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Pastimes : The Naked Truth - Big Kahuna a Myth -- Ignore unavailable to you. Want to Upgrade?

To: Dwight E. Karlsen who wrote (79281)	12/12/1999 6:10:00 AM
From: re3	Read Replies (2) \| Respond to of 86076

from the toronto star : thestar.com Dow theory suggests when to worry about markets It's time for investors to switch into worry mode. In the middle to late stages of a bull market, worry is a good defensive strategy that can protect you from holding the bag when the buyers suddenly disappear. The next step is to identify what to worry about. If you have no idea, you may lack investment experience. If that is the case, you should avoid any type of electronic trading and discount brokerages. You need an experienced stockbroker who can worry for you. If I were a stockbroker, I would worry about the current mania for Linux, the open source operating system seen as a competitor to Microsoft Corp.'s Windows NT operating system. Some Canadian stocks enjoyed the spillover from the market debut last Thursday of California's VA Linux Systems Inc. The stock was issued at $30 (U.S.) and promptly soared to end its first day at $239. On the same day, Canada's own Corel Corp. peaked at a new record of $64.55 (Canadian) before backing off to close at $57.95, up $16.20 on the day. Corel had jumped 73 per cent in just two days. Mind you, on Friday Corel did lose $13.95, or 24 per cent, to $44.00. Meanwhile, Markham-based Perle Systems Ltd. soared $13.65 to $33.65 on Thursday, for a gain over the two days of 377 per cent. The company, which did dip to $30 on Friday, had simply announced that it would distribute free software within weeks to make its data communications equipment compatible with Linux. Similar things happened during the airline mania of the 1920s. Investors bid up the shares of Seaboard Airlines, only to discover that Seaboard was a railroad, not an airline. Such thoughtless stampedes tend to occur shortly before significant market tops, and in each case the new technology is sold like underarm deodorant. Investors who don't have these stocks feel as though they will smell bad. My second worry is whether interest rates are on the way up. Last week, I turned to bellwether Federal National Mortgage Corp., an interest-sensitive stock better known as Fannie Mae, for hints on rates. The stock was trading close to its long-term trendline at $60. At the close Friday, Fannie Mae stood at $65.88. Whew! We're safe for the time being, and will probably stay that way unless and until Fannie Mae breaks below $60. My third worry is that the Dow Jones transportation average and industrial average are not confirming each other, as you can see on this week's chart. Dow theory is a indicator that tells where the market is going if both the transportation average and the industrials are heading in the same direction, preferably within three months of each other. If both are heading up and making new highs, the market as a whole will probably continue to rise. If both are heading down, the market as a whole will probably continue to drop. If the two are diverging, one of them is wrong as an indicator of future stock prices, and we don't know which one. The market could go up or down. All we can do is sit back and watch. The good thing about Dow theory is that it's so reliable as an indicator. The bad thing is that it's late in confirming a trend. By the time you get a confirmed signal, you're probably 20 or 30 per cent through the market's move. Currently, the Dow industrials are near a yearly high, but the Dow transports are near a yearly low, as you can see on our chart of the daily closes of the two averages up to Dec. 9. Each average reached a yearly high last May, but then the transports dropped through the summer months to find a bottom in mid-October. Meanwhile, the industrials rallied through the summer months to a new high in August and then collapsed to join the transports at the Oct. 9 low. Currently the industrials are rising back to the August highs, but the transports aren't confirming that with a rise of their own. In fact, during last week the transports traded down to the October low of about 2,800. On Friday, however, the transports recovered, moving back to the range of 2,862, much to the relief of many market watchers. We'll have to keep an eye on the transports to see whether they hold their ground and don't violate the October low between now and mid-January. If they don't, we have reason to smile. If they do, we've got a lot more to worry about as investors. What we've got right now is an uncomfortable trend that needs to be watched for signs of trouble that could hit early in the new year and spill over into most major world stock markets. --------------------------------------------------------------------------------