I found this to be an excellent read-------------------------------
September 15, 1998
Voices Events With...
John Murphy
Barron's Online columnist and technical analyst John Murphy participated in a Voices
Event on Monday, Sept. 14, 1998. The following is a transcript of that event. It has been
edited for clarity.
WSJ_Host: Welcome to Voices Events with Barron's Online columnist John Murphy. I'm your
host Ravina Khosla.
Jmurphy: Hello
Hgold: I'm Howard Gold, editor of Barron's Online, and I'm asking John the first question. John,
in your Sept. 2nd Column, you wrote: "There's little doubt that the U.S. Is now in a bear market
for stocks; the only question is, how deep will it be and how long it will last." Well, what do you
think?
Jmurphy: I think the bear market we've entered will last longer and fall further than most people
realize. I would suggest a 40% decline over the next year.
WSJ_Host: How would you explain the recent rise in market despite Clinton's scandal?
Jmurphy: I don't think the market is reacting to the Clinton situation. It has been falling sharply for
a couple of months and is deeply oversold. It's due for a bounce; as simple as that.
Rwaldock: What is the lowest you expect and WHY and WHEN?
Jmurphy: I think the Dow could eventually go to the 6000-5500 region. That would bring it into
line with long-term support. That probably won't take place until 1999, however. The market will
probably find support in the 7500-7000 first and attempt a rally during the fourth quarter, which
should fail.
1butler: Does technical analysis work better in a market with lots of ups and downs such as we
have right now?
Jmurphy: I think technical analysis becomes more valuable in the present type of volatility. It
helps people to define risk a bit better and protect themselves from losses. But I also think it
works well in most environments. A lot of my work is sector-drive. That has always worked well.
Thegreendragon: What would make you change your current bearish outlook?
Jmurphy: I would have to see improvement in my longer-term indicators, all of which have turned
very bearish. In addition, I'd need to see improvement in the global markets to suggest that the
global downturn has ended. My longer-range work suggests that the market is still too high.
Ryanp: The CRB's raw commodity index has been in a freefall. Does that seal the deflation case?
Jmurphy: The deflationary threat from falling commodity prices started last fall in Asia. The fall to
new lows by most commodity indexes seems to confirm that. In a deflation, bond prices rise while
stocks fall. So far, that seems to be what's happening.
Rodman T. Johnson: This is Rodman Johnson. John, I went back to the beginning of 1991 and
ran compounded rates for the DJ-30. I found that a 12% rate gets to a DOW of 8000 at the end
of year 2000. A 15% rate gets to 10,700. Are these not more realistic than what we have now.
Jmurphy: I think it's dangerous to extrapolate the last eight years of Dow action into the future
That assumes the bull market will continue. My work suggests that the long bull market may be
ending.
Jonanderson: Given the population bubble represented by the baby boomers, how much will the
stock market be driven by shear volume instead of fundamentals?
Jmurphy: I base my work on technical trends, not population trends. Markets rise and fall for
economic reasons. I don't think the size of the population is a big factor.
Overseasinvestor: Most ADR prices are driven by fear right now. Some of them, such as TBR,
are frankly ridiculous. How can technical analysis help us find opportunities?
WSJ_Host: TBR is the ticker symbol for Telebras.
Jmurphy: My technical work spotted these weakening trends in global markets as early as a year
ago, long before the Asian contagion spread to Russia, Latin America, and then us. The
fundamentals were much too slow to stop the damage and the losses.
Thegreendragon: What specific long-term indicators would have to turn? And do you have
specific points that we should look for to see a return to a bull market?
Jmurphy: Well, a lot of things would have to change. There isn't any one specific indicator.
WSJ_Host: What would be at the top of this list?
Jmurphy: The top of the list is always the price action. If most of the major stock averages were
to move back above their 200 day averages, that would be a good start.
Jac244: Your last Barron's article posits a low perhaps next year of 6000 to 6500 on the Dow, if
I recall. How did you get to that number?
Jmurphy: The actual range is 6000-5500. The 6000 level is mainly a 30% loss from the recent
high which is normal in a bear market. The 5500 level would test a logarithmic trendline going
back to 1987. That would also be a 50% retracement from the 1987 low.
Chung1: Do you think the Nasdaq can withstand the bearish outlook better than Dow or do you
also see Nasdaq plunge in 1999?
Jmurphy: Right now, the Nasdaq is being supported by the big tech stocks. But if the bear
market does really get worse next year, the Nasdaq should underperform the Dow.
Marshals: Do you feel that the small-cap stocks are better positioned for this bear market?
Jmurphy: The Russell 2000 has fallen further than any other index and is now testing its
eight-year trendline going back to 1990. That suggests that small stocks may have reached a
support area at which a bounce is likely. But there are no convincing signs that they will do better.
Koval: What formation does the current S&P 500 most remind you of?
Jmurphy: I'm not sure it fits neatly into any specific formation.
Spillman: Technical opinion on XON?
WSJ_Host: Xon is the ticker symbol for Exxon.
Jmurphy: I'd rather not give opinions on specific stocks. I can say, however, that oil stocks are
oversold.
Kinman: Are the banks and financial stocks attractive yet?
Jmurphy: They are in the sense that they are deeply oversold, have reached some trendline
support, and have lost about half of their value.
Gene.Williams: What do your studies show for oil, corn, gold, Swiss franc?
Jmurphy: I'm generally negative on most commodities, although I think gold may be putting in a
bottom.
WSJ_Host: Do any foreign markets look attractive right now?
Jmurphy: No, I don't think so. They're certainly oversold, and will probably bounce a bit, but I
wouldn't rate them as attractive.
Rodman T. Johnson: If profits decline, do you think an interest rate cut can keep the market at a
high PE?
Jmurphy: I think an interest rate cut is inevitable. But I doubt that it will be enough to stop the
global deflationary trend. The market has already lowered interest rates and it hasn't helped that
much.
Thegreendragon: Are there any specific sectors that look to buck the bear trend? Or are bonds
and cash the best place to be?
Jmurphy: In general, yes, I think bonds and cash are the best places.
Koval: What do you think of the Canadian dollar and the Toronto TSE 300 Index? Support and
resistance lines?
Jmurphy: The Canadian dollar has been once of the weakest of the currencies because of the
plunge in commodities. That has also hurt the Canadian market. Both look oversold and are due
for rallies. But if deflation continues, Canada should remain weak.
WSJ_Host: What about the U.S. dollar?
Jmurphy: The U.S. dollar is in a sharp downward correction. The Dollar Index may test support
near 95.00. Longer range, I think the dollar will regain its upward momentum.
Rwaldock: If we are not daytraders, should we just sit in cash?
Jmurphy: I think that's an oversimplication. There are lots of things an intermediate trader could
be doing in the market.
WSJ_Host: What are some of these things?
Jmurphy: I knew someone would ask that... That depends on how active a trader you are. We
think it's a good time to do some nibbling at gold stock. If you're nimble enough, you might catch
part of the rebound in the oils, the semiconductors, or even some of the large tech stocks.
WSJ_Host: Well, that's my job ;)!
Jmurphy: Oh, was that you, Howard?
Jeff1: How low do you expect the fed to lower rates? When?
Jmurphy: Right now, the market is anticipated a quarter point cut by December and a half point
cut by next March.
Spillman: What is your opinion on drug stocks?
Jmurphy: Drug stocks are one of the defensive groups that have been holding up relatively well.
We've told our clients that, if they wish to stay in stocks, drugs would probably be a good choice.
WSJ_Host: Here's a follow-up to your earlier answer on interest rates ...
Jimchi: John, many bond analysts believe interest rates are within a quarter point of a bottom. Do
you share that view, and if so wouldn't that limit any gains to be made from investments in bonds at
this time?
Jmurphy: I would agree that bonds have come a long way and look overextended at this point.
But my longer range work suggests that bond yields could eventually reach 4%. That's why we've
taken the view that we would prefer to sell stocks on strength and buy bonds on weakness.
Jerru: Is now a good time to get into large-cap mutuals
Jmurphy: That depends on your time horizon. If you have a very long-term perspective, and
you're dollar-cost averaging. But given my negative views on the market, I favor selling on strength
as opposed to buying on weakness.
WSJ_Host: Unfortunately, our time is up. Let's squeeze one last question in ...
Koval: What are the major index points which you are watching and what tools are you using?
Jmurphy: The major index point I'm watching is the 7000 level for the Dow. That's a crucial
support point for a lot of reasons. If that were to be broken this year or next, that would scare a
lot of small investors.
WSJ_Host: Thank you for joining us this afternoon. You can read John's analysis on his page
www.murphymorris.com and of course his monthly Getting Technical column in Barron's Online.
Jmurphy: Thanks, Howard, so long. And thanks, Ravina. I've been giving Howard credit while
you're been doing all the work.
WSJ_Host: That's ok John, I understand, Howard is your editor! :) I'll pass your message on to
him.
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