Mohan-san: Everything's fine. Says who? Says O'Neil. He is not the one who designed the street names in St. Paul, MN.
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William O'Neil says everything's fine
Market vet sees 'normal, intermediate-term correction'
By Kevin N. Marder, CBS MarketWatch
Last Update: 9:41 PM ET Feb 25, 1999
See: NewsWatch
LOS ANGELES (CBS.MW) -- Few people on today's investment scene
are as synonymous with growth stock investing as Bill O'Neil, president of
institutional research firm William O'Neil + Co. and chairman of Investor's
Business Daily.
O'Neil has studied the U.S. stock market for more
than 40 years. One of the first things he noticed
was that most of the greatest market winners of all
time share common characteristics. He studied
stock charts and saw that the same price patterns
emerged year after year in the market's top
performers.
After a few wrong turns, he developed a plan that focused on companies
with rapidly growing earnings whose stocks were outperforming the
overall market.
In 1962, starting with only $4,000 or $5,000 in savings, plus some
borrowed money and use of full margin, he connected with three big
winners -- Chrysler, Korvette and Syntex. By the fall of 1963, O'Neil's
profits were over $200,000, and he bought a seat on the New York
Stock Exchange.
Markets Editor Kevin Marder caught up with O'Neil earlier in the week
to see if he could make some sense of a confusing market.
Bill, is this pullback in the U.S. stock market a normal
occurrence following such a major run-up off the Oct. 8 lows? Or do
you think we're due for another bear market, as some people seem
to believe?
O'Neil: Friday morning [Feb. 19], our institutional research firm put out a
market memo, and I'll read some things from that:
"We believe the market has gone through a normal, intermediate-term
correction in the market averages. This can logically occur after the
market's surprisingly strong run since October of last year. It was easily
prodded along by several high-profile market strategists and technicians
talking the market down, as well as profit taking in a few of the big
high-tech leaders.
"We believe that while a few of the tech leaders have topped for the time
being, this is simply a normal rotation into other groups. We believe this
rotation is in the consumer-oriented stocks in the retail, cable, telecom,
drug and financial services groups. We do not agree with any assertion
that the market has topped and that a new bear market could be in the
offing. Economic conditions in the country remain sound even beyond the
expectations and worries of numerous economic experts.
"We believe any fears that the Fed may soon raise interest rates will prove
to be unfounded. Our own study of intermediate market declines in excess
of 8 percent since 1975 shows the average duration of such corrections
was 5.25 weeks for the S&P 500 and six weeks for the Nasdaq. The
average decline was 10.8 percent for the S&P and 12 percent for the
Nasdaq.
"We believe that historical precedence provides some guidance with
respect to the parameters of this current correction. We are not aware of
any bull market in history ending after only three months. We disagree
with any contention that a new bull market never started to begin with.
The severe decline that occurred in October 1998 was in fact a bear
market based on the percentage declines in the major averages. Declines
in excess of 40 percent to 60 percent in many stocks between July and
October of last year further qualify that period as a bear market. Several
easing actions by the Fed and the fact that a number of market leaders
made major moves from November through January provide objective
evidence of a new bull market that began in October 1998.
"We do not believe that strong breadth in the market as measured by the
advance-decline line is necessary for a bull market to occur."
So we viewed this whole thing that was going on as just a normal
pullback. There was some profit taking in a few high techs and a few
lower-grade Internet stocks, and everything else was fine. The market's
now showing that. The economy is sound. Oil is making new low prices
along with other commodities. Everything is positioned the way it should
be. We think that there were a number of strategists and technical people
that took a lot of very bearish positions, and we think they were
misreading a lot of data.
Such as their emphasis on the advance-decline line? It
seems like a lot of people follow this one indicator religiously.
O'Neil: We don't pay much attention to that
because it gives many false signals. For example, in
mid-November, it failed to break into new high
ground when the S&P did, and it started declining
then. Well, the big profits were made from
mid-November to mid-January, so you would have
missed that. And we've seen a lot of other markets
where it's very premature and very wrong, so we
disregard that indicator a lot. If you also look at
what's going on in the market, you had a transition
into big-cap quality leaders and out of the
small-cap stocks. So it's natural that your
advance-decline line would probably be a little bit
sloppy because more than half of the stocks are
low-grade, lower-priced stocks that were probably
overplayed several years ago. And they're not
going to participate so well. So we thought that was
misread.
What about the action of financial
stocks?
O'Neil: This was another reason they thought the market had topped. As
soon as the inflation figure came out ... low, the financial stocks turned and
all started running up. So they were wrong on that analysis. General
market analysis is something that not very many people [on Wall Street]
have got down because I think everybody spends their time on stock
selection and research, and so it's left to a few technicians and a few
strategists. And they don't really do it as well as they should. We don't see
anything wrong at all. The market looks fine to us.
You weren't concerned with some of the leaders breaking
down?
O'Neil: What you had going on was some selling in Sun Microsystems
(SUNW) and Intel (INTC) and Cisco (CSCO) and a few of the other big
leaders. But other than that, there really wasn't that much going on. Most
of the better stocks were handling themselves pretty well. WorldCom
(WCOM) wasn't affected that much: It sold off a few points. And some
of the big retailers sold off a couple of points, and they just sort of sat
there. Even the Dow in the last three or four weeks was hanging in there
and not breaking down.
It's a matter of perspective. If you look at the Nasdaq, which is where a
little more of the selling occurred, it's showing a very powerful technical
formation because you moved a tremendous distance from Oct. 8, and
you held 80 percent to 90 percent of that. So you didn't really come off
that much. When you start a new bull market and you come up and then
hold fairly well, that's perfectly normal. After going into new high ground
like the averages did, they're certainly entitled to go back and forth a little
bit. So we see this as normal, even though there was some selling going
on.
We were taking the position that if you started a new bull market back in
October that you're only three months into it. And there's no bull market
in history that we know of that ended in three months.
Now, if we're wrong on our assessment of this bull
market, that's another question. But we don't think
we are because all of your classical evidence
occurred. You had a wipeout in a lot of technology
stocks last summer, AOL (AOL) even came down
50 percent. And then you had the Fed moving, and
so everything fell in place. We thought we were in
the second, third or fourth inning, not the eighth or
ninth. And so we wouldn't be as worried on the
first correction, because that's kind of normal. Now
the value people are correct in that price-earnings
ratios have expanded a lot. And I think that's
maybe why some selling occurred in Cisco and
some others since P/Es [price-to-earnings ratios] had more than doubled.
But still, the country is doing very well. We're in this automation age
where the technology is improving so rapidly that everybody's getting
more efficient, which lowers costs.
Did you notice how the Investor's Intelligence percentage of market bulls
moved up and moved up and then just broke like mad?
Yes. It dropped from 61 percent to 55 percent in one week.
O'Neil: That's the sentiment shifting. You corrected 8 percent to 10
percent in some of these indexes. But in the overall cycle we're three
months into a new bull market. If the new bull market goes to new high
ground, you should expect that stocks will drift sideways or have a normal
correction of 6 percent to 8 percent that early in the game. So that's fairly
normal. What happened is that all the good stocks had already broken out
and run up. Then they pulled back either into the top of their prior base or
they pulled back to their 10-week moving average line. If they're really
high-quality institutional leaders, usually people will step in and buy them.
So what was going on in our view is just perfectly normal. Since you're in
this business, and you hear everybody and talk to everybody, you see
how fear really grabs and runs. You have four or five experts appear on
CNBC and they're saying this and saying that, and they get the ball rolling,
and basically most of them are wrong. A bunch of people at [one major
brokerage firm] were hammering pretty hard. Eventually, people get
affected by that, and then, if a couple of their stocks go down, they get
scared, too.
You did have an intermediate correction. But this is all normal. |
