As promised, here is my candid view of the next few weeks and the coming year. With all the "What's Hot in 1998" threads on SI now, you can compare my views to others, do your own research and invest accordingly. I hope that your comments, debate and probably scornful abuse will regenerate some interest in this thread.
In the short term this is a very, very dangerous market for the small investor. It is a momentum market, not a value market. Look at the past few weeks: the semiconductor stocks crashed on earnings warnings, downgrades and the Asia problem. Then they became "undervalued" despite the fact there will be virtually no earnings outside Intel, and institutions rushed in Friday to build them up again. At the first whiff of trouble, those same momentum players will get out in a hurry, several points and several hundred thousand shares ahead of you, the individual investor.
Taking the semis as an example - should you short them with that much institutional weight going the other direction? Not unless you like being squeezed. I recently stopped out of AMD and MU shorts despite their dismal earnings picture. Should you go long? Only if you can watch the tape every minute and be ready to bolt in concert with the big players. Most of us can't.
Internet stocks - had a great run in late 1997 thanks largely to short covering. Then January 2 comes and most head south, except for XCIT which inexplicably jumped more than a point while all the others took a beating. YHOO earnings are due 1/14. A short-term short could make a bit next week but you run a serious risk if earnings beat expectations (i.e. this $66 stock makes .03 instead of .02). As long plays, Internet stocks are very risky this year.
What about 50% Value plays? On Thursday I ran the charts on my favorite prospects and made a solid case for going long in ATLPA, EQNX, FTIC, TMBS, and UCMP. Didn't pull the trigger until I saw which way the wind was blowing in the market. Good thing, too, since small cap value plays were not going up in the famed "January Effect" rally. Only heavily shorted crap like ZITL seemed to make big moves, plus a few value plays like CGN (very low volume). Trying to guess which of your favorites will trade rationally is a dangerous, expensive proposition at the moment.
Another example: BTO, the John Hancock Bank and Thrift Fund which Individual Investor put on its Magic 25 list for 1998. Thought about buying but decided to sit and watch for a day. BTO traded 1.5 million shares, double the highest volume in the last six months of 1997. Did it go up? Nope, down 1/16. That tells me there is distribution going on. A lot of money dumped BTO once they could put the gain in the 1998 tax year and sold their shares to the new hopefuls who will bear the risk of the upcoming uncertain market. Theoretically BTO is in stronger hands now. But that much selling makes me very suspicious.
What do we face short term? Consider the following:
--The NASDAQ has moved between 1500 and 1600 lately, which represent its 200-day MA and 50-day MA approximately. MACD analysis signaled the recent move up once the NASDAQ held at 1500. Now with the NASDAQ sitting right on its 50-day MA, there is an important test. Can the NASDAQ break the 50-day MA with heavy volume Monday or will it bounce back? Watch closely as an indicator for techs in January.
--Earnings season: key companies reporting soon are INTC 1/13, YHOO 1/14, QNTM 1/15, NVLS 1/19, CA and QCOM 1/20, TXN 1/21, and GTW 1/22. Any big misses beyond previously issued earnings warnings could take the wind out of the NASDAQ's sails in a hurry. And remember that these announcements come out before or after the markets open, leaving the professional traders to set the stock price on their private exchanges before you can even get an order in. High-risk players love to play options around earnings time. Not for the inexperienced or faint of heart.
--Options expiration January 16, right in the middle of earnings season. Add two heaping tablespoons of volatility to the market that week.
--Unemployment and hourly earnings data due out January 19 (inflation figures before and after but they shouldn't be a problem). Any indication of a tightening labor market will make everyone jittery.
What's the bottom line here? If you think you can play a short-term January rally, go for it. Pick a short list of companies to follow and be ready to pull the trigger fast, in and out. Alternatively, if you want to buy your favorite beaten-down tech stock with a longer term horizon, dive in and be ready to ride with the storm.
Long-term in 1998: the storm is not guaranteed by any means. If earnings come through OK, Asia stabilizes and no economic data comes along to spoil the party, you could see some gains for a while. But last year's pattern of a February - April slump could repeat itself. I don't see any reason to be stuck in a lot of losing long propositions if the overall market tone turns sour.
The storm would come with missed earnings from key market leaders, a spreading Asian contagion and a general sentiment that the bull has had its day. Small caps virtually across the board will get slaughtered in this environment as investors are willing to take less and less risk, and overall PE's come down. Briefing.com and others are pointing out that a general re-evaluation which takes S&P PE's from 23 to 15-18 is not out of the question. They calculate an S&P bottom around 800 if that happens, or 20% lower than today. The key is in the earnings. Watch carefully.
Sooner or later, I think there will be a good small cap run in 1998, just like May - October last year. The companies I mentioned earlier as long plays should do well if their performance holds up on the bottom line. I'm less optimistic about penny stocks, maybe since four of my five largest losing trades in 1997 came in $5 and under stocks (my second foray into QNTM rounds out the top five - others were BNGOW, BROC, TSSW and PLRN/ICCN). I'm skeptical that companies turning a few cents profit will be awarded astronomical PE's, where .20 earnings yield a stock price over $5. That's not to say it won't happen in some cases but overall I think these stocks are a losing bet in a weak market.
Where do I stand? Cleaned out the dog pound to make my tax position as nice as possible, leaving me long in BNGO, CREAF, FFC, NRAG and THQI. Still short CDRD, KOPN and SHEL. I'll short ZITL again when its latest spike begins to ebb since this is a company headed for oblivion sooner or later. Lots of cash and margin sitting idle, waiting to see where the market heads the next few weeks. The hardest thing I found in my "rookie" year in the markets was not trading. As a result, I was fully invested all the time. In retrospect, not getting out in October when the first signs of real trouble appeared cost me a lot of paper profits. Won't make that same mistake again this year, getting in or getting out.
One last word on diversification: I usually go for small caps and tech stocks because I can figure out what they do. Last year, a colleague with lengthy experience in financial and insurance stocks put me into Fund American (FFC). It made 20% despite the market's overall gyrations. This year he is big on Security Capital Group, a REIT holding company with several subsidiaries. The main company trades as SCZB according to Yahoo, while the warrants trade as SCZ_t. E*Trade does not have these two listed at the moment and I'm trying to find the correct symbol to enter a buy order. Point is, think about diversifying out of the usual SI hunting grounds if you are managing a significant portfolio. You may be very glad you did.
That's a lot to chew on all at once. Please go through and pick apart my analysis. I'm especially interested in stocks which you think will beat the possible 1998 storm, or your favorite short picks if the onslaught arrives as predicted.
Very last thought: if you are trading short-term, watch the futures markets before the open on cme.com, plus the Asian and European markets available in YHOO. That will save you from going long with companies you love on a day when the NASDAQ is due to tumble, or shorting into a sudden rally.
A happy, prosperous 1998 to all. |
