Hi Tom,
This a really long article but I thought you would find it interesting. The guy seems to use some of the IW and some of my S@P 500 indicator.
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Posted 3/23/2000
Steve Shobin
-- Lehman Brothers
Shobin's Picks
1 yr. vs. S&P
Goldman Sachs
Morgan Stanley Dean
Witter
Weatherford International
Nabors Industries
Motorola
Sprint PCS
eBay
Xilinx
Dell Computer
Cisco Systems
Interviews
How to spot trends and ride their momentum
Global shifts in the markets tend to last, Lehman Brothers technical strategist Steve Shobin says; investors can win by
catching the waves and riding them for all they're worth.
By Eneida Guzman
There is a type of Wall Street technical analyst who pores over individual stock charts, looking for characteristic patterns known to the cognoscenti
by such arcane designations as "cup and handle," "double top" or "ascending right triangle."
Then there are people like Steve Shobin, who's also a technical analyst, but on a more global level. As Lehman Brothers' chief technical strategist, the
57-year-old Shobin keeps an eye on trader sentiment, momentum, the bond market and "bellwether" stocks in order to detect broad market trends.
Those trends, he notes, really do have a tendency to last, and investors are most successful when they ride them.
In an interview last week with MSN MoneyCentral, Shobin spoke mostly about the trends that have been powering the
major indexes lately -- often, in very different directions.
You use a variety of technical indicators to help you analyze the direction of the market. Which are the most important
ones?
There are four categories of indicators that I rely on. One is the bellwether stocks of the markets I'm looking at. The
second is the bond market. The third pertains to traders; it's important to understand whether the trading community is
bullish or bearish. And the fourth, which is pre-eminent and most pivotal, is momentum. Momentum refers to the power and force of the movement
and performance of the market.
Riding the 'mo'
How do you measure momentum?
There are many ways that you can measure momentum. One is by looking at the traditional advance/decline index -- how many stocks are rising or
falling on any given day. Another is the volume in rising stocks less the volume in declining stocks. We have found this indicator to be extremely
useful because, to us, it's an explicit reflection and measure of institutional confidence. If the institutions are confident, they will put tremendous
volume behind rising stocks. If the institutions are not confident, they'll put much more volume behind declining stocks. And, finally, we like to look
at the number of stocks making new 52-week highs vs. new 52-week lows.
Which companies are bellwether stocks for the various markets you follow?
Every single market in the world has its bellwether stocks. The bellwether helps validate and corroborate break-outs and breakdowns in the market
that it's measuring. For instance, Hong Kong has Chung Kong, Japan has Nomura Securities (NRSCY) and Mexico has Telefonos de Mexico (TMX),
the telecommunications company also known as Telmex. Here in the United States, the bellwethers, the corroborators and validators for the S&P 500
($INX), are General Electric (GE) and the New York Financial Index. GE is used because it has its financial tentacles in just about every aspect of the
U.S. economy, and the New York Financial Index because so many stocks on the New York Stock Exchange are financially related.
What about the Nasdaq?
The Nasdaq Composite Index ($COMPX) has its own set of bellwethers, and it's very important to differentiate between the Nasdaq and the S&P. One
can no longer make a uniform call on all of the indexes, just as one can't make the same call on Phelps Dodge (PD) as on Microsoft (MSFT) and hope
to make money for their clients. We like to look at the Nasdaq a little bit differently than the S&P, and the bellwethers there are Cisco Systems (CSCO)
and the Russell 2000 ($RUT.X).
It seems that the Nasdaq, S&P and the NYSE would all have more than just a couple of bellwethers. Why are those few stocks used to gauge those
markets?
In every cycle, different stocks and indexes can be useful to gauge the market. We try to pick the stocks we think, over time, best represent these
markets.
A bear in hiding
According to your analysis, the S&P 500 is in a bearish trend. Can you elaborate as to why?
That's correct. We think it's very important to distinguish between the different indexes. Sometimes those indexes will have the same story and paint
the same picture -- other times, they won't. Right now they're not doing that, just as sometimes IBM (IBM) and Microsoft will move similarly, and
other times they'll move in opposite directions. The picture for the S&P is not bullish. We feel that the S&P has been in a correction since mid-July of
1999. During that time, nearly 70% of the S&P 100 stocks have lost ground, and in fact, approximately 60% have lost about 15% in the past nine
months. Our conclusion that the S&P is in a correction is indisputable. We think that there has to be a period of convalescence and rebuilding before
the long-term bull market in the S&P resumes, and the hallmarks of a bottom, or the indications that a rebuilding process is under way, will involve a
sharp rally in the financial sector and a surge in trader skepticism. A sharp rally in financials and increased trader skepticism is an almost unbeatable
combination, and almost always suggests the end of a bear market, or the end of a correction.
The S&P was up around 20% last year. Most investors are not under the impression that we are in a bear market.
The S&P was up for the year, but from mid-July of 1999 through now, it has made virtually no progress. I'll give you a specific number. On July 16,
1999, the S&P closed at 1,418.78. On March 13, 2000, the S&P 500 closed at 1,383.62.
Oil-service stocks
appear to have
turned the corner
on the upside. The
upside doesn't have
"dot-com" potential,
but we think that
these stocks will
weather the storm
because of the
technical patterns
and rising earnings
estimates.
Which names and sectors represented in the S&P will outperform should, as you believe, this correction continue?
I think that sectors that will hold up well in the event that the S&P does continue to correct are the brokers and the oil-service stocks.
Oil-service stocks appear to have turned the corner on the upside. The upside doesn't have "dot-com" potential, but we think that these
stocks will weather the storm because of the technical patterns and rising earnings estimates. We think the brokers look very interesting
because, one, their technical patterns appear to be improving and, two, there has been a fair amount of put activity accompanying their
rallies. When we see options-put activity in the presence of an advance, to us it means that not all the money to be invested is in that
stock. The put-call data doesn't preclude short-term pullbacks -- again, anything can pull back at any old time. But they do suggest that
medium-term targets are higher. So those are two areas that we look at. Finally, and this is for both the Nasdaq and the S&P, I think
some of the Internet stocks should do well.
Which segments of the Internet sector are you recommending in this environment?
I will be party to consensus and say Internet infrastructure is where we're placing most of our commitments. So Cisco is a name we are
confident in. We also think eBay (EBAY) is beginning to improve, and we like it very much.
Do you like any other names in the Internet space?
We also like Dell Computer (DELL), Xilinx (XLNX), Sprint PCS (PCS) and Motorola (MOT).
Could you give us a couple of names in the broker and oil-service sector?
In these sectors we like Goldman Sachs Group (GS), Morgan Stanley Dean Witter (MWD), Weatherford International (WFT) and Nabors
Industries (NBR).
Oil prices have tripled in the past 18 months, and Wall Street expects the Fed to continue to tighten the money supply. What
do your technical indicators suggest for the domestic economy?
Technically, I think the bond market might go a little bit lower, but not a lot lower. I think the dormancy and lassitude of gold suggests that
inflation is not a big threat, and I think that the strength of the dollar implies that inflation is also not a big threat. It's hard to imagine rates
going a lot higher when inflation is contained and subdued. But it's a far cry from the bond market not going down and it actually going up.
A sharp rally in the bond market will be confirmed by a number of other developments. Usually, when the bond market is on the verge of a
big rally, financial stocks will start to do well. So if we see a week or two of good performances in financials, that would suggest that the
bond-market trading environment has improved enough to get a little bit more aggressive. Number two, we often see huge rallies in
home-building stocks, and as remote and obscure an observation as that might seem, home-building stocks are just as sensitive to the
trends of rates as anything else. If we were to see a huge rally in the home builders, that would suggest that the picture had improved
considerably for bonds. And, finally, we'd like to see a big rally in electric utilities.
That hasn't happened in quite some time.
That's correct. One of our many messages to investors is that one doesn't have to buy during bottom ticks to make money in the market.
Trends really do persist, and one can often wait for confirmation from the market, or particular stocks, before taking a position. Strong
momentum leads to even stronger momentum. One does not have to buy the absolute low to make money in an item. One can often
exercise patience and wait for confirmation before making his or her investments, and those confirmations in the bond market will be sharp
rallies in utilities, home-building and financial stocks. Once those occur, one can, with greater confidence, become more aggressive on
the bond market.
One of our many
messages to
investors is that one
doesn't have to buy
during bottom ticks
to make money in
the market. Trends
really do persist,
and one can often
wait for
confirmation from
the market, or
particular stocks,
before taking a
position.
Dow or Nasdaq?
The Dow is recovering from a 15% correction from its all-time high, and the Nasdaq has recently corrected 10% from its
all-time high. What do your indicators say about those indexes?
Well, the Dow ($INDU) and the S&P are virtually the same. The Nasdaq is different. The Nasdaq technicals are mirror images of the S&P
technicals. Let me go over some of them. The up/down volume indicator, which we alluded to earlier, has been in a strong, bullish trend
since the bottom in October of 1998 for the Nasdaq. We have seen virtually no glitch in this indicator, and it's the truest reflection of
institutional confidence that I can think of. Meanwhile, this very same indicator for the S&P is in a downward trend. In fact, the new high
that the S&P reached in December of last year was the first time that the up/down volume indicator did not confirm. It did not match the
new high. The up/down volume indicator for the S&P has been in a downtrend since July of 1999, so that's one example of the mirror
image.
The second example has to do with volatility, and I don't mean to get too esoteric here. Volatility is an arithmetic calculation that can help
gauge trader sentiment. Usually, a sign of a bottom is when traders are extremely bearish, when volatility for an item is extremely high.
Usually, a sign of a top is when volatility is compressed and low, and that often reflects too much complacency or optimism. Right now,
we're seeing high volatility for the things that are working -- namely, the Nasdaq -- and low volatility for the things that aren't working --
namely, the S&P. So that's another example of what we call the mirror image. The S&P's volume will have to rise sharply to suggest a
major bottom. The Nasdaq's volatility will have to contract sharply to suggest a major top.
Even though the Nasdaq has come under some pressure recently, year-to-date it's up close to 20%. On a technical level, do
you expect the upward trend to continue?
Technically, the Nasdaq is in a major up trend and shows no sign of an important top. That does not mean that the Nasdaq can't pull
back. Anything can pull back any old time it wants to. The Nasdaq could correct anywhere from 10% to 15% in the blink of an eye, but we
feel very strongly that one should continue to focus on and emphasize Nasdaq-type stocks until the up/down volume indicator changes
direction and starts to slow down, or until the volatilities become compressed and reflect too much complacency. The Nasdaq is in the
leadership position, and conceding the fact that it's long overdue for a correction and could easily have one over the short run, we still think
that's where investors should continue to place their emphasis.
It seems that investors see the Dow Jones Industrial Index and the S&P as representing the Old Economy, and the Nasdaq as
representing the New Economy. Do you think those distinctions are meaningful? And do you foresee a time when the old and
new economies will rejoin?
Our guess is that the S&P and Dow Jones will be moderately firm for a couple of months, then sink back towards their recent lows in late
summer/early fall. But as we approach the end of the year, the S&P and Dow Jones should be able to resume their longer-term up trends.
Old and New Economy stocks will probably share leadership.
Interviews
Recent Interviews:
? Drilling down on
high-energy stocks, 3/16/00
? Investing in Asia doesn't
have to be 'hit or miss',
3/9/00
? Rest up for the next round
of hot new IPOs, 3/2/00
More?
Do you have any Nasdaq names or sectors that should continue to experience near-term strong momentum?
Sectors that should continue to do well under current technical scenarios are telecom, technology and biotechnology. There really has
been no expansion in other areas of this market. That's where we see the most skittishness, and again, skittishness is not the sign of a
top. For whatever reason, we're seeing more trauma associated with the prosperity and success of Nasdaq stocks than we are seeing for
the stocks that are failing on the S&P. Trauma is not a sign of a major top.
What is your take on overall investor sentiment at the moment?
Investor sentiment for the S&P is complacent and far from the agitated, bearish characteristics that mark bottoms. And trader sentiment
for the Nasdaq counter-intuitively is skittish, scared, cautious, dubious and pessimistic. Many investors feel that what happened to Procter
& Gamble (PG) has to happen to the stocks on the Nasdaq, which have price-to-earnings ratios as high as Everest, and that isn't
necessarily so. One thing that we underscore is that trends really do persist, that investors never need feel immobilized by the fact that
they didn't buy on a bottom tick. You can wait for confirmation in technical indicators and still make a lot of money in the market. We
think using confirming tools, such as momentum, bonds, trader sentiment and bellwether stocks, can help in that regard.
At the time of publication, Eneida Guzman owned or controlled shares in the following equities mentioned in this column: Morgan Stanley
Dean Witter.
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