The Millennium is Over Now What?
QMS - Portfolio Market Strategy (Volume 02.49)
PAUL RABBITT (310) 798-7974 paul@rabbittanalytics.com
S&P500 1458.34 (+2.63%), DJII 11,405.76 (+1.32%) RUSSELL 2000 482.43 (+3.48%)
December 27, 1999
We forecast the year 2000 return in the S&P 500 to be about 20%. Our DJII year 2000 target is 13500. In the short-term charitable trust funding, and year-end compensation bonuses combined with inflows from pensions should continue the upward momentum into the next few weeks. Still, markets do not surge at this velocity indefinitely. A technology correction is expected as investors, having successfully delayed their tax-liabilities for another 12 months, sell shares to lock in profits. Our estimated 90-day trade-ranges are unchanged DJII (11750/10750), S&P 500 (1500/1340), Russell 2000 (500/440), NASDAQ (4000/2900).
Shortly after Thanksgiving we suggested investors start to lean against the current by avoiding purchases in extended technology issues and instead purchasing technology stocks on pullbacks. In December we directed investors to ride their winners and, while suggesting seasonal risks were low, we identified the developments in December as "mania" and ventured that a technology sell-off is likely to occur in the first quarter. In the last two months of 1999 we downgraded commodities and manufacturing while upgrading finance.
Long Bonds May Turn Out To Be One Of 2000 s Best Investments.
Bonds are an extraordinary buy. Bullish bond sentiment is non-existent (a contrarian buy-signal). Rates
are in the top of their 6.67% / 6.1% range. The Fed has a good grip on inflation and is viewed as being
proactive. By continuing the tightening of 1999 with another hike in February the Fed will assure
investors the economy will be controlled and inflation will remain in an acceptable range. Ultimately the
bond will react to the new perception and rates will decline. Remember, with the balanced budget, the
US will reduce borrowing. Since they are the world s largest borrowers, the upward pressure in rates will
be lessened.
Technically stocks are in good shape. Our principle concern is sentiment. Put/call volume and the
public/specialist short sales ratio are low and the new issues / NYSE ratio is at an 18 month high all
low signaling broad optimism. Moreover, three of the four polls we monitor reflect excessive optimism.
Since bull markets climb a wall of worry a healthy dose of fear is needed to sustain the long-term bull.
Extremes Likely to Reverse Early in 2000
We love extremes they usually predict trading reversals back to the norm. The obvious extreme is the
"nothing-can-go-wrong" technology extreme. The NASDAQ/S&P ratio is extreme i.e. look for a relative
rally in the S&P 500. What are some others? 1) The growth/value ratio is extreme i.e. growth rarely
out-performs value at this extreme level for an extended period. A reversion to value leadership or, at
least a more balanced market is expected. Where is the value? One place to look is banks, S&Ls,
finance companies, investment managers, property-casualty and specialty insurance; 2) The cyclical /
small-cap ratio is extreme. Both small-caps and economically sensitive stocks tend to loosely track
each other i.e. they need an expectation of a good future economy to do well. Recently cyclical stocks
have seriously lagged small-caps. We expect a rally in cyclicals versus small-caps in the near future.
The rally last week continued with the trend of growth stock and technology stock leadership. Losers
included value, economically sensitive manufacturing, industrial, commodities, energy, gold, and
utilities.
Sectors
Stay overweighted in technology (29% suggested portfolio exposure don't chase extended stocks),
energy (9%), durables (4%), retail (6%), finance (21%), and services (15%). We would scatter our
remaining capital among the underweighted sectors including manufacturing, commodities, utilities,
non-durables and health.
Stocks We Like
Applied Materials Inc. (AMAT/121.63), KLA-Tencor Corp. (KLAC/102.88), Solectron Corp. (SLR/91.5),
LSI Logic Corp. (LSI/64.5), Lattice Semiconductor Corp. (LSCC/48.5), XILINX Inc. (XLNX/89.25),
Edwards J D & Co. (JDEC/28.88), Adobe Systems Inc. (ADBE/67), Consolidated Papers Inc.
(CDP/30.63), Ensco International Inc. (ESV/21.63), Macrovision Corp. (MVSN/67.13), Harley-Davidson
Inc. (HDI/61.56), Wal-Mart Stores (WMT/67.38), Williams-Sonoma Inc. (WSM/44.13), Toys R Us Inc.
(TOY/14), Paychex Inc. (PAYX/41.56), MGM Grand Inc. (MGG/49.75), Morgan Stanley Dean Witter
(MWD/131.5), Knight/Trimark Group Inc. (NITE/47), Citigroup Inc. (C/56), Price (T. Rowe) Associates
(TROW/35.38). |
