InvestmentHouse Newsletter 20.10.00

[reg]

[Brigitte]

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10/20/00 Investment House Daily
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Investment House Daily Subscribers:
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TONIGHT:
- Friday's rally was somewhat uninspired, but it did more good than bad as
we look toward confirmation of the rally this week.
- Some patterns shaping up in anticipation of the market moving further
ahead, but we have been here before.
- Getting ready for a confirmation of last week's rally.
- U.S. third quarter GDP due out this week and is expected to be weaker,
reflecting the U.S. slowdown that coincides with a slower world economy.
- Subscriber Questions
- Team Trades
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Friday went pretty much according to plan, with a softer open, a rally,
and then some afternoon selling ahead of the weekend. Volume backed off,
but was still very strong; indeed, it was the fourth strongest volume in
the last two weeks, and two of those days were attempted reversals where
you always get high volume. In the process, the indexes were able to
avoid a late selloff, maintaining their momentum and allowing stocks to
continue to work on their bases.
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The last part, stocks forming up their bases is key. One of the elements
of a reversal that we have not seen much of are lots of great stocks in
bases conducive to longer term price rises. Past leaders such as CSCO,
INTC, DELL, AMAT and the like have been crushed, and are nowhere near
breaking out to new highs to lead the market higher. Wednesday's reversal
and the two-day run at the end of the week, however, allowed the leaders
to form up the right sides of their bases (e.g., JNPR, BRCD, GLW, CLS,
SANM, PWER) and others to move within striking distance (ITWO, JDIC,
DDIC). Indeed, some of the recent leaders have already hit new highs
(BEAS, NTAP, ELNT, IDPH).
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There are not a ton of stocks ready to surge higher, but there are enough
from the right sectors, i.e., technology and biotech, two past leading
groups that are looking to do the same if we get a continued rally. That
leads us to next week. We had a reversal on Wednesday and two rally days
following that. Sure volumes were not higher, but when Wednesday's
reversal volume was over 2.5 billion shares it is hard to mount continued
rising volume. We were pretty comfortable with the quality of volume late
in the week given the previous selling volume. Moreover, what we feel we
are going to get this week is somewhat of a slowdown early in the week
after the two solid days. A little rest after the move is fine. Indeed,
that would let stocks slide sideways a bit after two strong moves.
Moreover, if volume is as it should be on some light selling or lateral
movement, i.e., lighter, that sets the stage for a good confirmation day
as the markets roar back up on higher volume sometime Tuesday through
Thursday.
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Of course, the big test will be whether the market moves sideways on lower
volume and does not reverse sharply and start selling again, something we
have seen on every attempted rally out of the bear thus far. This move
has looked better so far looking at the A/D line, the VIX, the sharp move
off of support once it was undercut (in a good double-bottom fashion), and
the other factors we have been following. There has been some controversy
over the put/call ratio on Wednesday as it was supposedly only 0.85 on the
close, but the CBOE has never changed its position that it spiked to 1.01.
There remains mixed data, but we like what we see this time better. And
for those value players, the fact that the P/E ratio on the S&P 500 is at
21, its lowest level in three years (before the big rally started), has to
give you some confidence that a bottom is near. In any event, no matter
what the your view is on the markets, up or down, next week is a critical
week.
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What we are expecting.
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To us, this week finished up just fine with a reversal, two rallies days,
and indexes that did not sell off sharply heading into the weekend. We
had great stocks moving well, breaking out our getting ready to finish
their bases. With so many stocks approaching their old highs (even with
the recent plunge back into bear territory; shows the strength of certain
stocks and sectors), we are expecting a breather early in the week. There
have been some impressive moves the past two sessions, and all stocks need
to take a rest after big moves. Some light selling or lateral movement
would set the stage for the confirmation mid-week with a gain of 1.5% (1%
minimum) on rising, above average volume. That confirmation would show us
that the institutions are interested in the move and that it is more than
likely not just a passing fad. With the huge earnings the leaders are
putting up on the board and the predictions for further strong growth this
quarter, fund managers are getting the ammunition they need to commit
those billions of dollars that are out there piling up. From our view, we
think we are going to get some commitments from the big money next week.
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THE ECONOMY
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The above potential rally is for the shorter term, say through the end of
the year. There are a lot of the bullish fund managers and analysts who
have been licking wounds during the bear. They are starting to speak up
about the rally they think is coming. Abby Joseph Cohen had already come
out twice exhorting investors to buy to save her year-end prediction. Tom
Galvin and Joe Battipaglia were on CNBC Friday pushing bullish agendas as
well. Ms. Cohen will be back on CNBC Monday no doubt pushing here
year-end prediction yet again. That may give us a great rally here that
we are set up to have. But what about the first quarter of 2001 and
beyond?
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As we noted last week, the U.S. national election is rolling along with
both parties banking on big surpluses generated by the economy. The
Democrats view the financial house as being in order and thus the
surpluses will be there. The Republicans are counting in part on a tax
cut to enable the economy to continue at its current perceived pace in
order to keep the surpluses available, and that at least is encouraging.
Still, both sides are assuming way too much regarding potential surpluses.
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Oil may not be hurting U.S. yet, but overseas?
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Other countries are not experiencing as rapid growth as we have all been
told would be the case. A big factor is oil. As Greenspan said last
week, energy was not hurting the U.S. economy as of yet as it has shifted
from predominantly manufacturing to high tech and services. Overseas that
is not necessarily the case, particularly for those economies that have
little or no energy reserves of their own. In the UK, growth was much
lower than anticipated in the third quarter, coming in with just a 0.7%
increase. That is barely visible on the radar screen, and just a slight
drop-off from contracting. Energy prices were fingered in part for the
surprisingly weak numbers. Canada experienced a rising CPI that country
attributed to energy. In Japan, last week brought the second bankruptcy
of a huge insurer; at $42.5 billion in assets, this is the biggest
bankruptcy in Japan since World War II. This is just two weeks after
another huge Japanese insurer filed for bankruptcy protection as well. At
the time of that filing, it was the largest failure since WWII. We keep
hearing of Japan's recovery from its decade of anemic economic 'growth.'
These bankruptcies are a very troublesome development.
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There is somewhat of a chicken or the egg question out there. When Asia
folded a decade ago, oil prices were clobbered because a big consumer no
longer had the thirst for oil. Low energy prices then helped these
nations when they started trying to climb out of the cellar a couple of
years ago. Now they are getting whacked over the head as energy prices
doubled. Think we are going to see robust gro