Mid Week Market Analysis
(11/21/00)
At this point I see nothing that suggests the markets have made a bottom yet. This is based primarily on the Contrarian Indicators which still don't show signs yet of widespread panic among investors. Although the markets are extremely oversold especially the Nasdaq that doesn't mean they can't go lower.
As talked about the last few weeks neither the Put to Call Ratio, Volatility Index (VIX) or the Bullish-Bearish Indicator have shown signs yet that a major market bottom has been reached. The chart of the Put to Call Ratio shows over the past two days that it has dropped significantly since last week. What we need to see is a second spike upward that is higher than the first spike which occurred in mid October (point A). In the past major market bottoms have occurred after a second or third higher spike. This happened in the Fall of 1999 (points B & C) and back in the Fall of 1998 (points D & E). Right now the Put to Call Ratio is trending in the wrong direction.
Meanwhile the VIX has also shown a similar trend in the past as well when a second or third spike higher has signaled a major market bottom. Once again in the Fall of 1999 (points F & G) and in the Fall of 1998 (points H & I) provided some good examples. Right now the VIX still is below the value that was reached in mid October (point J).
Finally the Bullish-Bearish Indicator still hasn't shown any signs yet of panic among the Bullish community as the % of Bulls has been steadily rising. What we need to see is for the Bulls to capitulate and the Bears to wake up with a convergence of the two lines much like occurred in the Fall of 1999 (point A) when the markets made a bottom.
Based on the above Contrarian Indicators this is why I'm still worried the markets haven't made a true bottom yet.
The question is now how far will the markets have to drop before everyone throws in the towel and gives up? The chart of the Dow shows once again it was unable to break through its 200 Day Exponential Average (EMA) near 10700. If the Dow breaks below the 10400 support level it could quickly drop back to 10000 or all the way back to the low in mid October around 9800. Meanwhile the Dow is developing a downward sloping trend line from the early September high which along with the 200 Day EMA will provide resistance on any attempted rally in the future.
The S&P 500 closed Tuesday right on its newly developed upward sloping trend line (point A) from the mid October low. If this trend line is broken the S&P 500 will likely drop back to or below its mid October near 1300. In addition the S&P 500 also has a downward sloping trend line from the September high which will provide resistance near 1420 on any attempted rally in the months ahead.
Finally the Nasdaq is at a critical point as it closed Tuesday near its 52 week low just made over a week ago near 2850. If the Nasdaq doesn't hold support at this level it could make another substantial drop lower. Below 2850 the Nasdaq no longer has any support levels left so no one really knows where it could drop too. If the Nasdaq can hold support near 2850 it will encounter strong resistance on any attempted rally near its downward sloping trend line around 3200.
If the markets do make one more strong move downward will this be enough to break the Bulls back and cause the Contrarian Indicators to signal a potential market bottom?
Although the Bear market continues there still have been some stocks that have performed very well this year. Each year different Industry Groups are targeted by the Institutional Money. As an investor it's important to know which Industry Groups are favored versus those that aren't. Investing in companies which reside in unfavorable Industry Groups can lead to poor stock performance even in favorable market environments. The table below shows what Industry Groups performed the best in 1999 versus the best performing Industry Groups so far in 2000.
Top 10 Performing Industry Groups in 2000 versus 1999.
|
Top 10 Performing Industry Groups |
Performance in |
Top 10 Performing Industry Groups |
Performance |
| Medical-Generic Drugs (+108%) |
+1% | Internet-Software (+389%) |
-63% |
| Medical-Hospitals (+95%) |
-32% | Internet-Network
Security/Solutions (+353%) |
-50% |
| Medical-Dental/Service (+84%) |
-21% | Internet-ISP Content (233%) |
-80% |
| Energy-Others (+76%) |
+49% | Telecommunications-Cellular (195%) |
-30% |
|
Medical-Health Maintenance Organizations |
-23% | Computer-Local Networks (185%) |
-30% |
|
Oil & Gas-US Exploration and Development |
+16% | Computer Software-Desktop (+177%) |
-40% |
|
Electrical-Scientific Instrumentation |
+113% | Telecommunications-Equipment (+173%) |
-17% |
|
Building-Residential/Commercial |
-24% | Electrical-Semiconductor
Manufacturing (+161%) |
+23% |
|
Medical-Ethical Drugs |
+0% | Computer-Software Enterprise (+136%) |
-28% |
|
Medical-Drug/Diversified |
+1% | Media-Cable TV (+130%) |
-43% |
As you can see there was a big shift from the Internet and Computer Software Sectors into the Medical and Energy Sectors from 1999 into 2000. Also notice that 8 out of the top 10 best performing Industry Groups in 2000 were poor performers in 1999. Meanwhile 9 out of the top 10 best performing Industry Groups in 1999 have been poor performers in 2000. As we move into next year I can almost guaranty you that there will be a shift into new Industry Groups with new leaders emerging. Of course the big question is which Industry Groups will the Institutional Money favor in 2001?
As far as the AII Top 50 there really isn't anything at this point to get
excited about. The technology sector continues to get hammered and many of
the stocks will take awhile to build solid bases and develop favorable chart
patterns. I have scanned through 1,000's of stocks and to be honest with
you outside of a few defensive oriented Industry Groups things look rather bleak
at this point. Since just about everything has been sold off you really
have to wonder how much more selling can occur especially in the technology
sector. However as stated above just because the markets are oversold
doesn't mean they can't go lower.
Stocks that are still holding up well in the current AII Top 50 include EASI, EOG, FRNT, FTUS, IART, IMA, MAPS, SCRI, TARO, TALX and UNT. Whether these companies can continue to hold up without getting sold off like everything else is a good question. Although I personally don't think they are worth investing in at this point at least they provide us a list of stocks to watch in the weeks ahead if the markets can get their act together and rally strongly at some point.
I know it's frustrating to go through a Bear Market but the markets go in cycles and eventually this will pass and new companies which most people have never heard of will lead the markets higher in the future.