Market Sell Signal

When we were recommending the aggressive purchase of stocks last October and November, we suggested a possible target in time some time after the New Year for a more significant top. In the event, January seemed to be continuing on just fine and it sd easy enough to go along for the ride, and even to buy a few stocks that continued acting particularly well. Now we see that there has been a massive and very rapid deterioration in market conditions. While we hesitate for obvious reasons to call a major market top and the end of the huge bull market, we say now that there has been deterioration sufficiently serious to warrant selling many stocks. Retain only a few that are either acting outstandingly well or are not excessively overbought, and to put new money into the smallest handful of special situations.

We cannot emphasize too strongly that the first rule for all investment is protection of capital. That means avoiding so far as possible the risk of getting caught in either a serious and long-drawn-out bear market or in a severe and sharp market drop. Once a stock or the market generally starts heading down, there is no way to know at the time how far it might go. Therefore, once there are enough negative indicators to suggest an unfavorable reward to risk, then it pays to raise cash.
Remember that you cannot have it both ways. You cannot invest for the long term and also buy stocks low after a major sell-off. In order to have cash, you must sell high while the selling is good and then conserve cash. For all practical purposes that means putting it into the money market and leaving it there. Sure, it doesn't earn enough compared with 20 or 30 or 100 percent gains that have been available from buying the right stocks when they are going up. But you need a secure parking place when stocks are going, or when the reward to risk ratio from owning stocks is unfavorable.

Market Conditions

First, note that for the immediate future stocks may have sold off enough to justify a rally from the current oversold condition. That oversold condition does not mean, however, any rally will lead to the bull market going ever on upward. Market tops sometimes take a long time to develop and sometimes the market starts sliding and simply keeps on going. We are inclined to doubt that stocks have a very long way to fall from here, but we believe strongly that the upside potential in the near term is very limited. It is worth reviewing some key stocks that tend to lead the market. Within the NASDAQ 100 index, we look at Cisco, Dell, Intel, MCI Worldcom and Microsoft, which together comprise about 35 percent of the index. Cisco doesn't look bad, but it is quite overextended and could fall a good piece in the course of a routine correction. The upward momentum has fallen off sharply. Dell looks dreadful. Technically it has broken down and there is no longer a case to own it in the near term. We thought we loved the company but technically there is almost a case to sell the stock short. Intel has been strong but it may have done enough for now. WCOM is in a confirmed bear market. MSFT is expensive, of course, as always. It looks as if the recent high will not soon be surpassed. While support under the market may well hold, upside potential looks minimal in the near term.

Among the Dow Industrials, there are many truly bearish chart patterns and hardly a one that is attractive to buy other than Exxon. There are bear market designations on the monthly chart for ATT, Caterpillar, Coke, Eastman Kodak, Honeywell, Johnson & Johnson, Philip Morris, SBC and United Technologies. SBC is surprisingly bearish given its position as a leader in information technology. IBM and Hewlett Packard are not attractive to own from a technical standpoint.

We follow sentiment indicators as measured by such services as Market Vane and Bullish Consensus. These readings are not in the stratosphere but they are too high for comfort. Remember that when the majority of people who can buy stocks have already done so, they feel great about what they own. But there may be no more money coming in behind them to push prices higher still.

The NASDAQ 100 index looks to be completing is second weekly downside reversal in four weeks, with the second one an outside down week if this index closes low on Friday. A couple of weekly downside reversals don not of themselves mark a trend reversal. However, they show how buying enthusiasm at the beginning of the week turns negative by week's end. Sellers have more influence on price than do buyers. In addition, there is most likely a monthly downside reversal falling into place on most of the major indexes. Coming with extremely overbought stochastics, these downside reversals suggest the possibility that the January highs may not be exceeded for some time to come, and possibly until lows quite a long way down have occurred. We want to emphasize that we are by no means dog-in-the manger bears. The revolution in information technology is real and profit gains are both huge and real for many companies like Nortel. However, there has never been a boom that has not been followed by a bear market in due course, however long it takes to develop. Given the immense euphoria about markets, it is prudent to wonder when sellers will overwhelm buying pressure in high tech stocks. Note that we say when not whether, for eventually there will be a substantial decline in stocks.

While we now envision perhaps a return to the lows of last October for the Dow Industrials. That would amount to a 15 percent decline off the top, to 9976 from 11,750 and a further 10 percent decline from the current 11,028. The figures for the NASDAQ are even more startling. Note that the gain from the October low to the January high was 69 percent! The index is now 8 percent off the top. It would take a 40 percent decline to take it down to the October low. That seems most unlikely to happen, but it could. The Fed turned on the spigots full bore to make money available in case of problems coming into the New Year. Having sent so much sloshing out the door, they now have to take it back. We can be certain that one of the forces driving stocks higher has been the ready of money, of buying power. Already the Fed has been reining in credit on a massive scale, with results almost certainly evident in the price of stocks among the Dow Industrials. While it is known that Fed Chairman Alan Greenspan is fearful of an economic downturn induced by a major and sustained fall in stock prices, it may be beyond his control to prevent a bear market once stocks turn down.

Another force driving expectations among the share-buying public is, of course, corporate profitability. Bad news drives buyers away and knocks price down, as you can all too readily see with what happened to Dell.
Equally significant, however, is that wonderful news from Nortel really did very little for the stock. a stock ought to soar on good news unless it is already over-owned. So, as we said at the beginning, capital conservation dictates selling when the signals turn unfavorable. Then you have cash with which to buy stocks, generally at lower prices, when the technical indicators again turn favorable. If you missed selling at the top, newer mind! All you can reasonably expect to do is to take a piece out of the middle of a major market move. The last time we delivered a general sell signal was almost a year ago, in March 1999. We soon reversed this with a new buy signal and a corresponding list of stock recommendations, many of which have done spectacularly and which we still own. Don't be discouraged if stocks you sell keep on going up after all. We are concerned here with both opportunity and risk management. You have only to look down the list of our recommendations to see that when we are right, we can be spectacularly right. Also, we do not hesitate to buy a stock back if it starts shaping up again, even if we have to pay more for it than we sold it for. We had to do that with Idec.

Stocks to Sell

It is almost but not quite a general liquidation. We are selling the following stocks now:

Amgen (AMGN)
It is not acting that badly but it will follow the market and could drop a fair way.

BCE (BCE)
This stock has made a new high but we expect it to be a prime sell on news.

Celstica (CLS)
This stock has been falling away relentlessly, so we might as well get out in case it keeps on going.

Chiron (CHIR)
This is not really a quality stock and it's quite overextended.

Cisco (CSCO)
Under normal circumstances this is a must-own stock. However we no longer rate prospects favorable enough versus the risk of owning it.

DELL
Terrible action and a serious breakdown, like Newbridge which was one of our few serious misses last year.

Erickson (ERICY)
Not bad but vulnerable

Flextronics (FLEX). It has acted exceptionally well, but could sell of sharply because so overextended.

JDSUniphase (JDSU)
A reluctant sell but we think it's very vulnerable if buyers go on strike.

Nokia (NOK)
Also a reluctant sell, but we don't like the reward to risk involved in holding.

Nortel (NT)
See above. It should have soared on its great results. BCE is using the news as an opportunity to dump its holding so there will be a lot of stock coming out that may keep the price down.

Royal Phillips (PHG)
It has done well but could be toppy.

Sun Microsystems (SUNW)
A marvelous stock but it will not be immune to a sell-off or just sideways action in the market.

Wal-Mart (WMT)
We love the company but chart action is a bit wobbly.

Yahoo! (YHOO)
We really love this stock but would love it even better at half the price. We don't want to risk carrying it right down.

Telefonos de Mexico (TMX)
Great stock with hinge potential but not worth the worry in current market conditions.

New and renewed recommendations

We see no new stocks to recommend but we do believe that conditions remain favorable for petroleum and oil service companies, and sufficiently so to regard this area as one that could march to its own drummer. We particularly like market action in Su(SU) and BP Amoco (BPA), and we like the story for Santa Fe International (SDC). One oil service stock not specifically listed but which is eligible for Canadian RRSPs is Precision Drilling (PDS) and it is as good as SDC.

We also love the overseas funds, particularly India, and any one of several of them. This chart is relentless. It still offers wonderful value and the prospect of a double within the foreseeable future, say within a year.

Action Ratings

The following is the legend for designating immediate action for our stock recommendations. The first code is B, meaning that the stock is timely to buy but the case for doing so right here is not overwhelming. Either the stock may have got ahead of itself and may be vulnerable to a retracement or else the stock has been performing disappointingly but may simply be regrouping. B+ and B++ indicate stocks for which there is a technical case to buy now, with plusses adding weight according to how many there are, up to a maximum of five. Stocks rated H are ones to hold, awaiting confirmation to buy more or to sell. SELL, of course, means what it says. It seldom pays to override this designation. There are several stocks at conspicuous buy points that warrant noting now.
Yahoo! looks ready to explode upward. This is the one pure Internet play that we think will hang in for the long term. Four Seasons has a conspicuously low-risk entry point here.

Current Recommendations:
(Entry Date, Entry Price, Last Close, Code, Name)

Stocks marked # are eligible for Canadian RSP funds. Otherwise there is a 20pc restriction on foreign stocks held in these accounts.

H 99/05/12 39.75 96.06 ADI Analog Devices
H 99/09/07 76.88 135.50 AMAT Applied Material
H 99/04/06 49.00 152.00 AMCC Applied Micro Circ (split on 99/09/10 2:1)
SELL 99/08/06 78.50 61.38 AMGN Amgen Co (split on 99/11/19 2:1)
B+ 99/06/14 30.63 31.38 AOG Alberta Energy Corp #
SELL 99/11/16 73.03 104.38 BCE BCE Inc
H 99/09/07 84.94 99.69 BGEN Biogen
B++ 99/06/14 109.78 54.13 BPA BP Amoco Plc
H 99/09/07 57.69 51.63 BVF Biovail Corp # (split on 00/01/07 2:1)
SELL 99/08/06 26.38 40.50 CHIR Chiron Co
SELL 99/05/14 40.69 37.56 CLS Celestica # (split on 99/12/21 2:1)
H 99/11/16 34.94 47.94 COMS 3Com Corp
SELL 99/05/12 117.50 106.63 CSCO Cisco (split on 99/06/21 2:1)
H 99/06/14 14.59 21.25 CXY Canadian Occidental Petroleum #
SELL 99/12/27 53.38 37.56 DELL Dell Computers
SELL 99/10/05 22.94 33.75 DGN Data General
(acquired by EMC on 99/10/07 .3125 to 1)
H 99/11/01 45.50 74.13 DT Deutsche Telekom
SELL 99/04/06 132.13 108.00 EMC EMC (split on 99/05/28 2:1)
SELL 99/06/14 31.13 65.63 ERICY Erickson
SELL 99/04/06 51.50 51.88 FLEX Flextronics (split on 99/12/22 2:1)
H 99/06/14 60.14 162.00 GLW Corning
H 00/01/10 115.00 130.25 IDPH Idec Pharmaceuticals
SELL 99/09/07 113.75 212.06 JDSU JDS Uniphase Cp # (split on 99/12/29 2:1)
H 99/04/06 60.83 92.75 LLTC Linear Tech Corp
H 99/04/06 32.75 81.75 LSI LSI Logic
H 99/12/27 84.94 119.88 LVLT Level 3 Com
SELL 99/04/06 163.19 178.50 NOK Nokia (split on 99/04/09 2:1)
H 99/05/12 25.06 33.06 NOVL Novell
SELL 99/04/06 65.66 97.15 NT Nortel Networks # (Buy BCE)
(split on 99/08/19 2:1)
SELL 99/10/05 46.69 51.81 ORCL Oracle System (split on 00/01/18 2:1)
SELL 99/06/14 93.56 149.06 PHG Phillips Electronics
H 99/05/12 106.06 191.25 PMCS PMC Sierra (split on 99/05/14 2:1)
H 99/05/12 49.88 74.00 QLTI QTLI Phototherapeutics #
(split on 99/10/12 2:1)
H 99/12/27 44.44 68.13 RIMM Research in Motion
B+ 99/12/27 24.47 28.00 SDC Santa Fe International
H 99/12/13 39.00 40.50 SEG Seagate Tech
SELL 99/04/06 53.75 71.00 SLR Solectron
H 99/08/19 129.02 246.75 SNE Sony
B++ 99/12/27 41.38 44.63 SU Suncor Intl
SELL 99/04/06 130.94 76.94 SUNW Sun Microsystems (split on 99/04/08 2:1)
(split on 99/12 07 2:1)
B 99/08/06 31.00 29.25 TLM Talisman Energy Inc #
SELL 99/10/05 50.27 59.13 WMT Wal-Mart Stores
SELL 99/09/27 186.00 337.38 YHOO Yahoo!

In addition we recommend the following Closed End Funds, based on the assumption that Third World economic downturns are not going to last forever and that their stocks are now showing superb technical strength

B+ 99/11/09 15.14 18.56 BZF Brazil Fund
B+ 99/11/16 10.50 10.88 FAK Fidelity Adv Korea
B++ 99/04/06 8.88 17.13 IFN India Fund
SELL 99/11/09 97.06 112.00 TMX Telefonos de Mexico

Stockscom