Go to Jeff Salisbury LWGate Home Page.From: Eric Jaenike <ericjaenike@yahoo.com>
Subject: [CANSLIM] Recent activity
Date: Fri, 16 Aug 2002 11:39:52 -0700 (PDT)
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Hi all-
Just wanted to throw out a few thoughts and get some feedback.
I am not terribly sanguine about the market right now, for a number of reasons. Before I go into why, I will review the things I see as bullish. If anyone has additional bull thoughts, please let me know.
Bull:
1.Heavy volume low mid-June, can be sign of climax bottom with sellers clearing out.
2. Lots of secondary indicators flash extremes generally associated with bottoms, including put/call, % bullish/bearish, nasdaq vs. NYSE trading volume, etc.
3. Rally confirms on indices.
4. Generally, up volume advances, down volume pullbacks.
5. Some breakouts occurring. These include (without regard to whether they have succeeded or not) CTSH FCN IMN XRAY DORL WTW PIXR CSTR ISLE BYD APOL.
6. Some potential leadership forming, including gaming (BYD ISLE), medical (LNCR AMSG HSIC), education (APOL CECO COCO), HMOs (CVH SIE MME), regional banks (if you're willing to include that group as leadership), retail (JASA PETM MIK KSS).
7. Skepticism about rally.
8. Certain secondary factors, such as the addressing of corporate governance issues, potentially improved accounting, recent strengthening of the dollar, etc
9. Increased insider buying.
10. Valuations have become compelling in certain areas/companies.
The concerns I have are both fundamental and technical.
Technical:
1. Secular bears generally don't end with a bang, but with a whimper ('29, '74). Tendency toward climax bottom with reversal, followed by lower volume selloff into true bottom.
2. Secondary indicators are area code indicators. In a prolonged, hard bear, they can be early and flash signals repeatedly before market has truly bottomed. Unreliable.
3. Rally confirm came very late on Dow and S&P, came on low volume on Nasdaq and S&P 600 following large givebacks/distribution. Both late confirms and excessive givebacks are signs of weakness, not strength.
4. While volume on up days has been up and on down days, down, volume has generally been very light. I prefer to see strong volume confirming, not just up volume. This might be seasonal, but it seems very suspicious.
5. There have been a number of up days spurred by positive news (ex. Thurs 8/8 Brazil loan approval announcement, CSCO call, etc.) News driven rallies are suspect and failure prone.
6. A number of up days have been caused by buy programs, which create artifically positive looking days. Wed. was a great example. There has also been support from institutional, charter based reallocations from bonds (think 40 yr low on Treasury yield) to stocks. This is not discretionary, informed buying.
7. There appears to be short covering activity. Not sustainable in longer term.
8. Oils are rallying. Generally not a good sign for market.
9. While there have been breakouts, they have not been particularly numerous, nor have they been that powerful. I reviewed my breakout list from last September. I counted 16 reasonably solid breakouts from the low through 10/15 (CACI AZO SANG RMCI AHMH APOL CPRT AMSG NDN MYL BVF CRL FRED MIK USPH ADVP). I count only 11 in the roughly same time period now (CTSH SIE IMH XRAY DORL WTW PIXR CSTR ISLE BYD APOL. Not counting banks, and I might have missed some). It appears that there are fewer, or at least not more, breakouts over the recent period. In reviewing the lists, it also appears to me that there was generally tighter, more consistent, and more prominent leadership back then. That rally, of course, failed rather quickly. I actually consider the late '01 rally to have been more of an oversold bounce than a true rally.
10. Expanding on #9, I am not enamored of the power of the breakouts. Ex. WTW nasty bearish reversal tuesday, declining volume on rally resumption since. This is not the type of action I want to see.
11. There has been too much strength in tech in the past couple of days relative to the general market, especially Wed. I do not believe there is much, if any, chance that tech will provide sustained leadership here, and especially not large cap tech. See below for more.
12. Lots of broken charts, whippy runups.
Fundamentals:
1. Recent weakening in consumer spending and sentiment. Generally lackluster employment.
2. Market never got "cheap". Some have argued that on a P/E basis the market got to acceptable trough valuations. Without going into detail, I have found those arguments generally lacking.
3. Tech fundamentals are bad, and appear to be getting worse. Look at all the recent calls in the semiconductor space (AMAT TSCM KLIC, etc). Revenue and earnings guidedowns, capacity utilization dropping, etc. I think I posted a piece on this previously. That means the market will have to rally through bad tech news in the upcoming earnings period, with tech stocks going from very expensive to even more expensive. I do not consider the Dell or CSCO calls positive for the industry in general. They are share takers, and are benefitting at the expense of the rest of their respective industries. Recall, as Dell noted in its conference call, total PC sales in the second quarter DROPPED 10%. Note the relatively poor action in the SOX.
4. We have shifted short term influences in the market. 5 weeks ago, corporate governance/bad macroeconomic numbers were the short term driving force, pushing the market to its lows. We digested that information as we hit the lows on volume. At that point, the market was poised to spring back, either sustainably or unsustainably. We shifted to a new short term driving factor: the oversold condition of the market (note how all negative news is being ignored- ex. AMAT horrible call. That is, IMO, because news is not the current short term driving factor; the technical condition of the market is). This short term factor is being augmented by asset allocation and short covering. However, this short term factor will eventually dissipate, and we will get a new driving force. Given how poor, IMO, the quality of this rally has been, I think the market will be primed to latch onto something negative. We are currently in a bit of a news vacuum. If I'm not mistaken, we should be getting preannouncements starting sometime in September, as well as additional economic insight. If this data comes in poorly, the market might start reacting to it negatively, and this could be our new short term driving force.
5. There is still "headline risk" in the market. This would include things like the service and equipment swaps that Q has done with a variety of companies, including IBM and BLS (not widely known). GE has seen order slowdowns. There are a host of bankruptcies yet to be announced. F is in trouble. Housing looks vulnerable. Retail sales were weak the week of Aug 10, BBY preannounced, etc, so the consumer is still vulnerable. There are other problems as well. While I undertand that it often looks darkest before the dawn, it also looks darkest before midnight.
6. Europe looks terrible. Brazil is still a threat, depending on who wins the presidential elections, and we could still lose South America.
7. There is annecdotal evidence questioning the strength of the rally. Ex. pulp and paper inventories were up above typical seasonal increases, Ingersal Rand saw no evidence of an economic comeback, etc.
8. Yield spreads are very wide.
9. Energy sector debt at risk ($500 B), 3G programs, which were supposed to support telecom debt, have been weak.
10. First Call forward earnings growth has been coming down too quickly.
There are, of course, others. I would be willing to overlook many of these negatives IF the rally looked better. To me, it looks too much like the type of bounce we saw in September, but with a shorter duration.
Any thoughts?
Eric
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<P>Hi all-</P>
<P>Just wanted to throw out a few thoughts and get some feedback.</P>
<P>I am not terribly sanguine about the market right now, for a number of reasons. Before I go into why, I will review the things I see as bullish. If anyone has additional bull thoughts, please let me know.</P>
<P>Bull:</P>
<P>1.Heavy volume low mid-June, can be sign of climax bottom with sellers clearing out. </P>
<P>2. Lots of secondary indicators flash extremes generally associated with bottoms, including put/call, % bullish/bearish, nasdaq vs. NYSE trading volume, etc.</P>
<P>3. Rally confirms on indices.</P>
<P>4. Generally, up volume advances, down volume pullbacks.</P>
<P>5. Some breakouts occurring. These include (without regard to whether they have succeeded or not) CTSH FCN IMN XRAY DORL WTW PIXR CSTR ISLE BYD APOL.</P>
<P>6. Some potential leadership forming, including gaming (BYD ISLE), medical (LNCR AMSG HSIC), education (APOL CECO COCO), HMOs (CVH SIE MME), regional banks (if you're willing to include that group as leadership), retail (JASA PETM MIK KSS).</P>
<P>7. Skepticism about rally.</P>
<P>8. Certain secondary factors, such as the addressing of corporate governance issues, potentially improved accounting, recent strengthening of the dollar, etc</P>
<P>9. Increased insider buying.</P>
<P>10. Valuations have become compelling in certain areas/companies.</P>
<P>The concerns I have are both fundamental and technical.</P>
<P>Technical:</P>
<P>1. Secular bears generally don't end with a bang, but with a whimper ('29, '74). Tendency toward climax bottom with reversal, followed by lower volume selloff into true bottom.</P>
<P>2. Secondary indicators are area code indicators. In a prolonged, hard bear, they can be early and flash signals repeatedly before market has truly bottomed. Unreliable.</P>
<P>3. Rally confirm came very late on Dow and S&P, came on low volume on Nasdaq and S&P 600 following large givebacks/distribution. Both late confirms and excessive givebacks are signs of weakness, not strength.</P>
<P>4. While volume on up days has been up and on down days, down, volume has generally been very light. I prefer to see strong volume confirming, not just up volume. This might be seasonal, but it seems very suspicious.</P>
<P>5. There have been a number of up days spurred by positive news (ex. Thurs 8/8 Brazil loan approval announcement, CSCO call, etc.) News driven rallies are suspect and failure prone.</P>
<P>6. A number of up days have been caused by buy programs, which create artifically positive looking days. Wed. was a great example. There has also been support from institutional, charter based reallocations from bonds (think 40 yr low on Treasury yield) to stocks. This is not discretionary, informed buying.</P>
<P>7. There appears to be short covering activity. Not sustainable in longer term.</P>
<P>8. Oils are rallying. Generally not a good sign for market.</P>
<P>9. While there have been breakouts, they have not been particularly numerous, nor have they been that powerful. I reviewed my breakout list from last September. I counted 16 reasonably solid breakouts from the low through 10/15 (CACI AZO SANG RMCI AHMH APOL CPRT AMSG NDN MYL BVF CRL FRED MIK USPH ADVP). I count only 11 in the roughly same time period now (CTSH SIE IMH XRAY DORL WTW PIXR CSTR ISLE BYD APOL. Not counting banks, and I might have missed some). It appears that there are fewer, or at least not more, breakouts over the recent period. In reviewing the lists, it also appears to me that there was generally tighter, more consistent, and more prominent leadership back then. That rally, of course, failed rather quickly. I actually consider the late '01 rally to have been more of an oversold bounce than a true rally.</P>
<P>10. Expanding on #9, I am not enamored of the power of the breakouts. Ex. WTW nasty bearish reversal tuesday, declining volume on rally resumption since. This is not the type of action I want to see.</P>
<P>11. There has been too much strength in tech in the past couple of days relative to the general market, especially Wed. I do not believe there is much, if any, chance that tech will provide sustained leadership here, and especially not large cap tech. See below for more.</P>
<P>12. Lots of broken charts, whippy runups.</P>
<P>Fundamentals:</P>
<P>1. Recent weakening in consumer spending and sentiment. Generally lackluster employment.</P>
<P>2. Market never got "cheap". Some have argued that on a P/E basis the market got to acceptable trough valuations. Without going into detail, I have found those arguments generally lacking. </P>
<P>3. Tech fundamentals are bad, and appear to be getting worse. Look at all the recent calls in the semiconductor space (AMAT TSCM KLIC, etc). Revenue and earnings guidedowns, capacity utilization dropping, etc. I think I posted a piece on this previously. That means the market will have to rally through bad tech news in the upcoming earnings period, with tech stocks going from very expensive to even more expensive. I do not consider the Dell or CSCO calls positive for the industry in general. They are share takers, and are benefitting at the expense of the rest of their respective industries. Recall, as Dell noted in its conference call, total PC sales in the second quarter DROPPED 10%. Note the relatively poor action in the SOX.</P>
<P>4. We have shifted short term influences in the market. 5 weeks ago, corporate governance/bad macroeconomic numbers were the short term driving force, pushing the market to its lows. We digested that information as we hit the lows on volume. At that point, the market was poised to spring back, either sustainably or unsustainably. We shifted to a new short term driving factor: the oversold condition of the market (note how all negative news is being ignored- ex. AMAT horrible call. That is, IMO, because news is not the current short term driving factor; the technical condition of the market is). This short term factor is being augmented by asset allocation and short covering. However, this short term factor will eventually dissipate, and we will get a new driving force. Given how poor, IMO, the quality of this rally has been, I think the market will be primed to latch onto something negative. We are currently in a bit of a news vacuum. If I'm not mistaken, we should be getting preannouncements starting sometime in September, as well as additional economic insight. If this data comes in poorly, the market might start reacting to it negatively, and this could be our new short term driving force.</P>
<P>5. There is still "headline risk" in the market. This would include things like the service and equipment swaps that Q has done with a variety of companies, including IBM and BLS (not widely known). GE has seen order slowdowns. There are a host of bankruptcies yet to be announced. F is in trouble. Housing looks vulnerable. Retail sales were weak the week of Aug 10, BBY preannounced, etc, so the consumer is still vulnerable. There are other problems as well. While I undertand that it often looks darkest before the dawn, it also looks darkest before midnight.</P>
<P>6. Europe looks terrible. Brazil is still a threat, depending on who wins the presidential elections, and we could still lose South America.</P>
<P>7. There is annecdotal evidence questioning the strength of the rally. Ex. pulp and paper inventories were up above typical seasonal increases, Ingersal Rand saw no evidence of an economic comeback, etc.</P>
<P>8. Yield spreads are very wide.</P>
<P>9. Energy sector debt at risk ($500 B), 3G programs, which were supposed to support telecom debt, have been weak.</P>
<P>10. First Call forward earnings growth has been coming down too quickly.</P>
<P>There are, of course, others. I would be willing to overlook many of these negatives IF the rally looked better. To me, it looks too much like the type of bounce we saw in September, but with a shorter duration.</P>
<P>Any thoughts?</P>
<P>Eric</P>
<P> </P><p><br><hr size=1><b>Do You Yahoo!?</b><br>
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