Sat, 18 Aug 2001, 12:50am EDT
Write on the Money
While many market experts stumbled, these newsletter editors shone
By Steven Lord Bloomberg Personal Finance September 2001
Last year, as the S&P 500 Index dropped nearly 10 percent, dragging investors'
portfolios down with it, 8 of 12 Wall Street investment strategists Bloomberg
followed were increasing their stock allocations. No wonder that many who
looked to these gurus for guidance are now skeptical of professionals'
pronouncements. Not all expert advice, however, deserves disdain. During the
last stages of the technology stock mania, many small, independent- minded
financial newsletter editors kept their readers in the market long enough to earn
money and then got them out of it when a reversal seemed imminent. A select
few called not only the Nasdaq crash in spring 2000 but also the later rally in the
Dow Jones Industrial Average that carried the index to within a shout of a new
record in May 2001. Three of these editors stand out:
James Dines, who gained notoriety during the gold rush of the '70s as the
"Original Gold Bug," has put out The Dines Letter since 1960, which makes it one
of the oldest continuously published financial letters in the nation. He practices a
brand of market timing based on his Dines Greed/Fear Oscillator. This
combines about 250 stock market indicators, drawing on everything from
technical analysis to mass psychology. Dines embraced the tech- driven bull
market of the '90s, riding the likes of AOL (now AOL Time Warner) and CMGI to
enormous gains by the end of the decade. More important, he correctly
predicted both the Nasdaq's March- April 2000 meltdown and the rally that
immediately followed.
What does Dines think the future holds? For the moment, he is conservative,
noting that most stocks are locked in multi-year downtrends and that the late
spring-early summer rebound, in speed and scale, was a textbook bear-market
rally--a brief respite in a continuing decline. He's also concerned about the rise
in long- term bond yields and in the prices of gold and real estate, as well as
about the strength of the dollar against other currencies. Believing these factors
foretell a more serious drop in the stock market before a prolonged uptrend can
be re-established, Dines is cautioning his readers to stay in cash rather than
commit it too early.
James Stack, editor of InvesTech Research, became pessimistic early, missing
the run to the top. In fact, he was table-pounding, in-your-face bearish for much of
'98 and '99. But his newsletter was one of the few that refrained from advising
investors to invest in the market following the March 2000 Nasdaq decline,
correctly calling this just the first phase of a long fall.
Interestingly, this gloomiest of advisers is now the most optimistic he's been in
five years, citing three key factors. First, Stack believes the Federal Reserve's
string of discount rate cuts have created the most bullish monetary climate in
almost a decade. Second, his proprietary Advance-Decline Divergence Index
is showing the best breadth (number of stocks going up compared with those
going down) in years. Furthermore, over five decades, the indicator has never
risen at the current rate without a bull market being the end result. Finally, Stack
points to his Negative Leadership Composite, which looks at the number of
falling stocks and the magnitude of their decline to determine how much selling
pressure is in the market. The composite has begun to show fewer companies
trading at their 52-week lows--a positive signal. "When you have the monetary
climate, breadth, and leadership all in the bullish camp," he sums up, "what's the
most prudent strategy? Give the bull every benefit of doubt."
Nonetheless, Stack is worried about the strength of the dollar, the amount of
margin debt investors have racked up, and the absence of the capitulation
normally seen at bear market bottoms. So he has recommended that his
readers allocate their assets for safety, avoiding technology and focusing on
energy, food, and solid small- and mid-cap value plays, where history shows
that price recovery occurs first.
Sy Harding, who edits Street Smart Report, has since 1988 been ranked among
the top 10 market timers by Timer Digest, which tracks newsletters' investing
calls. He is best known for his seasonal timing system, or STS, which builds on
the insight that certain periods of the year are more favorable than others for
investing. November through April, for instance, is the best time to buy and hold
stocks, because this is when the market typically makes its most positive
moves. Conversely, May through October is a good time to be out of the market,
safely earning interest on cash, since this is when the market has suffered most
of its corrections. Harding uses Moving Average Convergence/Divergence
(MACD), a technical analysis tool that compares two moving average lines to
confirm price moves and pinpoint entry and exit points.
Harding's current opinion is mixed. According to STS, which tracks the Dow and
the S&P 500, the next re-entry point will occur in early October, and investors
should expect flat-to-weak results until then. The Nasdaq's rally had brought it
very close in June to Harding's target of 2,350. Should the index make a move
above that level that is significant in scope and duration, he expects a further rise
to just shy of 3,000. However, Harding's short-term indicators show a market that
is already overbought, and, since gains so far have been substantial, he is
expecting it to head to new lows by early fall. Dines, Stack, and Harding proved
their worth as prognosticators in the recent bear market. If they now seem at
odds about what the near term holds--well, that's the nature of transition periods.
Meanwhile, investors can take heart that all three see a bull run in the offing, even
if they don't agree on the timing.
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