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Market Wrap-Up (02-05-2004)
Financial Sense Online ^ | 2/5/2004 | Martin Goldberg

Posted on 02/05/2004 5:01:01 PM PST by Orangedog

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Today's WrapUp by Martin Goldberg 02.05.2004  Mon   Tue   Wed   Thu   Fri   Archive


Current Strength in Drugs, Weakness in the Technology Generals

A Concise Technical Analysis (Nasdaq Technical Analysis  Follows)

Similar to the late 90s bull market, the current rally’s leadership is from the “Technology Generals” such as Intel, Cisco, Oracle, Dell, and Microsoft. Another characteristic of the both the market top and this rally is a notable laggard group – the large capitalization drug stocks. Whereas in March of 2000, the drug stocks bottomed at about the same time as the Technology Generals topped, this time the drug stocks appear to have already bottomed and are showing strength. However, the similarities in leadership and “laggardship” between the last market top and the current rally, suggest that when the rally finally ends for large cap technology, it is likely to continue for the large drug companies. Are the technical charts of Technology Generals healthy? In this article, I present a comparative technical analysis of the major drug stocks and the Technology Generals. It shows that there is strength in big drug stocks, and weakness in large technology.

Remember the Last Technology Top?

Strolling down memory lane from October ’99 to the March of 2000 top, let’s look at the NASDAQ composite versus the major drug stocks – Merck (MRK), Pfizer (PFE), and Johnson & Johnson (JNJ).

At almost the exact moment when the NASDAQ topped, the drug stocks bottomed. What happened after that? As shown in the chart below, the major drug stocks rallied, while the technology stocks dropped precipitously.

When the NASDAQ failed over the next year, dropping 45%, the major drug stocks gained from 28 to 45%.  Ten thousand dollars invested in the NASDAQ at the top would dwindle to $6,500 a year later. The same $10,000 invested in Pfizer would have grown to $14,500.

This time around, the drug stocks appear to already have bottomed. Pfizer bottomed in August, Johnson & Johnson and Merck bottomed in November. This time the bottoms for the drug sector were at similar stock values (in US dollars) as at the March 2000 technology top. Generally, earnings have grown for these companies but the stocks are at similar levels as they were then.

Strength in Drugs

Johnson & Johnson

Below is a two-year daily chart of Johnson & Johnson. The stock bottomed in November 2003 on the news of stent problems. There is always some “calamity” that befalls JNJ at the bottom. I can’t remember what happened in July of ’02. It must have been some horrible thing that scared out weak hands. Somebody really needed to sell those JNJ shares at 42 real badly!

The most recent downtrend for JNJ beginning in April 2003, (one month after the beginning of the war rally in technology), has been broken. JNJ is now in an uptrend.

Pfizer

As shown in the weekly 3-year chart below, similar to Johnson & Johnson, Pfizer has broken a linear downtrend. It now appears to be heading up. Note the classic 2-bar reversal that occurred in July of 2002 (see Technical Analysis Explained, by Pring 4th edition, page 122). That would have been an excellent and low risk entry point. Pfizer can now probably be bought on pullbacks to its recent trendline.

Merck

The one-year daily chart of Merck below shows a clear and linear downtrend that was decisively broken.

Note the tremendous volume on horrible news (can’t quite remember what the news was now…but I do remember that it was all you heard on Bloomberg radio that day!). What things reported on the radio were horrible for Merck, the daily MACD histogram was saying something completely different. The daily histogram put out higher low, telling sharp technical analysts, that it was smart to buy the stock and place a stop loss at the bottom that was made on the “horrific” news.

As you can see by now, there is a reliable behavior pattern with the large drug stocks. That is the final “capitulation” day following long downtrends occurring on “bad news” reported in the media. The volume on these events is much larger than all other days. It would probably be a good idea to put these signs on your watch list, once you identify a large cap drug stock that is in an extended downtrend. A “capitulation day” is probably a good day to buy the stock for trading and/or investing purposes (with a stop loss).

Weakness in Technology

Intel

Below is a one-year daily chart of Intel. It shows a clear breaking of a long-term uptrend. Intel could bounce; but the intermediate prognosis of Intel’s chart is not good.

Microsoft

The one-year daily chart of Microsoft below shows a clear head and shoulders pattern forming. It’s notable that the MACD histogram plunged below the zero line at the head formation. During formation of the right shoulder, the MACD histogram barely made it above the zero line. The intermediate pattern is bearish.

Dell

The one-year daily chart of Dell shows a broken uptrend, and a clear topping pattern. The chart of Dell is showing lower highs and lower lows. (For you fundamentalists out there, Dell has a P/E of 35, not including stock options.)

Oracle

Oracle has traded manically for a while. There seems to be support at 11 and change, and resistance at 14. Oracle broke the resistance for a few days, but not decisively. It then went right back into its box. If it stays there as I think it will, then Oracle will be dead money at best for a while. Price objectives suggested by classical technical analysis in Pring, suggest that if it breaks below support, it will reach 8.5 or less. Similarly, a decisive break above the resistance at 14 would suggest a minimum upside price objective of 17, but I wouldn’t hold my breath.

Pring indicates that breakouts from trendlines that do not hold generally put traders holding the formerly broken out stock in a bad technical position (page 73).

“Often the technical position is worse after such breakouts. This is because breakouts that cannot hold indicate exhaustion, and exhaustion moves are often followed by strong price trends in the opposite direction to that indicated by the (false) breakout.”

Oracle at about $14 may seem “cheap”. Why is it so “cheap”? This is because Oracle management split the stock time after time during the 90’s technology bubble. Oracle has a P/E of 30, and optimistic Wall Street analysts expect it to grow earnings at a 10% per year for the next 5 years. This is extremely expensive during any non-mania market time frame.

Cisco

Below is a one-year daily chart of Cisco. As with Oracle, Cisco has broken out of a support/resistance region, but quickly (after a few days) turned tail, and moved back into its channel. It sold off on its disappointing earnings and outlook, and broke below its channel line. If it doesn’t reclaim the channel in about a week, then traders may begin to think about Cisco’s P/E, and stock options policy.

Disclosure:  Martin owns shares of Johnson & Johnson and Pfizer.

NASDAQ Technical Update

Around Thanksgiving week, I noted that the Nasdaq has formed a “fan” pattern. This classical technical analysis pattern is a method used to identify the end of a corrective (up) trend against a secular (down) trend. The standard rule is that when the third trend line is broken, “the high has been seen”. However although the pattern was identified accurately, the “rule” was broken at about New Years when Nasdaq broke above 2,000 decisively. At that time I noted that if the “fan” pattern had any remaining usefulness it would be if the third trend line (L-3) became a resistance line. As you can see from the chart below, trendline L-3 did in fact, become a resistance line. If Nasdaq 2,000 is broken decisively (say by 3%, and not reclaimed in a few days), then we may consider the fan pattern alive, and an indicator of the end of the Nasdaq bull run.

Note also in the chart below, the apparent exhaustion move, as the Nasdaq broke out of the upper channel line, only to have the channel reclaimed in just a few days. Nasdaq entered back into its channel in a weak technical position, as it quickly sold off to the lower portion of the channel.

Finally, consider the behavior of leading Nasdaq stocks after they reported their latest quarterly earnings: Cisco sold off. Yahoo sold off. Intel sold off. Amazon sold off. This is not a good sign. It is also behavior that was also shown by Nasdaq stocks near the March 2000, top. Dell and Oracle earnings reports are next.

Why is all of this important? Because we can fiddle with charts all we want; but in the long run, valuations, dividends, and the definition of actual earnings do matter. I’m using charts as a tool to help establish when the nonsense will end. When it does end, it’s a long way down. There’s opportunity there!

Today’s Market

It was a weak rally today, fed (Fed?), by comments by Ben Bernanke. The aggressors in today’s market were listening to Bernanke. Good luck with that! With the exception of Oracle, all of the technology generals were down today. Cisco is now at a critical juncture, since it is sitting below its support trendline. If it doesn’t reclaim it soon, then Wall Street may be inclined to look at its market capitalization, stock option accounting, and long-term growth outlook.

The general mood of the market has changed over the last 10 days or so. The Nasdaq is generally down on high volume, and up on light volume. Not a good sign. But there is opportunity there.

Bonds went in the tank today (the 10-year was down 14/32). Gold was down marginally along with silver. But the gold bugs index (^HUI) was up 1.9%. The dollar was up on Bernanke’s comments. If he gives a speech every day, will that prop up the dollar? Just wondering.

Your Opinion Matters – e-mail your opinions and comments. I don’t have a lot of time, but I answer most e-mail, and enjoy the feedback.

Have a great evening!

Martin Goldberg

Copyright © 2004 All rights reserved.

Martin F. Goldberg, MS, P.E.
Market Analyst

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Try as they might, they can't really get gold to move much below $400 and silver refuses to drop below $6, period. If the traders are going to drive the metals down, I wish they would hurry up...I'm still looking to buy more.
1 posted on 02/05/2004 5:01:02 PM PST by Orangedog
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To: Tauzero; imawit; Dukie; Matchett-PI; Moonman62; Free Vulcan; Wyatt's Torch; Huck; ken5050; ...
OK fellow doomers, here it is...return of the charts! Be afraid...be very afraid!
2 posted on 02/05/2004 5:12:38 PM PST by Orangedog (An optimist is someone who tells you to 'cheer up' when things are going his way)
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To: Orangedog
Hey, quit calling us "doomers". I prefer to think of myself as a "skeptical realist".
3 posted on 02/05/2004 5:27:48 PM PST by Elliott Jackalope (We send our kids to Iraq to fight for them, and they send our jobs to India. Now THAT'S gratitude!)
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To: Elliott Jackalope
That's the problem with PC names...too many syllables ;)

Besides, I thought it would be fun to take one of the insults that trolls like to throw at us here and wear it like a badge of honor.
4 posted on 02/05/2004 5:38:41 PM PST by Orangedog (An optimist is someone who tells you to 'cheer up' when things are going his way)
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To: Orangedog
I'm curious about your CDE inquiry late yesterday. If you're still interested, take a look at SA miner BVN. Its a better value (imo), pays a 1.1% dividend, and has (or had) a fair amount of institutional ownership.

If you think the USD is going to devalue further, there is less currency risk going with a foreign miner. However, one might also conclude that the business climate in South America is a greater risk overall than North America.

5 posted on 02/05/2004 5:42:40 PM PST by mac_truck (Aide toi et dieu l’aidera)
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To: mac_truck
I've been watching CDE for a few months. Owned it a couple of times...timed one trade wrong that really stung for a while ;)

The SA situation could get ugly at a moment's notice. CDE is sitting on a VERY large amount of unheadged silver in the ground. They did put more shares into the market last fall, but they reduced a lot of their debt with most of it. Having a listing on the NYSE doesn't hurt either. Management seems to have a grip. I'm sure there's better silver miners, but IMO there seems to be some value there.
6 posted on 02/05/2004 6:01:37 PM PST by Orangedog (An optimist is someone who tells you to 'cheer up' when things are going his way)
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To: Orangedog
Here is a chart for CDE. I'd wait a bit longer before getting in.


7 posted on 02/05/2004 6:13:05 PM PST by mac_truck (Aide toi et dieu l’aidera)
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To: mac_truck
I agree. Gotta wait for the blue line to cross with the red line again.
8 posted on 02/05/2004 6:18:09 PM PST by Orangedog (An optimist is someone who tells you to 'cheer up' when things are going his way)
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To: Orangedog
Here is a huge list of silver stocks put together by Jason Hommel. Stocks with known reserves are ranked based on how many oz in ground you are buying per dollar of investment. The index value he uses is actually oz of silver in ground per 1 oz worth of stock. This is one way to value mining stocks, but it is not the only factor, so be careful in interpreting the ranking. He also has a separate list of explorers and has assigned some of them points based on exploration potential (not sure how this was determined). This is a great resource for starting your DD on silver shares.
9 posted on 02/05/2004 6:18:39 PM PST by Soren
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To: mac_truck
Aren't you better off owning shares of company located in a country where the currency is falling? Take SA for example. When the Rand was weakening, the POG rose in Rand, so mining revenues increased, while their expenses were largely in Rand. So profits increased significantly. With the Rand strengthening significantly over the last year, SA shares have lagged.
10 posted on 02/05/2004 6:25:17 PM PST by Soren
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To: Soren
Aren't you better off owning shares of company located in a country where the currency is falling?

Good point, I'm not sure I know the answer. However, if you're worried about the US dollar's fluxuation, a foreign miner might be the place to be.

11 posted on 02/05/2004 6:50:23 PM PST by mac_truck (Aide toi et dieu l’aidera)
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To: mac_truck; Soren
There's going to be advantages owning shares in miners everywhere. The only concerns I have with SA shares are political, that is the chance that instability could lead to nationalizing of property in some countries. But that's just another factor to take into account.
12 posted on 02/05/2004 6:54:49 PM PST by Orangedog (An optimist is someone who tells you to 'cheer up' when things are going his way)
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To: Orangedog
I think an investment in SA miners or companies owning mines there is OK if you've got a feel for how the company interacts with the locals. It was one of my motivations for picking up some MYNG.OB, the locals are really tight with them and they've begun producing.

I like CDE, I have an affinity for them and Hecla because I used to live up in Idaho. Of course, making a boat load of profit off them helps. I haven't gotten back into CDE since I got shaken out at $4.66 (probably should). I should have realized that the latest round of instrument issuance is probably an aquisition warchest. If I correctly recall, they had about a 7 or 9 year reserve life. While they probably will prove more on existing terrain, they would score a coup if they could get something like that 200m oz Mines Management property over in Montana.

13 posted on 02/05/2004 7:00:21 PM PST by Axenolith (Not only is silver a good investment, you can kill werewolves with it too!)
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To: Orangedog; imawit; Tauzero; Dukie; Matchett-PI; Moonman62; Free Vulcan; Wyatt's Torch; Huck; ...
Investors betting on bulls buy US stocks on credit

By Nick Olivari

NEW YORK, Feb 2 (Reuters) - Just 15 months into the bull market, investors are again increasingly optimistic and buying stocks on credit.

Margin debt, which allows a buyer to put down a percentage of a stock's purchase price and borrow the rest of the cash from a broker, is a bet that better days lie ahead for the market.

With the bulls back in charge, at least for the time being, margin debt has jumped 33 percent since September 2002, a month before the market's most recent trough.

"When you buy on credit it says not only are you sure the market is going up, but you are willing to leverage," said Anthony Chan, senior managing director and chief economist at Banc One Investment Advisors, which oversees $185 billion. "You are betting aggressively that you are going to win."

The New York Stock Exchange said margin debt totaled $173.2 billion in December, its highest since May 2001 and far from the low point of $130.2 billion in September 2002.

Those investors who were willing to take on the extra risk of buying on margin have also been rewarded for the most part. The Standard & Poor's 500 index (^SPX - News) gained 43 percent since Oct. 9, 2002, according to Reuters analytics.

The market's rise, in turn, increases the optimism of other investors who may begin to borrow on margin, or those already using margin debt may finance new purchases with their profits.

Excerpted...
14 posted on 02/05/2004 7:04:38 PM PST by Beck_isright (" I cannot vote for a liberal whatever his party label happens to be."-Lazamataz, FR 2004)
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To: Beck_isright
FYI, this was posted by me as a bright red warning flag. When, by this summer, you hear the grocery bag boy talking about stocks again, you'll know the game is almost up.
15 posted on 02/05/2004 7:05:29 PM PST by Beck_isright (" I cannot vote for a liberal whatever his party label happens to be."-Lazamataz, FR 2004)
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To: Beck_isright
"by this summer....you'll know the game is almost up."

It better be!! I'm still waiting for the Dow to go back to 3000 as was promised here so I can clear my shorts (so to speak).
16 posted on 02/05/2004 7:20:30 PM PST by norwaypinesavage
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To: Axenolith
I missed out on the whole Mines Management score back when it was in the pennies. Their story is compelling, to say the least.
17 posted on 02/05/2004 7:20:33 PM PST by Orangedog (An optimist is someone who tells you to 'cheer up' when things are going his way)
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To: Orangedog
Lots of churning, but no one making bets on the employment report tommorow.
18 posted on 02/05/2004 9:21:48 PM PST by Free Vulcan
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To: Free Vulcan
The government rolls the dice and whatever number comes up we will hear the lies.
19 posted on 02/05/2004 10:23:34 PM PST by jwh_Denver (The gold ship is coming to a port near you. Jump on!)
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To: Orangedog; All
Man, there's some movement today! Don't have the time to peruse around right now but noticed some dollar cratering in progress. Any comments?
20 posted on 02/06/2004 10:21:56 AM PST by Axenolith (Not only is silver a good investment, you can kill werewolves with it too!)
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