To: Nemer who wrote (28070 ) 11/9/1997 1:55:00 PM From: Fred Weiss Read Replies (1) | Respond to
John Murphy's commentary today:Update for Nov 9, 1997 STOCK RALLY FADES A combination of technical factors and more troubles in Asia undermined the rally in stocks. A selloff in Hong Kong pushed the Hang Seng into a retest of support at 10,000. New worries about Korea also shook the mainstream view that the worst was behind us. More selling in Latin America also reinforced the view that the American market can't hold up with so many parts of the world in trouble. From a technical standpoint, the Dow had retraced 62% of its October fall, and had reached its 20 day moving average just below 7800 on Wednesday. If the rally has failed, the Dow's lower Bollinger Band is at 7230 (which could be the next downside target). The daily RSI stalled at 50 which often happens during rally failures. The daily stochastics has slipped back into negative territory. The daily MACD for the Dow and the S&P never turned positive. The S&P 500 failed a test of its 20 and 50 day averages just above 940. It may drop to its lower Bollinger Band near 892. MORE ASIAN DEFLATION TALK An article in Barron's this weekend talks about the growing threat of global deflation starting in Asia. We've been saying that for some time. More importantly, the market's have been sensing it and preparing for it. The Asian currency crisis began in early July with the collapse in Thailand's currency. Since the start of July, a number of market events have occurred which support the view that the market is taking Asia more seriously than Wall Street -- copper and gold prices plunged; utilities and bonds began outperforming stocks; big multinational stocks with foreign exposure began underperforming smaller stocks with less foreign exposure; consumer staples began outperforming cyclicals; retailers rose while technology fell. ASIAN EXPOSURE HURTS TECHS Many of the big technology stocks have large exposure in Asia, which helps explain their poor performance of late. The weakest tech sector has been the semiconductors. The PHLX Semiconductor (SOX) Index is the first technology index to fall below its 200 day average and stay there. After this week's selloff, it now looks like the other technology index (like the Morgan Stanley Tech Index ) may be getting ready to retest their 200 day averages. CYCLICALS HURT. CONSUMERS GAIN We talked about this point last week. When the market starts to sense that economic growth may slow, it starts to punish economically-sensitive cyclical stocks (like copper, aluminum, paper, heavy machinery). A relative strength (ratio) comparison of the Morgan Stanley Cyclical Index versus the S&P 500 shows a breakdown in the cyclicals during October. The selling of industrial metal stocks like copper and aluminum followed the plunge in their respective commodities that began in July. A relative strength (ratio) comparison of the Morgan Stanley Consumer Index vs. the Cyclicals shows money flowing to the more defensive consumer staples - beverages, food, drugs, tobacco, and household products -- for the past month.RETAILERS STAND TO BENEFIT Ever since the Asian crisis began, it has been pointed out that retailers stand to benefit from Asian deflation. Since they produce or import goods from that area, their bottom line's should get better. It's not surprising, therefore, that retailers have done so well lately. A relative strength comparison if the CBOE Retail Index (RLX) to the S&P 500 shows retailers outperforming the market over the past three months. Two of the individual stocks we mentioned last week hit new highs this week - Gap (GPS) and Dayton Hudson (DH). When you put all these factors together, it becomes clear that profound changes have been taking place in the markets since early July that appear to be related to the Asian crisis and the increased threat of deflation. Who are we to believe - the market or the self-serving Wall Street establishment? We're market analysts. We vote for the market. EUROPE CURRENCIES YES.LATIN AMERICA NO The U.S. Dollar continues to lose ground. It's interesting to note the close correlation between the Dollar Index and the Dow for the past few months. After a modest bounce over the past week, the Dollar appears to be weakening again. Having already broken its 200 day average, the failure of the Dollar Index to bounce may also carry a negative message for the Dow. The Mexican Peso has also tracked the Dow closely and tells us a lot about sentiment in Latin America. The Peso rally failed this week as well, reflecting continued loss of confidence in Latin American. In contrast, currency funds continue flowing to Europe - mainly the British pound, the Swiss franc and the German mark. The pound was aided by a rate hike in Britain, which shows that central bankers are fighting the wrong enemy - inflation. The Australian dollar, tied to commodity prices, continues to fall. SOYBEANS SOAR The grain markets remain the lone bright spot in the commodity pits - soybeans in particular. January soybeans jumped 13 cents on Friday to achieve the highest level in eight months. With January soybeans near 7.40, prices are approaching a challenge of the March peak at 7.52. Corn prices are also firming. That may explain downward pressure on livestock markets, which are usually hurt by rising grain prices. The precious metals continue to weaken (the XAU fell to a new low). Given the tensions in the Persian Gulf, the modest bounce in oil hasn't been very impressive. Natural gas has also fallen sharply. December natural gas is nearing a test of its up trendline near 3.20. The CRB lost ground and remains on the defensive. BOTTOM LINE -- GIVE YOURSELF A CASH GIFT FOR CHRISTMAS As you know, we turned defensive on this market back in August and suggested you do the same. We've seen nothing to change our view. When a market is old and overvalued (as this one is), it's prone to downside surprises. A study of market rotation since the summer shows that the market is responding exactly as it should in a deteriorating global situation. We continue to favor bonds over stocks.consumer staples over cyclicals. plus utilities, retailers, and oil service stocks. We would avoid precious metals and technology. We're also taking a less optimistic view on real estate.vFinally, treat any Santa Claus rally during December as a Christmas gift and raise some cash. A risk- free 5% money fund return may look pretty good a year from now.
