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Tech Traders 12/26/00 Market Summary
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Technical Traders Subscribers:

Continuing Plays:

CGP (Coastal Corp--$88.25; +5.31; optionable (CPG)): Breaking out of the ascending wedge, soaring to a new all-time closing high. The stock remains a buy on this breakout move.
BUY POINT: Up to 89.32 on the breakout.
POSITION: Stock and/or March $85 calls to buy (CPG CQ).

http://www.investmenthouse.com/ch/cgp.html
(Click to view the chart)

ORCL (Oracle Corporation--$31.88; +2.38; optionable (ORY)): Bouncing up and down in a trading range from 27.50 to 32.50, which is now looking more like an ascending wedge. ORCL pulled back on volume that continues to drop farther below average (20.5 million). The stock can pull back to the 50 day MVA at 30.19, which coincides with the stock's short term uptrend (connecting November and December lows). Look for a bounce back up on stronger volume, over the pattern high of 33.13 for a breakout.
BUY POINT: Aggressive: On a move up from the 30 level after a pullback, on stronger volume. Breakout: 33.26, on volume in the range of 59 million.
POSITION: Stock and/or February or March $30 calls to buy (ORY BF or CF).

http://www.investmenthouse.com/ch/orcl.html
(Click to view the chart)

CYTC (Cytyc Corporation--$62.88; +1.88; optionable (YQK)): A scientific and technical instruments stock that moved up in its ascending wedge pattern (that is the stock's handle to its 5-month cup base. Volume was lower at 484,400 (avg. 741,000), so we want to see shares rally for the breakout over the handle high of 64.50. Relative strength has broken out ahead of price.
BUY POINT: 64.63, on volume of 1 million or better.
POSITION: Stock and/or February $60 calls to buy (YQK BL).

http://www.investmenthouse.com/ch/cytc.html
(Click to view the chart)

MOND (Robert G Mondavi--$50.88; +0.25; no options): Moving up in the pennant pattern on much stronger volume (108,300; avg. 58,000). Looking for a breakout over the pattern high of 52.50. Strong money flow and high relative strength.
BUY POINT: 52.63, on volume of 20,000 or better.
POSITION: Stock.

http://www.investmenthouse.com/ch/mond.html
(Click to view the chart)

New Plays to look at:

AVNX (Avanex Corporation--$56.38; +3.13; optionable (GUH)): A chip stock that looks to be a roller between 50 and 92. Currently near the bottom of the range and showing a doji on lower, below average volume (1.4 million; avg. 2.2 million), the stock looks to be readying for a move back up in the pattern. The 10 and 18 day MVAs are at 62.94 and 67.17, respectively). Good buying.
BUY POINT: On a move up from here on stronger volume.
POSITION: Stock. February and March $55 options had insufficient open interests (too illiquid for this stock).

http://www.investmenthouse.com/ch/avnx.html
(Click to view the chart)

EPG (El Paso Energy Corp--$71.88; +4.07; optionable (EPG)): An oil and gas stock that is breaking out of an ascending wedge. Volume was up toward average levels (1.9 million) as the stock shot out of the pattern; to sustain the move look for above average volume, as the stock remains a buy on this breakout. Strong money flow and high relative strength.
BUY POINT: Up to 72.91 on the breakout.
POSITION: Stock and/or April $70 calls to buy (EPG DN).

http://www.investmenthouse.com/ch/epg.html
(Click to view the chart)

Put play for a falling market:

MERQ (Mercury Interactive Corp--$95.63; +0.88; optionable (RQB)): Tapped the down trendline on the high of 96.41, volume dropping back below average to 1.56 million. Look for a turn down from here or the trendline (on a move back up to that level), for a retreat back down to at least the 90 level (short term moving averages).
BUY POINT: On a turn down from the 96 level on (preferably) rising volume.
POSITION: April $100 or $95 puts to buy (RQB PT or PS).

http://www.investmenthouse.com/ch/merq.html
(Click to view the chart)

THE SUMMARY:

For a review of frequently asked questions, please use the link below:

http://www.investmenthouse.com/1questions.htm

TONIGHT:
- Today was a letdown, but don't give up on the Holiday rally just yet.
- Many interesting undercurrents to this market.
- Retails sales improve in the last weekend, but things still slow here and abroad.
- Subscriber Questions
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Lukewarm day after Friday's big rally.

JDSU was downgraded right off the bat, and that was one of the unknowns we identified over the weekend. That set a poor tone for the market overall, and after an attempt at rallying early in the session, the indexes turned south. They all, however, touched bottom right after lunch and spent the rest of the session moving up. Not a furious move up, just a gently rise. The Dow and S&P 500 hit positive territory, while the Nasdaq shaved 67 points from its low as it spent the last two hours recovering.

The leaders were in the usual defensive sectors: drugs, food, beverage, energy, and financials; this is the pattern when the techs have one of their frequent weaker sessions. Still, we don't see today as necessarily the end of the big move on Friday that had its roots back on Thursday. Yes it was a letdown to once again see selling so soon, and that is how all of the two-day rallies have ended this year. But there were some differences out there today that keep us anticipating a further move up this week.

JDSU was downgraded, but it turned the day around and rallied at the close to finish positive on the session. Tech stocks are up after hours, not racing ahead, but moving higher. The Nasdaq futures are up after hours as well, about 35 points over fair value. Not strong, but there is upward momentum. Today was not the rally continuation we were looking for, but it was far from a wreck, something it could have easily done as it was down 80 points on its low.

Now the interesting undercurrents.

Sentiment indicators showing that the bears are here.

For several weeks we have been talking with brokers and investors around the country, indeed, around the world. Almost all we have heard is negative. Brokers are saying clients are downtrodden, closing positions and giving up. We see it in the emails we receive. That is why it is so perplexing to see the reports that bullishness remains high and bears are few in number. We look at many sources for sentiment indications. Investor's Business Daily conducts its own surveys, Tobin keeps tract of bulls and bears, we follow the CBOE and option purchases, and we monitor other sentiment surveys. IBD's indicators have showed high bullishenss as have some other surveys. More and more were starting to show some bearishness over the past month, however.

Over the weekend, IBD seemed to admit there was more bearishness out there than its own survey of newsletter writers indicated as it cited the American Association of Individual Investors survey that showed bearishness at 51%. It cited another poll from Consensus, Inc. that indicated bulls had dropped to 20%. Those are high and low levels, respectively. Also over the weekend, Tobin Smith put out the latest reading from his bear/bull indicator. That indicator shows that bears had spiked ahead of bulls 1.8 to 1. Tobin's ratio is read much as the put/call ratio; thus 1.8 to 1 is considered a very extreme reading. In his release, Smith said "we have never, in 13 years of tracking bearish/bullish sentiment extremes, had a bearish extreme NOT BE a bottom of a correction or bear market. NEVER." That is not a huge stretch of time, but it does take into account the 1987 bear market, the 1991 recession, the 1998 bear market, and several corrections.

So, we decided to take a look at what has been going on. We went and took a look back at sentiment indicators over the past four months, basically when the August rally ended. Sentiment declined as the market started down, but it was not sharp. There were the usual spikes and pullbacks, but overall it was pretty steady. Then we see the election results and the turmoil afterwards. Negative sentiment started to rise; we supposed it was because of economic concerns as the nation struggled over the leadership over the next four years. There was some more bearish sentiment after the November 15 FOMC meeting when the Fed did nothing. But the point at which we see a marked increase in bearishness and a decline in bullishness is at the December 19 FOMC meeting where no rate cut came. This shot most of the surveys higher, including Smith's. Apparently investors, with all of the negative economic news coming out, feel that there is a very real risk of recession and that the Fed is not taking the necessary steps to prevent it. Forget the 'soft landing' and 'hard landing' euphemisms. Investors, in the form of the marketplace, see through sloganeering and cheap talk. When the Fed tried to talk the market up, it did not work. The change in bias did not work. The small investor threw in the towel when the Fed did not act.

So who are the bulls? Supposedly the money managers. We have commented about how they were chasing the hot sector of the day back in the late summer, running the market up and down on huge volume. They apparently feel that a rate cut is coming and that gives them hope for the future. We are not sure if that is the whole problem, however, as there is still the Dow doing fairly well out there. With one major average holding its own, the fear has not spiked to all-time highs. But, there is a war of attrition going on just as it did in September and October of 1999. There was no sharp selloff with that bottom, just enough investors saying "enough, I am out of here." We saw that happening when the Fed failed to act on December 19. There are massive outflows from equity funds (about $9 billion or better last week) as some proof of that. As we have said, when the majority of investors throw in the towel, that clears the way for a market rise. We have seen investors hanging on because 'all the markets had to do' was get through October earnings; when that did not work, it was the November election; when that turned into a nightmare, it was help from the Fed; when the Fed turned a cold shoulder to investors, negative sentiment jumped. Maybe, just maybe we are near the bottom of sentiment. We would like to see the put/call ratio spike higher as that has been an important catalyst in past reversals; coming in over 0.9 today, it is getting close. We still have a mixed picture from the sentiment indicators, but there are very real signs that this market is right at bottom based on investors emotions. The market will tell us the rest when it makes its move.

Tax selling season: only one more day left.

One of the problems that has roughed up this market is the extreme highs to lows this year. That has led to the crushing of many tech stocks that fund managers feel will give them the growth in the coming year. That creates a dilemma for fund managers: they want to get in early in the stocks that they feel will do well in 2001, but they also need to attract investors to their funds, and that means putting out a prospectus that does not have any of 2000's dogs in it. It is called 'window dressing' and other things, but the idea is to weed out the losers and fill in with winners so when the year end holdings are printed, it looks like roses.

With the three days it takes for a stock trade to clear, most fund managers either have already completed tax selling or are going to do so tomorrow. At that point, the 'January effect' usually starts; they call it the December rally, but it is an early start to January where new money is put into the market and mutual funds start looking for the winners for the next twelve months. Those include smaller issues with good prospects and those leaders that have been roughed up. Those are there this year. They have shown they have the earnings power even in the fall, and they are going to show it again in January. Those include JNPR, VRTS, SEBL, BEAS, AMCC, PMCS, VTSS, CIEN, GLW, BRCD, NEWP, etc. They are the leaders in earnings and revenues in leading sectors. Their growth potential is huge in the new year with the Fed cutting rates, especially if there is meaningful tax relief. Given the market action today, we feel we could easily see the market reverse back to the upside tomorrow and have it carry through to next week.

The rumors surrounding the Fed.

We hate rumors, but there is one floating around among pretty reliable sources that the Fed is going to cut rates in the next two weeks. Yes there was the rumor of an emergency meeting last week, but that was a 'floor' rumor with dubious origins. This one makes more sense as the two-week period coincides with the release of the December retail sales numbers.

Even if this rumor is false, when it gets some wider circulation it may give the market a little more reason to move up toward the end of the year and early next year. Moreover, we do not discount the impact of an actual rate cut as some are doing. Bear markets have always found bottom when the Fed starts cutting rates. After greater than 50% blood loss on the Nasdaq, the Fed cannot be too worried about re-igniting a two-month run to 5,000. There has been a lot of damage done with a lot of investors leaving the market. But that is always how it is in a bear market. Investors swear off the market and there it goes back up. It will take more work with the economic problems and resultant earnings worries, but as we said, a 25% to 50% rise in the Nasdaq is a money maker's dream. When the actual cut will come is hard to tell. We like the idea of a rate cut right after the retail sales numbers are out as that dovetails with Greenspan's worry about the consumer. What we know now is that one is coming, and the odds of one before January 30 are increasing each day as measured by the Fed Funds futures contract. That tells us that despite the continued grousing about earnings, help is on the way for the start of the next rally. Earnings will be low again in January, but the market knows that; if the Fed starts cutting rates, the market knows that will lead to higher earnings later in the year if the Fed keeps cutting.

THE ECONOMY

Two reports expected today were pushed back to Wednesday due to the holiday (existing home sales, consumer confidence).

Not much new here at home. Sales over the last weekend before Christmas were up, but Wal-Mart warned that it would not make estimates. Sales were higher, but they had been crappy. There is still the post-Christmas rush where stores usually get 10% to 17% of yearly sales. That will help, but overall the reality is that consumers were not spending as much because of future expectations, and what they did spend money on was sharply discounted. That does not help the retailers.

On the world front, Japan did not surprise us, coming out with very weak economic numbers that indicate the end is nowhere in sight for the 10-year recession it is mired in. Unemployment is at an 8-month high; retail sales fell for the forty-fourth month in a row; household spending was down 2.3% over last year; consumer prices were down 1% for 2000; and export growth and corporate capital spending, the primary leaders in Japan's attempts to climb out of the recession, are now decelerating. This is the scenario that we have to fear; the remainder of the world is still either in recession or struggling, and now the U.S. is exhibiting rapid deceleration. Sure we still have (at least did in the third quarter) a positive GDP growth rate, but the speed and steepness in the decline if frightening. We are close to problems, and we can just hope that the Fed hacks away at rates promptly and that the new administration is successful in accomplishing the tax relief it campaigned on.

End Part 1 of 2

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