Loki:
Here is the Accompara WARNING! Nothing on CPQ specifically, except that it was on his New Year list of top picks.
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February 8, 1999, 10:40 a.m. EST
Prices as of close on 02/05/99
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.
Prudential Securities Incorporated makes a primary over-the-counter market in the shares of Intel Corp.
Intermediate Term
The rotation taking place under the surface is critical at this time; it appears that investors are more willing to take new positions in cyclical names. This is normal, especially if there is growing concern about the direction of interest rates. Read our comments above about interest rates.
On the early morning conference call Frank Ponticello, Prudential's Insider Analyst, spoke about smart money insiders (value buyers) who have been concentrating on the following areas: airlines, chemicals, containers and packaging, metal fabrication, steel iron ore and construction equipment.
This insider input fits neatly into the recent rotational activity between the sectors. Use these observations as a starting point when making investment decisions over the next several weeks.
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