John Murphy's Comments Today:
Update for Nov 23, 1997
BLUE CHIPS LEAD RALLY The market had another good week with the Dow and S&P 500 rising above initial resistance barriers at 7765 and 950 respectively. That's the good news. The bad news is that the broader market is lagging behind. The Nasdaq Composite backed off on Friday from similar resistance (the November 5 intra-day peak) at 1644. What's more the relative strength (ratio) of the Nasdaq vs. the S&P 500 has fallen to the lowest level in three months. Part of that comes from the continuing poor performance by technology stocks. A lot, however, is the result of the lagging smaller stocks. The bounce in the Russell 2000 is still ten points below its November 5 peak and ended lower on Friday. Since the October bottom, the Nasdaq has gained only half as much as the Dow and S&P 500 while the Russell has gained only a third as much. Nothing has happened to alter our view that the market is enjoying its traditional yearend bounce. The narrowness of the advance, however, is keeping us very cautious.
LEADING GROUPS Once gain, the best performing groups this week fall under the general category of defensive stocks - utilities, financials, and consumer staples. Within those sectors, leading industry groups were water and telephone utilities, money center banks, and drugs. Not surprisingly, the weakest market sector was energy and in particular the oil drillers. This week's breakdown in energy prices (probably owing to the resolution of the Iraq situation) no doubt hurt the oil service stocks. Airlines stocks, however, benefited.
OIL DRILLERS HURT We talked last week about the new signs of weakness in oil service stocks and the importance of them holding at their October lows. We mentioned the 118 support level in the PHLX Oil Service Index (OSX). Prices closed below that level on Wednesday. However, a subsequent bounce resulted in a Friday close just above 119. We listed the support levels for each stock last week as well. The only one that ended the week below its October low was Dresser Industries (DI). Global Marine (GLM) dropped below support at 27, but then bounced to 28 1/16. Its 200 day average is right at 26. We suspect the testing of underlying supports in this group will continue. In addition, oil service stocks are underperofming the market for the first time this year. That argues for continued downside pressure.
AIRLINES GAIN ALTITUDE Whenever energy prices (and energy stocks) fall sharply as they did this week, airlines stocks usually gain. And that's exactly what happened this week. Stocks hitting new recovery highs were Alaska Air (ALK) and Delta (DAL). Delta has an especially attractive chart pattern. DAL has been consolidating between 94 and 109 since mid-September in a triangular shaped pattern. Friday's close at 110 resulted in a bullish breakout. We listed Alaska Air as a long term breakout back in September when it rose above 30 for the first time (exceeding its 1989 peak). It has since become one of the best performers in that group ending Friday at a new altitude record of 36 7/8. AMR may also be close to a breakout.
DRUG INDEX BREAKS OUT People buy pharmaceutical products when they need them - not when they're feeling good or bad on the economy . That is why they are considered defensive stocks. With the recent outperformance of consumer staples, drugs have done especially well. The AMEX Pharmaceutical Index (DRG) scored an impressive bullish breakout this week from a trading range in effect since June. Some of the leaders have been Bristol Myers (BMY), Pfizer (PFE), and Schering Plough (SGP). Last week, we mentioned Johnson & Johnson (JNJ) as having achieved a three month upside breakout. JNJ ended the week just shy of 65 and is within a couple of points of exceeding its June peak at 66.4. Merck (MRK) has been a laggard in this group. Merck, however, ended above 94 and is climbing back above its 200 day average.
TECHS CONTINUE TO LAG The technology sector continues to lag behind the rest of the market. We pointed out last week that a number of technology indexes and individual tech stocks were bouncing off 200 day averages. While that action is encouraging, the inability of those same stocks to follow-through this week is disappointing. A number of high-profile techs fell on Friday after an unsuccessful try at overhead resistance. Here are some of those resistance barriers: Applied Material (AMAT) at 40, Compaq (CPQ) at 69, Dell (DELL) at 86, Intel (INTC) at 86, Oracle (ORCL) at 87, Sun Microsystems (SUNW) at 38. Some high-profile techs gained ground. Cisco (CSCO) is once again testing its old high at 86; IBM is nearing its September peak at 107; and Microsoft (MSFT) is approaching its October peak near 139.
BONDS AND DOLLAR GAIN The Dollar Index gained this week along with stocks. However, the Dollar Index closed lower on Friday after trying to climb back above its 200 day average. The greenback also failed a challenge of a down trendline drawn along its July/October peaks. Given the close correlation between the dollar and the Dow of late, what the dollar does from here may give some hint as to what the Dow may do as well. December T-bonds hit a contract high this week in a bullish breakout by closing above 119. The next major upside target is a test of the January 1996 peak at 122. We've mentioned several times of late that bullish breakouts in utilities usually lead to similar action in the bonds. The Dow utilities ended the week at a new four year high and are challenging their 1993 all-time high. One of the driving forces behind the strong action in bonds was this week's plunge in energy prices and commodities in general.
COMMODITES FALL MORE All three commodity indexes fell again this week. The Journal of Commerce Index hit another new low. Copper contributed to that by hitting a new low. Nearby copper prices are threatening their 1996 lowpoint near 85. The CRB Index and the Goldman Sachs Commodity Indexes also fell. The latter was influenced mainly by plunging energy prices. January crude oil hit a two-month low and is threatening its contract low near 19.50. January natural gas hit the lowest level since August before bouncing on Friday. Some commodities bucked the downward trend. March corn bounced off its July/October trendline near 2.80 and is oversold. February live cattle closed at a four week high.
STOCK REVIEW: Last week we listed several stocks that were breaking out to the uspide and showing good relative strength. They included mostly utility, telephone, retail, and food stocks. Two notable winners were American Water Works (AWK) and AT&T (T). While most had very good weeks, one that that didn't was Quaker Oats (OAT). OAT fell back to 50 this week to push it back below its July peak at 53. No serious damage has been done, but the upside breakout has been negated for now. Of those stocks testing 200 day averages, most saw gains. Three notable gainers were JP Morgan (JPM), Hewlett Packard (HW)P, and Whirlpool (WHR).
NEW FOOD HIGHS Two other food stocks achieved bullish breakouts. Nabisco Holdings (NA) broke out of a trading range in effect since February. Hersey Foods (HSY) also broke through its September peak at 60. (see Chart 6) People eat even when they're nervous about the market.
HOW CAN WE BE OPTIMISTIC AND DEFENSIVE? A number of media reports this week have commented on new signs of optimism among stock market investors. After all, they're buying stocks again. We only wonder why most new money is flowing toward defensive shares if investors are so optimistic. Defensive buying reflects caution, nervousness, even fear - not optimism. Money flows for the past couple of weeks are also instructive. Latest figures show the biggest chunk of money going to money funds. The next biggest has been bonds. Stocks have come in third. Again, not a strong vote of confidence for the stock market.
BOTTOM LINE We haven't seen anything to change our overall view of things. We've been looking for a yearend rally and we're getting one. Our strongest impulse is to take some money out of the market during the current rally in favor of money funds or bonds. Or, as an alternative, rotate toward those defensive groups we've been recommending - consumer staples, retailers, telephones, and utilities. Drugs and foods look especially good now -- energy doesn't. REITS also merit some attention. Bargain hunters can use the list of stocks near their 200 day averages as a shopping list. However, we think those weaklings will continue to underperform.
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