Stockscom Report for Thursday May June 22, 2000

Sell All Stocks Except Petroleum and Oil Service Stocks -- Buy Those!

This may be the most important message for a long time. We said to sell all stocks in February before the big slide only to buy back far too early, starting at the beginning of March. In the meantime, we have found so really good winners but there have also been some bad losers.

During the past few weeks, it was looking as if a large number of stocks were rounding out beautifully and were all set to resume their bull market. At the same time, however, many stocks that were looking wonderful, Like Advance Micro Devices, simply flopped over, turning from a wonderful chart to one that now looks dreadful.

We cannot emphasize too strongly that it looks very much indeed as if the entire stock market is setting up for a major slide. The Dow Jones monthly chart is setting up for a classic Lindahl sell signal. The average is now decisively below its declining 25 and 40 week moving averages and last week completed a Rule 2 sell signal ( a weekly downside reversal bar followed by one with a new low close at the bottom. This week looks to be completing a confirming Rule 1 sell signal on the weekly chart.

There is a massive head and shoulders formation on the Dow, readily seen on the weekly chart. By no means all head and shoulders formations lead to a major downside break, but when they do the move down can go a very looming way indeed. The nature of this formation is that it shows in graphic form how a market runs out of buying power. When the downside break actually comes, there is a trend reversal in price, and selling power dominates buying power. There are rallies, often major and powerful ones, but they generally fail to surpass previous highs, or do so only by a little. Then the price turns down and makes a low below the level of the previous one.

After a very long bull market, it is usual for the corresponding bear market to go a very long way down. Sentiment changes from positive to negative over a long period of time until there is gloom as think as the enthusiasm at the top was frothy.

We suspect that the Dow Jones will head for a level around 9000 to 9200 at its next low. Then there should be a rally back to 10,000 before it turns down again. The eventual low is unlikely to be much above 5000 and 3600, the major breakout level might be reached.

If these targets seem far out, then look at long-term charts for previous major bear markets. Not just the one from 1929 to 1932 but the one in the early 1970s, or even the one that went from 1031 to 770 between May 1981 and August 1982. That was not starting with prices at any high level of valuation compared with what we now have.

When it comes to valuations, consider Proctor & Gamble. Even after the stock has come down from 118 to 54, the stock still has a Price/Earnings ratio of 24. That used to be the kind of P/E accorded a major growth stock. However, PG not only now has no growth, it has negative growth. Profits are shrinking, and doing so even as the economy is booming. What happens if the economy slows? Answer: PG's earnings shrink some more. Finally, profits and the stock price stabilize, but do so only when the P/E has fallen in line with very limited growth prospects. By historical standards, a reasonable P/E for PG would be around 8, so the stock could fall well below 20, and that's assuming that profits don't tank still more.

Most Dow stocks fall into the category of having P/E ratios far in excess of their growth rate and, by that criterion, are trading at about double what used to be considered fair value.

We don't like being Scrooges but we do have to give some credit to Alan Greenspan for correctly identifying the concept of irrational exuberance. For a long time we believed that the kind of heady growth seen by companies like JDS Uniphase, which we used to own, and Nortel too, as well as some of most of the stocks now on our list, could grow into their valuations. If profits double every two years, you can readily justify a P/E of more than a hundred. But then we come to stocks like Cisco and we have to ask ourselves: Is this real? Can it go on like that for the next ten years?

There was a time during the 1960s when IBM was growing at 50 percent annually or better. An extrapolation of that growth rate should have had the company with sales greater than the GDP of the entire world by the year 2000. Of course, it didn't happen. And it won't happen for Microsoft ,either, or Cisco or JDS Uniphase or Corning. Whatever the growth rate of fiber optics, at some poignant the industry will become mature. At some point, moreover, the lure of profits will attract so much investment that it will make everyone's investment unprofitable.

As we said before, it looked to us as if the decline in the first half of this year might have been enough of a correction in the ongoing bull market, given the explosive growth of the US economy and of technological innovation generally.

But now things are potentially starting to go wrong. The crunch in oil supplies is real. Even if OPEC wanted to expand production, the available unused capacity is minimal. The cure for low prices, and in this case low oil prices, has in fact been low oil prices. So there was insufficient investment to find more. So demand closed in on supply until there was a squeeze. There will continue to be tight supply for some time to come, and possibly for ever. As a finite resource, we cannot assume that we shall discover more oil as rapidly as it is being consumed, especially seeing how demand is growing inexorably along with the transition of undeveloped economies toward development.

In conjunction with the oil price squeeze, we have, of course, inflationary pressure. The worker that has to pay more at the gas pump wants a higher wage to pay for what goes into his Socially Unacceptable Vehicle (SUV).

With rising oil prices and a domino effect on wages, the only way for inflation to go is up. You can measure inflation all you like without considering food and energy but in the long run they impact all price levels, including each other. A farmer spending more on gas to drive the combine needs a higher price to pay for the higher input costs.

The technical position for the NASDAQ is interesting. The price has made a little better than a 50 percent retracement of the difference between the March high and the May low. A downturn here would fit with 50 percent retracement theory. It would make a major M in the process, the basic first prerequisite of a bear market, the second of which is a lower low than the previous one.

It does not necessarily follow that the indexes or indeed any specific stocks will carve out a bear market. However, you must not think that your stocks will buck a general market decline. In a general decline, 90 percent of all stocks go down. Even those that don't go down, are unlikely to go up by much unless there is some very specific reason, such as we think there is for oil stocks, and as there was for gold stocks in the 1970s. It should be easy to sell stocks that havoc done well for you. That's an exercise in banking a profit. It is equally important, if not more so to sell stocks that are losing money, even if the proceeds seem hardly worth having. Stocks that are beaten up may never come back at all.

New Recommendations

All our petroleum and oil service stocks are a buy now with new money. They have such strong charts and also a strong fundamental case that we could readily envision investing up to 75 percent of a moderately aggressive account in this relatively narrow area. We are talking about investing in major corporations delivering a product as staple as food or banking.

Sell Short Amazon (AMZN) $42.00 Enter a Buy Stop at 62.50. This stock has its back well and truly broken. It looks as if it could go well under $10 in due course.

Sell Short 1 NASDAQ September Futures at approx. 3880. $100,000 margin recommended. Buy stop at 4025.00. Target 3000 for a potential profit of approximately $88,000 against a provision for loss of approximately $12,000.

Sell Short 1 Dow Jones September Futures at approx. 10,530 $25,000 margin recommended. Buy Stop at 10,850. Target 9000 for a potential profit of $15,000, risking approx. $4000. Note that this is an alternative to the NASDAQ.

Even if you are familiar with selling short, do so very lightly. If you are not accustomed to sell short, then your commitment should be extremely light until you get the hang of it.

Stocks to Sell

Sell all stocks except petroleum and oil service stocks. In addition, sell all bonds with maturities longer than five years. See the list below which shows which are which, as some name of oil service companies are not obvious unless you know it.

Cash balances should be held in a money market deposit or in Treasury Bills. They don't pay enough compared with what you might have become accustomed to expect from capital gains but all you need is a parking place. Then you have cash with which to buy stocks when it is timely to do so again.

List of Current Stock Recommendations:

Note that there are several of our current recommendations which might seem to warrant selling on account of the fact that they have fallen hard. Our experience over the past year has been that it generally pays to give a great stock more room to move than many people suggest. We particularly believe that Idec and Sony are outstanding buys on what we believe to have been temporary weakness. Several biotech stocks have come under extreme pressure. Nevertheless, we don't see them going out of business. What we do see is a dynamic sector that has come through a severe thunderstorm, but which is very unlikely to be ending its bull market, let alone starting a bear market.

Action Ratings

The following is the legend for designating immediate action for our stock recommendations. The first is B, meaning 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.

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

First bought Entry Last

6/5/00 ADC Telecommunications (ADCT) 75.81 77.62 SELL
5/15/00 Alberta Energy(AOG) 38.63 40.56 B++
6/5/00 Alcatel (ALA)# $61.44 60.31 67.06 SELL
5/15/00 Apache Corp.(APA) 59.88 56.31 B++
3/2/00 Applied Micro Circuits(AMCC) 136.75 98.75 SELL
6/5/00 Bank of Montreal(BMO)# 42.50 41.88 SELL
6/5/00 Bank of New York(BK) 48.00 44.88 SELL
4/3/00 Beckman Coulter(BEC) 63.75 59.06 SELL
3/2/00 Biomira(BIOM) 17.75 9.25 SELL
3/2/00 Biovail(BVF) 67.56 51.00 SELL
3/2/00 Broadcom(BRCM) 208.50 168.50 SELL
3/2/00 Broadvision(BVSN) 85.75 58.50 SELL
5/15/00 British Petroleum Amoco(BPA) 54.44 57.94 B++
5/15/00 Cdn Occidental Petroleum(CXY)# 26.13 29.06 B++
5/15/00 Chieftain Development(CID)# 20.50 19.62 B++
3/2/00 Ciena(CIEN) 181.50 157.19 SELL
3/2/00 Cognos (COGN)# 33.00 42.94 SELL
3/2/00 Corning(GLW) 200.00 240.00 SELL
6/5/00 Four Seasons(FS)# 62.00 58.75 SELL
3/2/00 Fusion Medical(FSON) 17.75 16.62 SELL
3/2/00 Genzyme Molecular(GZMO) 29.00 15.12 SELL
5/15/00 Global Marine(GLM) 26.38 29.00 B++
3/2/00 Idec Pharma(IDPH) 149.88 108.50 SELL
3/2/00 LSI Logic(LSI) 69.25 64.25 SELL
5/15/00 Nabors Industries(NBR) 42.25 41.38 B++
4/3/00 Novell(NOVL) 28.38 9.12 SELL
6/5/00 PMC Sierra(PMCS) 182.00 190.31 SELL
3/2/00 QLT Therapeutics(QLTI) 73.25 68.75 SELL
3/2/00 Rogers Group(RG)# 33.75 29.12 SELL
3/2/00 Royal Phillips(PHG) 50.10 50.44 SELL
3/2/00 Seagate(SEG) 51.25 60.44 SELL
8/5/00 SDL Inc.(SDLI) 262.44 267.38 SELL
5/15/00 Shell Transport & Trading(SC) 51.75 50.19 B++
5/15/00 Transocean Sedco(RIG) 51.13 44.50 SELL
5/15/00 United Technologies(UTX) 63.50 56.50 SELL
4/3/00 Yahoo!(YHOO) 168.75 131.69 SELL

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