Ralph Acampora on market
U.S. Stock Market Outlook
Near-Term
Over the past several weeks we highlighted in this
section our concerns about some technical near term
problems like: negative breadth, too much bullish
sentiment and the very poor price action of the Dow
Utility average. Today we want to add three more
technical difficulties that could have a negative impact
on the market's near term outlook:
NYSE volume is running over 800 million
shares per day with no appreciable upside
increase in price momentum. This is called
"churning". And after a huge price advance
since the October 1998 low, this churning
activity can be construed as distribution or
topping activity.
Stock splits are abounding—this is usually a
late cycle phenomenon.
The tech stocks are, on balance, under
pressure. Even after last week's drubbing,
many of these issues are still too spiky and
could drop another 10% + from current levels
before encountering their respective major
uptrends or significant support levels.
Rotation is sweeping across the tape. The
recent leaders are under near term pressure
while the one's that basically lagged the market
over the past several months are quickly
becoming attractive. For example, the cyclical
side of the market is holding up well: e.g.
steels, papers and some energy names. On the
other hand, financial issues are beginning to
flounder, like banks and interest sensitive
sectors:
Stocks that are rolling over in price range are:
Philip Morris (MO—46 1/8, is not rated by
Prudential Securities Research)
VFC Corp. (VFC—41 1/2, is rated
'STRONG BUY" by Prudential Securities
Research)
State Street (STT—68 1/2, is not rated by
Prudential Securities Research)
First Union (FTU—49 1/8, is rated
'STRONG BUY' by Prudential Securities
Research)
Mellon Bank Corp. (MEL—65 3/8, is rated
'ACCUMULATE' by Prudential Securities
Research)
National Semiconductor (NSM—11 /38, is
not rated by Prudential Securities Research)
Issues that seem to be enjoying positive investor
interest—money appears to be rotating into these
names:
Kellogg (K—39 5/8, is rated 'HOLD' by
Prudential Securities Research)
Allergan (AGN—79, is not rated by
Prudential Securities Research)
Clorox (CLX—120 7/8, is rated 'STRONG
BUY" by Prudential Securities Research)
Weyerhaeuser (WY—56 1/8, is rated
'ACCUMULATE' by Prudential Securities
Research)
McDonalds Corp. (MCD—80 5/16, is not
rated by Prudential Securities Research)
USX US Steel (X—28 1/4, is rated
'STRONG BUY' by Prudential Securities
Research)
Prudential Securities and/or its affiliates have managed or
co-managed a public offering of securities for First Union
Corp, Federal National Mortgage, General Electric
We are concerned about the near term market
outlook—the above shifts in groups, stocks and
indicators suggests that a normal correction is
currently unfolding. "Normal" means a decline in the
range of 5% to 10%. We don't think that this is
unreasonable in the light of the fact that so many huge
gains were realized since the market's low registered
in October, 1998. But this normal correction could
turn ugly if interest rates become a problem short
term.
The yield on the 30 Year Treasuries is currently
testing its downtrend that has been in force for about
two years. If rates were to rise above the 5.4% level
it could mean an eventual rise to 5.7%. If push came
to shove, a rise to 6% could also materialize. In any
event, a bigger rise in rates over the near term would
have a negative effect on the overall stock market.
Our proxy for interest rates is Federal National
Mortgage (FNM—68 15/16, is rated 'STRONG
BUY' by Prudential Securities Research). This stock
has critical support at the 67 level. If FNM breaks
below 67, then equities would be saying to the world
that they expect interest rates to rise over the
foreseeable future.
When was the last time we had a 6% interest rate
environment? In early 1996, the bond market came
under pressure and rates went to 6.4%. The Dow
dropped 4.5%. in a few days. About a month later,
the Dow dropped again but this time it was a 5.3%
decline. All in all the secular bull market remained in
tact despite the near term rise in rates. Rising rates
caused only a near term correction.
On August 4, 1998 we dropped the word "stealth"
and said that a 'cyclical bear market' had begun. We
felt then that the Dow Jones Industrial average would
join the NYSE breadth and both would move lower.
Today we are reintroducing the word "stealth" into
our vocabulary because we DON"T think that the
Dow will join the sagging NYSE breadth
dramatically lower. There is rapid rotation within the
DJIA itself. For example, last week the leaders
within the DJIA, stocks like International Business
Machine (IBM-165 3/4, is not rated by Prudential
Securities Research), General Electric (GE-98, is
rated 'STRONG BUY' by Prudential Equity
Research), General Motors (GM-85 15/16, is not
rated by Prudential Securities Research) and Hewlett
Packard (HWP-71 15/16, is not rated by Prudential
Securities Research) were being sold off while the
money was rotating into the laggards within the Dow
such as, Boeing (BA-37 1/16, is rated 'HOLD' by
Prudential Securities Research), Caterpillar (CAT-46
1/4, is not rated by Prudential Securities Research),
Chevron (CHV-78 7/8, is rated 'ACCUMULATE'
by Prudential Securities Research), etc..
We see less risk in the DJIA because it has fewer
technology components. The S&P 500 and the
NASDAQ Composite outperformed the Dow on the
way up from their October 1998 lows but, for the
same reason, the Dow is expected to outperform
these two barometers during any near term
correction.
What is the Dow's current risk? We still believe that
we are in a secular trending bull market. And any sell
off is deemed a normal near term correction. Our
primary support is still 9087.72 and our secondary
support is 8676.03. These levels confirm our 5% to
10% near term range. However, our message is
different because of the group rotation and shifts
taking place (e.g interest rates, etc.). This is a stock
pickers market—be very selective when making
investment decisions in the equity arena. |
