Special MarketCentral.net Report
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a friend Special MarketCentral.net Report For December 27, 1999
And Now Y2K! With the stock market roaring through the pre-Christmas season in typical ?year-end? rally fashion; we are now approaching the great unknown with Y2K concerns now increasing with every passing day. Fears of terrorist activities are causing airlines to increase security dramatically. The possibility that packages containing mail bombs may be coming from Frankfurt has caused the US Postal Service to warn citizens to watch for strange packages over 60 ounces. And major cities across the US are preparing for the worst by manning bunkers and clearing out major thoroughfares on New Year?s Eve to make way for emergency vehicles all the while telling people not to panic. In the meantime, stocks continue to rally with absolutely no fear of any problems lurking on the horizon due to Y2K. In fact, this past week has witnessed a bit of improvement in market internals with the dogs of 1999 finally joining the party with improved performance coming from indexes like the Russell 2000, the stodgy Dow Industrials and the Dow Utilities. But still not in gear is the lagging Dow Transports, perhaps due to the problems associated with potential airline terrorism and/or rising oil prices and interest rates most likely holding back investors. We had expected the October decline to lead to a significant rally phase from November to January and that event has now come to pass. However, we didn?t necessarily expect interest rates to rise to the levels they are at right now, nor did we expect the economy to be so strong that many analysts are now anticipating up to 4 additional Fed interest rate hikes in 2000.
With the NASDAQ stock index for the millennium reaching 4000 on Friday and now up over 80% for the year, we cannot help but wonder what higher rates will do to the prospects for TECH stocks that dominate the NASDAQ index. Typically, higher rates are a negative for Tech due to the high dependence on cheap money to develop and expand Technology companies.
We have now broken most of the old rules of fundamental valuation for stocks and are now firmly entrenched in a momentum driven, narrowly focused stock market. Perhaps the new millennium is also the beginning of new ways to value stocks and all the old rules don?t apply. Maybe stocks selling at 150 times 2001 earnings are reasonably valued in this new era and we have to change the way we think. But we are not sure that is the case yet and with excessive optimism and euphoria dominating Tech right now, we must advise investors to become a bit defensive in their portfolios. That means to lighten up on overextended securities at a minimum. When the market does finally take a breather it could be rough sledding for a while. Investors looking for investment candidates should focus on stocks that have lagged the markets and on issues that have been depressed due to tax loss selling. We expect a period of broader stock market strength despite any near term sell-offs and believe the markets will once again rotate into the basic industry, cyclical and secondary stocks in early 2000.
Investors need to note that while this years winners and losers are easily identified, just jumping on board the big winners of 1999 may not lead to success in 2000. With the economy at full steam and overseas economies now expanding, we should see some shift into basic industry and cyclical issues. Rising rates have typically been a negative for Technology and although Tech remains the favorite choice of many for the foreseeable future, a major sell-off could occur in this overbought sector at any moment shifting market leadership to more traditional companies for a good part of 2000. The same principle applies to Mutual Funds. The big winners of 1999 will not necessarily end up the big winners of 2000 so investors need to do their homework to see what will work best next year. One sector that has done better of late is the long forgotten emerging markets sector and that may be a big surprise in 2000 with worldwide economic growth on solid footing.
Last week the stock market rallied once again with the stodgy but improving Dow Industrials reaching new all-time highs rising 148.33 points to close the holiday shortened week at 11,405.33. Many of the worst performing stocks in the Dow Industrials are starting to improve as this liquidity driven rally attempts to broaden its scope. Meanwhile the lowly Dow Transports declined a modest 31 points and is still flirting with 1999 lows. Any break below 2779 would be a negative signal for the stock market. The interest rate sensitive Dow Utilities managed a modest rally and closed up 6.94 points despite rising long-term bond yields and talk of up to four Fed rate hikes in 2000. While all of this conjecture has hurt Utilities and Bond Prices, the more extreme the conviction that rates are going much higher, the less likelihood of that event occurring as negative sentiment could serve as contrary opinion and set the stage for a recovery in bond prices. However, higher bond yields approaching 7% is being forecast by many analysts and although not far from this week?s high of a 6.46% yield, this event would be sufficient impetus to ignite a major stock market correction early next year. What we hope is that economic growth slows down soon to a more modest pace and we avert further Fed rate hikes, especially as a result of the three Fed rate hikes of 1999. Right now the economy is on a tear with reports of an extremely strong Christmas retail sales period causing fears of another 5% plus showing for the US economy in the 4th quarter of 1999. That is above the Fed?s acceptable target for growth and would inspire the Fed to raise rates once again. Luckily, this past week saw the Fed leave rates unchanged with the bias to raise rates remaining Neutral although no one thought the Fed would raise rates right before Y2K. But looming is the February Fed meeting and most believe that a fourth rate hike is likely at that time.
The NASDAQ Index of stocks for the new millennium continued its winning ways rising once again to new all-time highs and breaching the 4000 mark the first time in history. Now up an amazing 82% this year so far, this historic rally shows no signs of letting up. The NASDAQ rose a whopping 5.77% or 216.38 points last week to close at 3969.44, defying any attempts at a meaningful pullback. Meanwhile, as MarketCentral.net anticipated secondary stocks have started to rise as evidenced by the gains in the Russell 2000 Index of smaller capitalization issues. Up 3.48% for the week, many secondary stocks are starting to gain strength as tax loss selling season is winding down creating what is called the ?January Effect?.
Market Internals continued weak last week despite new highs in all the major indexes. New Highs vs. New Lows, Net Advances vs. Net Declines, the decline in the Dow Transports and rising bond yields are all in negative territory. However, as we have said repeatedly, ?The Trend Is Your Friend?, so while we may be heading towards a major correction at any moment, investors should stick with the primary trend until the markets reverse course, especially during the seasonally strong November to January time period. However, we are getting very close to the end of this particularly strong seasonal period and market weakness may appear at any time after New Years.
The economy remains strong with 3rd quarter GDP growth revised upward to 5.7%. With 4th quarter GDP growth continuing at a strong pace, the Federal Reserve Board last week delayed what many expect, a definite rate hike, until after Y2K. Retail sales in the US for the holiday season were up 8% with sales of $18.4 billion reported. That is a great performance and will keep pressure on interest rates with the consumer acting confident. And worldwide stock markets have put in a stellar performance so far this year with Paris up 48%, Germany up 35% and the UK lagging up just 15%. Hong Kong reached a new all-time high last week and Japan remains strong with many portfolio managers favoring the Japanese market. In fact, Industrial Production in Japan was reported up 3.8% and that is a great improvement over recent results. One of the key indicators we follow to determine the outlook for the US Stock Market is World Markets performance. With World Markets rallying to new highs in many locations, we would have to view the situation as extremely positive for US Equities for the year 2000 despite near term concerns. And because we are heading into a Presidential Election year, the odds favor a positive year as most Presidential Elections years are positive years for the market.
This week?s chart analysis has once again called the market?s turning points and has kept traders and investors on the right side of the market. Our Dow Industrials Hourly Chart shows momentum breaking below the all-important 0-line that delineates positive vs. negative momentum but holding the triple bottom area that has contained sell-offs during the recent rally phase since October. Thus we now have a quadruple bottom in place. Price, however, broke below the uptrend line and fell out of the upward rising channel for a couple of days below rallying back into the rising price channel late in the week. So long as price and momentum did not break down jointly, the upward trend remained intact. A move once again below the uptrend line with (at the same time) momentum breaking below the quadruple bottom formation would ignite a more significant short-term sell-off than we experienced last week. Price did reach new all-time highs in the Dow Industrials last week and that is a positive sign for further price gains directly ahead. We also have to consider the momentum resistance area that has caused many short-term sell-offs to occur and we will be approaching that level should prices continue to rally strongly this week.
Our Daily OEX Chart is revealing that the Momentum high level consolidation we pointed out last week ended with Momentum breaking out and is now once again rising towards the resistance area. Price held the rising uptrend line and remains in the rising channel as shown on the chart. We are now looking for a potential double top on momentum or divergence with price reaching new all-time highs on this index and at the same time Momentum has been unable to reach new recovery highs so far.
Because we are anticipating a market correction coming as early as January, we are now looking for clues in our chart analysis that would indicate that a market decline is underway. But due to the upward bias expected during typical holiday trading again this week, we expect continued upside pressure in the markets until the holidays are over.
Action in Gold and Silver and the Philadelphia Gold and Silver Stock Index (XAU) was uninspiring last week with gold rising a modest $3.30 an ounce to $386.70. Meanwhile the XAU declined less than a point to close the week at 66.56. With world economies continuing to improve and with the US economy surging, we continue to expect modest but increasing inflationary pressures to materialize. That would be sufficient fuel for the Metals complex to stage another rally phase soon. Investors should continue to accumulate metals stocks at current levels and become more aggressive if the XAU approaches its all-time lows near 50.
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Roy Spectorman
President
MarketCentral.net
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spector@marketcentral.net
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