MASTERING
THE TRADE
ORIGINAL, INTERACTIVE SEMINAR ON TRADING USING
TECHNICAL ANALYSIS 

 SEC FILINGS

Today, the NASDAQ rose 45.81 to its third straight record high while the Dow sank for the fourth straight day.  Oils, technology, and biotechs continue to power higher, but cracks have begun to appear elsewhere in the market.

This month's short-lived rally by the cyclical stocks, in particular the chemicals and papers, is now looking like nothing more than a dead cat bounce. After hitting new 52-week highs earlier this month, industry leaders International Paper (IP) and Dow Chemical (DOW) have both fallen beneath their 200-day moving averages.  Despite their recent declines, the majority of chemical and paper stocks remain fully valued.

Although the majority of cyclical stocks are unattractive at this point, pockets of value have begun to appear among several stocks that have lagged behind the broader cyclical group over the past year but stand to benefit from strong Asian economic growth.  Steelmaker Ispat International (IST, forward P/E 8.5, projected 5-year growth rate 25.0%), paper company Asia Pulp and Paper (PAP, forward P/E 8.7, projected 5-year growth rate 30.0%), and construction and engineering giant Foster Wheeler (FWC, forward P/E 8.5, projected 5-year growth rate 8.5%, price/book 0.7, price/sales 0.1) all remain 50% or more below their mid-1998 levels and are attractively valued at current levels.

Like the failed cyclical rally, early January hopes for a rebound in the drug sector are quickly fading as the month progresses. Despite the sector's year long underperformance, we continue to see few signs of value among the drug stocks.  Valuation levels of industry leaders Merck (MRK,  forward P/E 25.4, projected 5-year growth rate 12.4%), Glaxo Wellcome (GLX, forward P/E 27.8, projected 5-year growth rate 11.3%), and Johnson & Johnson (JNJ, forward P/E 26.7, projected 5-year growth rate 13.2%) remain tilted towards the overvalued side of the road based upon their projected growth rates.

While the underperformance of the cyclicals and drugs have been disappointing to investors who eagerly snapped up their shares earlier this month, the failure of the transports and financials to confirm the recent highs in the major averages is sounding a technical warning bell to all investors that trouble may lie ahead.  The Dow Transports have broken below their October lows, sending Dow Theorists running for cover.

The NYSE Financial Index ($NF), which over the years has proven to be a good leading indicator of future market activity, peaked in July 1998.  The two most recent rally attempts by the index were stopped dead in their tracks by resistance at the index's 55-day moving average.  The post -earnings release slides, despite results that surpassed estimates by a mile, endured by Paine Webber (PWJ) and JP Morgan this week is sounding a warning bell that should not be ignored.

The selling on the news that greeted bellwether General Electric's (GE) earnings this week is sounding yet another alarm bell.  The stock fell 6.88 on the week to close even with its 55-day moving average.  A failure of the stock to hold this support level could put additional pressure on the blue chips next week.

Equities enter the week riding on a reborn cloud of euphoria following last Friday's benign CPI numbers that convinced traders that the damage from the Fed's February soiree will be limited to 25 basis points.  Sentiment in the bond market sits at the opposite end of the scale as unrepentant demand, tight labor markets, and surging stock prices convince traders that the Fed's bite will be far harsher than many expect.

Stock traders will play little notice to this week's batch of economic data, leaving traders free to concentrate on the week's flood of big name earnings releases.  The week's parade of earnings releases kicks off on Tuesday with Bank of America, Abbott Labs, Delta Air Lines, and Wells Fargo before the bell.  Microsoft, Broadcom, DoubleClick, and Xilinx head up a flurry of technology earnings releases after the close today.

America Online's earnings on Wednesday, and IBM's post-release conference call on Thursday will also be closely watched.

With superlative fourth quarter results already fully discounted in current stock prices, selling on the news is likely to be the norm this week, and only those companies that exceed the top end of expectations are likely to be spared from the post-release blues.

While a focus on earnings will temporarily divert the stock market's attention from the upcoming FOMC meeting this week, all eyes in the bond market will remain on the Fed and the economy this week.

The release of the Fed beige book and Housing Starts numbers on Wednesday are unlikely to provide any surprises, but the surge in consumer demand during 1999's waning days is likely to feed through to Thursday's trade figures, with  higher than expected Trade Deficit numbers putting pressure on bonds and the dollar as the week winds down.

The one saving grace for bonds this week could be the depths to which sentiment has sunk in the bond pits.  Combine a roomful of depressed traders with a TYX (30-Year Treasury Yield Index) severely extended over both its 21-day and 55-day moving averages, and the ingredients for a short-term bond market rally are there--but only if stocks nosedive and the inevitable flight to quality develops.

The bond market will also have its eye on Europe this week where the ECB is expected to raise rates by 25 basis points on Thursday.  Stronger than expected inflation figures from Italy this morning have made a rate hike a near certainty.

 While the odds of a larger than 25 basis point hike are slim to nil, any hints by the ECB that the current rate hike cycle will be a prolonged one are likely to cause skittishness in both the U.S. bond markets and overextended European stock markets.  In Europe this week, we would avoid the German DAX, where a 40% rise since October makes the market a correction waiting to happen, and Amsterdam's AEX, where valuation levels make the market a bubble waiting to burst.

Despite the stock market's post-CPI proclamation that the bugaboo of inflation was dead and buried, inflation concerns will once again weigh on the bond market this week as a surge in oil prices to $28 a barrel strikes fear into the hearts of young and old. Although commodity price inflation has largely been limited to crude oil, the strong rebound in global growth means that the question has now become when, not if, other commodity prices will also begin to rise--a question that is likely on the minds of both the Fed and the European Central Bank in coming months.