Stockscom Special Report for Wednesday, December 6, 2000

The Bear Market Resumes

Reinstate Short Positions

Yesterday’s immensely powerful up day for stocks, including the record percentage gain for the NASDAQ, seemed to be putting in place a weekly Lindahl buy signal for the Dow Jones and the SP Mid-Cap stock indexes. Given that there is almost always a powerful year-end rally, there seemed to be a big risk in holding short positions and a reasonable prospect of reward from buying selected stocks already showing strength.

Good-bye to all that! When we set about trying to make up a buy list, the task proved too difficult. Then we were overtaken by the failure of yesterday’s rally to follow through. There is always a trade-off between seizing the moment and exercising due diligence, and sometimes you are certain to get it wrong both ways. Sometimes you delay because you wait for the balance of the evidence to improve, and the favorable entry gets away on you. Sometimes you pull the trigger too fast in anticipation and the case for acting blows up in your face.

As we look at stocks tonight, the case for owning most stocks has never looked worse any time since the bear market began. More and more stocks look to be fading out, even now including Merck (MRK) and Boeing, which appear to be topping out, MRK with an apparent island top. Among the NASDAQ 100, we see tonight a grand total of just one stock into which we could envision putting new money, namely Sigma-Aldrich (SIAL). In the event of resumption of the downtrend in the general market, it is most importable that this stock would resist the general selling. We were also looking at Genzyme last night as a possible buy, but the same principle holds. When the stocks are declining across the board, people sell what they can sell. Many people succumb to the tendency of human nature to sell stocks in which they have profits while hanging onto their losers. Although this is the exact opposite of what you need to do to survive, many people hate taking losses. It is worth stating again the axiom that you must cut your losses. Losses, particularly in a bear market, only get worse. Look at the chart for a Lucent or AT&T.

Reinstate Short Sales

For investors able to assume some risk, we recommend selling short the following stocks, essentially the same list as we had before, but not now including Microsoft and Ebay: Amazon (AMZN), Dell (DELL), IBM. There are several stocks like Gateway (GTW), which might be even better but it’s hard to sell a stock that never rallies. Besides, there may not be an uptick to sell on. There are no telcom or telcom suppliers that warrant retention in our view, not even the likes of Nortel and Ciena. It would be the easiest thing in the world for them to halve or worse from current levels.

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