09:35am EDT 16-Apr-99 Robinson-Humphrey (ROBBINS) ATI DY SONE TXCC AOL CSCO INT
Market Strategy Weekly Market, Sector, Stock Comment
--SUMMARY:------------------------------------------------------------------
Please see comments below.
--OPINION:------------------------------------------------------------------
CURRENT STOCK MARKET CORRECTION NOT LIKELY TO EXCEED 7%;
CYCLICAL STOCK RALLY SEEMS ABOUT HALF FINISHED, LIKE EARLY 1992
Since our last report the DJIA is up 2.5% and the S&P 500 fell 1.6%. The
S&P 500 became somewhat overbought in terms of its 10-day traders index at
Monday's close. That, combined with the overbought condition of many
technology stocks, has resulted in a significant correction in the S&P 500
and the technology sector. This correction has not been reflected by the
DJIA, as a rally in economically sensitive stocks is largely responsible
for sending that index higher over the past several days.
The S&P 500 is 2.7% off its all-time high of 1358 on April 12th. We have
recognized the possibility of up to a 7% correction, though we still
believe that the stock market is unlikely to correct more than 7%. The
possibility of up to a 7% correction is in line with (1) our outlook for
corrections to increase in magnitude as this bull market progresses and
(2) the negative seasonality of May, the second weakest period of the year
behind the late September through early October period. We think a
greater than 11% decline from the market",s all-time high (our definition
of a bear market decline if sustained for more than two days) is very
unlikely.
HISTORICALLY, CYCLICALS HAVE BEEN TRICKY
Cyclical stocks typically rally as concerns over slowing economic growth
or recession are relieved. The past several months have seen the
consensus for economic growth rise from expectations for a probable growth
recession to estimates for U.S. Q1 GDP growth of between 2.0% and 3.0%.
Our current GDP estimate is for 3% growth in 1999, made November 25, 1998,
with a current range of between 2.5% and 4.5% (established February 11),
due to the already stated high possibility of an upside surprise to our 3%
estimate. Our GDP outlook also includes the probability of huge
precautionary inventory building in the fourth quarter due to concerns
over possible year 2000 computer problems.
Economically sensitive stocks have rallied strongly in the past several
days. Continued favorable economic data has caused analysts to revise
their economic expectations higher, as well as earnings estimates for
basic materials and producer cyclicals companies, in particular. The
basic materials sector has underperformed the S&P 500 over both the long
and intermediate terms, but has rallied strongly in relative price over
just the past few days. At this time we have no confidence that the move
in cyclicals portends a change in the intermediate- or long-term trends.
Specifically, we do not currently anticipate the type of economic
overheating that would lend basic materials or producer cyclical companies
enough pricing power for a long-lasting change in the current
underperformance trends. These types of rallies during very long-term
disinflationary economic growth periods typically last between a few weeks
and a few months. We think the current cyclical stock rally is probably
similar to the early 1992 rally, which was more than half completed after
a few strong days. We also note that, typically, bear market rallies and
bull market declines are quite sharp, and that is consistent with both the
rally in cyclical stocks and the decline of technology stocks during the
last few days. In sum, we are not changing our sector allocation now and
do not expect to change our sector allocation on further strength,
although we will reevaluate if we see signs of longer-term improvement.
TECHNOLOGY AND INTERNET CORRECTIONS RESEMBLE FEBRUARY DECLINES
The Morgan Stanley High Tech Index, now 1029, has corrected 9.2% off its
all-time closing high of 1099 on April 9,1999, to today, Thursday's,
intraday low of 997. Now 6.4% off its all-time high, we believe the
correction has more than half finished and would not be very surprised if
the MSH does not close below today's low. We view its correction as
comparable to its February correction, which was 12.5% from its daily
closing all-time high of 1034 on January 29, 1999, to 905 on February 17
(see chart).
The CBOE Internet Index (INX, which is more representative of the larger
Internet stocks than other Internet indices) corrected 18% from its
closing high on April 12 of 699 to today's intraday low of 573, and 611
currently. We view the correction in the Internet stocks as similar in
duration and magnitude to the 21% correction of mid-January to
mid-February. During that correction, the INX fell from its high of 566
on January 29th to an intraday low of 422 on February 10th, for a 25%
correction intraday. As such, the current correction could possibly
continue, with significant rallies, for the next few weeks, but the
decline has probably reached an unsustainable momentum peak (see chart).
We continue to recommend the technology sector as 34% of total equity
allocation, versus a broad market weighting of 24%, as this sector
outperforms the overall market.
For investors who are underweighted in technology, we list below our
favorite technology stocks. These stocks are not necessarily timely at
current prices given the potential for them to correct further over the
next few days or weeks. Still, we do not rule out the possibility that
the MSH has already seen its correction low at today's intraday low
(please refer to our timely indications that are updated twice daily for
more information). In the technology sector, our favorite Short-term
Strategy Selections (for traders and aggressive investors) are: AirTouch
Communications (ATI 1/1-M-1/NR, $97 9/16), Dycom Industries Inc. (DY, U,
Monitored, $43 3/4), Security First Technologies (SONE, 1/1-S-1/NR, $115),
and Transwitch Corp. (TXCC, 1/1-H-1/NR, $42).
Our favorite Long-term Strategy Selections in the technology sector are
the 'bellwethers': AOL, CSCO, INTC, and MSFT. America Online (AOL, SSB
rated 1H, $143 7/8) is in the Internet area, the leading area in
technology and the best subgroup of hundreds in the entire marketplace, in
our opinion. Our RH Internet index is up 600% or sevenfold in the last
year. Cisco Systems (CSCO, SSB rated 1M, $110 5/16) is the leader in
networking. Intel Corp. (INTC, Not Rated, $58 7/16) is the leader in the
semiconductor group. Microsoft Corp. (MSFT, SSB rated 1M, $88 7/8), the
largest capitalization stock in the world, continues to be the standout
performer in the software area, which is otherwise a very difficult area
in technology and in the marketplace.
STOCK FOCUS: SONE PROVES TO BE A GOOD TRADE
Security First Technologies (SONE, 1/1-S-2/NR, $115) was removed from, and
then added back to, the Short-term Strategy Selections list based on a
short-term technical downgrade from 1/NR to 2/NR and then a subsequent
technical upgrade. SONE rallied strongly and we removed it from our
Strategy list based on its overbought condition following three
consecutive days of strong gains that were expected to become a very sharp
technical blowoff over the next few hours to few days. SONE",s subsequent
stock price correction enabled us to return the stock to our list at $105
versus its removal from the list at $135 1/2. |
