Right from the Monkey's mouth- Ralph Acampora,Prudential-US market outlook.
February 9, 1999, 10:52 a.m. EST
Near-Term
Yesterday, the DJIA closed down -13.13 points to 9,291.11 or -0.14%. Breadth on the NYSE was narrow with approximately 150 issues lower than higher. Microsoft Corp. (MSFT-165 1/4, is rated 'ACCUMULATE' by Prudential Securities Research) led the rebound in the NASDAQ composite as most technology issues have been depressed from the previous week.
For today, expect the market to open flat to slightly down as overseas markets were somewhat weak. Additionally, this week starts the Goldman Sachs Technology Conference.
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 what technical analysts call "churning". And after a huge price advance since the October 1998 low, this activity can be construed as distribution or topping.
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:
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[Mohan: Ok Ralphie baby, we got the 5-10% correction,now shut the hell up will-ya,sheeesh.<vbg>]
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We are concerned about the near term market outlook—the above shifts in groups, stocks and indicators suggests to us that a normal correction is currently unfolding. We define "Normal" as 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 likely have a negative effect on the overall stock market. Our proxy for interest rates is Federal National Mortgage (FNM—68 3/16, 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 Securities 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 & Microsoft Corp.
Prudential Securities and/or its affiliates have managed or co-managed a public offering of securities for Federal National Mortgage, General Electric )
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.
Long-Term
This is the time of year that we provide our friends at the popular weekly TV show, Wall $treet Week With Louis Rukeyser, with our new year stock picks. For 1999 we selected eight names for the next twelve months; this list includes large, mid and small cap issues to reflect our belief that 1999 will be a broad based affair in which stock picking is most important:
Ralph Acampora's 1999 Wall $treet Week With Louis Rukeyser's Stock Picks:
Compaq Computers (CPQ-45, is rated 'STRONG BUY' by Prudential Securities Research)
Intel Corp (INTC-130 1/8, is rated 'ACCUMULATE by Prudential Securities Research)
Microsoft Corp. (MSFT-159 7/8, is not rated by Prudential Securities Research)
Pfizer Inc.(PFE-131 9/16, is rated 'HOLD' by Prudential Securities Research)
Liposome Company Inc. (LIPO-14 3/4, is not rated by Prudential Securities Research)
Texas Instruments (TXN- 96, is rated 'ACCUMULATE' by Prudential Securities Research)
Platinum Software Corp.(PSQL-11 5/8, is not rated by Prudential Securities Research)
Taco Cabana Inc. (TACO- 9 1/16, is not rated by Prudential Securities Research)
(Prudential Securities Incorporated makes a primary over-the-counter market in the shares of Intel Corp, Microsoft & Platinum Software.)
Our 1999 Stock Market Outlook—The Year Of The Stock Picker...
Our 1999 yearly range for the Dow Jones Industrial Average is 7800/8450 on the downside and 9800/11,500 on the upside. The S&P 500 range is 1050/1090 on the downside and 1350/1525 on the upside.
October 1998 was the bottom and represents a four year low.
The year 1999 is the third year of the president's term in office and the third year is historically the best of the four years.
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(Mohan:I like Ralphie's style,spook the market don't own up TO the B.S yeah that is the ticket.Great insight,the only thing is he could be wrong as the disclaimer shows below. SO WHAT THE HELL WAS THE POINT AGAIN?)
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(Past performance is no guarantee of future results.
There is no assurance that the forecasts will be attained.)
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