Dave
What is "Top to Bottom"?
Ralph J. Acampora, CMT: I am not too sure I understand your question but I think you are asking me what is the difference between "top down" and "bottom up". TOP DOWN refers to ONLY using of technical indicators to come up with a market opinion. BOTTOM UP means that the technician will use ONLY sector and individual stock action to come up with a market opinion. I use both all the time-however, they often don't agree which makes life very interesting to say the least.
E-Mail: finkster@roadrunner.com
Name: David J. Finkel
Although you have cited technical factors as your reason for believing the market is at a bottom, could not an event, specifically an increase in the discount rate by the federal reserve, drive the market down even further? Would this simply delay your scenario or could it do more long-lasting damage to a market recovery?
Ralph J. Acampora, CMT: I am a technician first but I truly respect all other inputs, especially interest rates. Rates will have a major impact on the direction of equities. I could live with another bump up in interest rates-it will only cause a short-term decline in the stock market. If, on the other hand, I was expecting a dramatic rise in rates, let's say to the 7% to 8% level, then I think this would have a meaningful impact on the equity market.
E-Mail: tlpaul47@yahoo.com
Name: T. P.
What do you value as one of the best indicators that the market will sustain its rally?
Ralph J. Acampora, CMT: In order for this rally to continue on a sustainable basis we need to see a friendly interest rate environment. Another, more recent, input that has to be considered is the direction of the US Dollar. Any major shift in these inputs would impact the equity market significantly.
Name: Pat Blankenship
Other than tech stocks, Ralph, where has the 'summer rally' been...the rally that is to continue into the fall? Also, generally speaking, when do you think investors will renew some interest in consumer product stocks...after all, the economy is supposed to be getting better in Asian and South American markets? Thank you for considering these two questions. I enjoy your appearances on CNBC.
Ralph J. Acampora, CMT: The Summer Rally has been in the technology stocks in particular-but we also saw some gains in the depressed drug area. Handsome gains were scored in the bio tech stocks. Energy names, especially the drillers, did well. I am sure I am forgetting another couple of groups; but in total, you are correct-there has not been a major ground swell of new leaders during the summer advance. This puts the onus upon the investor himself/herself to zero in on individual stocks selection.
I agree that the Far East is improving economically but unfortunately I don't see great upside potential in the consumer product stocks just yet.
E-Mail: corey-VI@msn.com
Name: P. Lytle
Dear Ralph, do you think we can hit and/or exceeded 11,300 by the end of October? Also, do you think the Fed will raise rates at their next meeting?
Ralph J. Acampora, CMT: I recently (July 6th) raised my 1999 expectations from 11,500 to 12,000/12,300. I still think that it is possible for the DJIA to cross 12,000 but I must not witness any major deterioration in many of the Dow's 30 component stocks or I will have to push my 12,000 + target into the new year (2000).
E-Mail: gunshelly@yahoo.com
Name: Selvi Gopalakrishnan
What do you think will be the favorite industry of the investors in the next 2 years?
Ralph J. Acampora, CMT: The future has to include technology and the internet stocks. I would also include bio tech in this same thought process. These are the wave of the future-careful stock selection is still required but the sectors' potentials are enormous.
Name: Don Filbert
Do you think large cap growth stocks will continue to lead for the next 6-12 months and will we continue to see double-digit returns on these stocks?
Ralph J. Acampora, CMT: I think that the large cap growth stocks should be a big part of everyone's portfolio. Of course there will be periods of time when secondary stocks will outperform; but, on balance, I think you have to have a big exposure to large cap growth. Double digit gains can be expected but don't expect them all the time.
E-Mail: bodyplan@lvcm.com
Name: Brad Hennington
As the Fed pushes interest rates higher, what companies on the market benefit? Wouldn't companies with large cash positions, like insurance companies, benefit from higher interest rates?
Ralph J. Acampora, CMT: If the Fed continues to push rates higher there will be a flight out of the interest sensitive stocks (like utilities, insurance, banks, brokerage, etc.) into the more defensive areas like food, energy, etc.
Name: Lakshmi Krishnamurthy
Dear Mr. Acampora: In order to take advantage of the tech revolution, I have had to disregard diversification concept. I own more and more tech stocks and not enough financials, retail or energy stocks. Am I exposing myself to a greater risk?
Ralph J. Acampora, CMT: Diversification is always important. If you have, as you say, too many tech related stocks, I think you should look to spread your exposure out a bit. Take a look at drug stocks, bio tech names, to mention two ideas.
E-Mail: SCFatLaw@aol.com
Name: Steven Filipowski
There has been significant news coverage regarding an anticipated change in Japanese savings/investment behavior, suggesting a rush of money from saving to equity investments. Historically, have the Japanese invested in the US stock market, or have they stayed home? Can we anticipate a move upward in our markets based upon movement of new money from Japanese investors?
Ralph J. Acampora, CMT: Ever since the Japanese stock market peaked in late 1989/early 1990, Japanese exposure to US equities has diminished considerably. Except for their exposure to the US debt market, I do not think that there will be any major impact on our market if the Japanese were to turn negative on US investments. Remember, the Dollar/Yen relationship is probably the number one concern when it comes to US/Japanese investing.
Name: Ernie Beaudet
The leveling off of the Internet stocks, which has been the big drive for the tech stocks to date. Where do you see the next wave of tech stocks going? How high do feel they will go?
Ralph J. Acampora, CMT: Most Internet stocks peaked in April of this year. Since then most of these stocks dropped anywhere from 30-% to 50% over the past several months. This damage will take time to repair. Unless you are patient, I would reconsider any investing at this time because I am not totally sure that some of these stocks will hold above their respective August lows. If an Internet stock closes below its August 1999 low, be very careful-it could be vulnerable technically.
E-Mail: venu@objs.com
Name: Venu Vasudevan
Ralph, Do you see any sector leadership change in the coming rally? Do you see any large to small cap, or growth to value transitions?
Ralph J. Acampora, CMT: Last week I saw for the first time in many months a glimmer of interest in secondary stocks. As long as the leading small and mid cap averages remain above their respect August 1999 lows, I would be inclined to invest in some of them.
E-Mail: gvleo@aol.com
Name: Gerald Leo
Which sectors are most expected to reap the benefits of the summer rally and can you list specific companies and why?
Ralph J. Acampora, CMT: Assuming that the summer rally is still in effect, I would stay with the technology stocks, the bio tech stocks and some of the drillers. Halliburton and Cisco are two names that come quickly to mind.
E-Mail: spinola@netilink.com
Name: Carlo Spinola
Dear Mr. Acampora: I'm really surprised to continue to observe a stock rally that started five (six?) years ago. What about medium expected p/e and yeld %? In understand that surplus balance in Fed budget flow financial resources to private borrowers, but may be around the world there markets undervalued (Europe? Japan? Asia?). Or, are American investors too domestic minded?
Ralph J. Acampora, CMT: Americans are domestic minded-and I think that they should be. Invest in stocks that one understands is a good start. As for the valuation question you bring up (p/e multiples, etc.), I can only say, as a technician, that this is a secular bull market that began in November 1994 and that it could last for several more years. We will have periods of over valuation and thus a correction/pause but because of improved productivity and a friendly economic environment (less inflation) the major trend is up over the next five years or so.
E-Mail: mjyuen@pixi.com
Name: Mel Yuen
The biotech sector looks hot but like the Internet sector, many biotech companies lose money. How would a prudent investor invest in biotech companies?
Ralph J. Acampora, CMT: Bio tech stocks were real hot about ten years ago-in fact they reminded me then of what the internet stocks look like today. The big difference is that the money that the bio tech stocks raised years ago was spent in R&D. So now, these companies are benefiting from their years of looking for and creating new and exciting products for all of us to enjoy. The bio tech stocks are now coming into their own-they are real companies with real futures. This will also happen to the Internet stocks but it will take them some time.
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