Stockscom Report for February 6th, 2000 21:36

Special Report

This is not the time to buy stocks.

In hindsight we see that we were too early in lightening up our stock portfolio per our last bulletin on Thursday January 27. Even under the best of circumstances selling is an art and one much more difficult than that of buying. Yes, in hindsight we were premature and we missed one heck of a week of further advances last week. Nevertheless, many indicators have deteriorated considerably and it is a long way in time and price wince we were very bullish on stocks. It could well be that the latest rally amounts to no more than a failure swing for the majority of stocks even though there were so much higher new highs in stocks that we inadvertently sold too early, such as Nortel and BCE.
It is important to remember that we see seek only to take a big piece out of a major market move. We want to buy when the probabilities turn favorable and we want to sell when they turn unfavorable. Note that we started buying stocks on April 5, 1999 and until January 27 we did no more than fine-tuning, adding a few stocks on the way but selling only a few stocks, most under-performers but a few that we would have preferred not to have sold. As we look through the list of what we have retained we are prepared to hang in with everyone of them for now. However we are nervous, extremely nervous and it is highly likely that we shall be unloading some more of our recommendations. Correspondingly, it is extremely unlikely we shall be make new recommendations soon even though there are some stocks like Seagate, already recommended, and General Motors and Disney that look attractive both technically and fundamentally.

NASDAQ has gone out to a new high but only just, and even as many leaders such as Dell and Microsoft have really not been acting that well. There is a high probability that the apparent new high could merely be what technicians call a bull trap, an apparent breakout that aborts.

The New York Composite Index, comprising the top 1500 stocks listed on the New York Stock Exchange has just completed a monthly Lindahl sell signal, having made its high last July. This is a very ominous development. The daily chart for the SP500 now has a pattern of lower highs and lower lows on the daily chart and price is trading below the declining 25 and 40 day moving averages. Even the powerful NASDAQ could well stop at the approximate level of the triple top achieved last Friday. It was ominous that it reached high early and closed near its low for the day. That is not a sign of a strong market.

During the past year, margin debt has doubled. Buying stocks on margin is fine when stocks are going up. In a declining market, you have either to put up more money or to sell enough stocks to pay off the margin call. A declining market leads to a succession of margin calls, which leads to more selling. This is how a virtuous circle turns vicious.
We look at stocks like Cisco, which essentially we love and admire as a company. But its growth rate is probable about 30 percent for profits and 40 percent for sales while it sells at a Price/Earnings multiple approaching 120. A normal valuation would be for its P/E multiple to equal its growth rate. Some people say they are prepared top pay double the growth rate for the P/E of a really powerful company. Buy three times? Cisco delivers results on Tuesday. They had better be stupendous otherwise the stock could fall however good the results. In sum, we have made wonderful money on most of our recommendations during that past year but right now we do not want to buy more and we expect to be lightening up further in the even of further technical, deterioration.

There are clearly magnet and serious conflicts between high tech stocks and the broad market. Previously we expected this divergence to be resolved by way of the broad market turning up. Now this looks unlikely to happen. Many of the best non-high-tech stocks like Wal-Mart and McDonalds have been acting very badly indeed. On the high tech front, many of the former leaders and many prominent Internet stocks look as if it may be some time before they succeed in making new highs. The bottom line is that we are very nervous about current market conditions. For our futures subscribers, we have just recommended a small short sale in
S&P futures. That, of course, is a relatively speculative trade and one intentionally taken with the knowledge that it may be appropriate to exit or reverse at any time during the trading day.

Stockscom