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

 SEC FILINGS

Our disappointment with market internals aside, the Dow will likely make an afternoon run at 10,000 today provided there are no unpleasant surprises in the P.P.I..   The S&P futures have held up well in the face of a disappointing earnings report from Oracle (and a 20% slide in Oracle's stock on Instinet) and yet another warning about personal computer sales growth, this time from National Semiconductor.  The S&P futures, which closed at a 19 point premium to cash yesterday, are currently trading up 2 points to 1318, which is the resistance level we mentioned in Tuesday's column.

Events in overseas markets have played a large part in negating the negative tech sector news.  European equity markets are in rally mode this morning as they continue to cheer the resignation of Germany's Finance Minister.   In London the FTSE-100 is at a record high, and in Germany the DAX is currently up 5.44% and within 3 points of resistance at 5015.  In Asia, the Japanese government approved a 7.5 trillion yen bank bailout and many observers continue to grow more optimistic about Japan's chances for recovery.

With the Dow knocking on 10,000 after a decade long bull market, it is perhaps to Japan that we should turn our attention.  We have mentioned the parallels between the Japanese bull market of the 1980's and the current U.S. bull market several times in the past, but there are also other  similarities between the economies of the two nations.

The Japanese economy, like the U.S. economy, is largely consumer driven with consumer spending accounting for 60% of the economy.  When consumer confidence fell in Japan and the Japanese consumer cut back on spending after a tax rise, the economy fell into a deep recession.  Today's Japanese GDP figures show the economy shrinking for the 5th quarter in a row despite a massive spending spree by the Japanese government. The economy shrank by 3.2% in 1998, and corporate profits are expected to fall by 25% in the fiscal year that ends on March 31st.  In the U.S. it will also be a loss of consumer confidence that signals the end of the current economic expansion and leads to a period of severe recession.

The belief in a never ending period of economic expansion and rising stock prices that existed in Japan in 1989 has long since disappeared from the memory of Japanese investors. The lessons that we have learned from watching Japan struggle in the aftermath of a failed new paradigm economy should be remembered and studied closely by U.S. market participants today because unlike diamonds, economic booms and  buoyant consumer confidence don't last forever.

Despite the new highs, yesterday's market action was characterized by narrow breadth and was not inspiring, to say the least.  The S&P rally was largely limited to the financial and oil stocks, and it took an analyst pep talk (and a few gravity defying price targets) on internet stocks to save NASDAQ from a losing day.

The market's narrow breadth yesterday and the strong negative divergence exhibited by the advance/decline line during this year's march to new highs continues to trouble us. Equally bothersome is the inability of the Transports and Utilities to confirm the new highs.  Perhaps most troubling is the extreme bullishness and disregard for market history that many analysts continue to exhibit.   During prior market tops, historical valuation measures have also been cast aside in order to justify a continued rise in already inflated prices.

Equally reminiscent of prior market tops is the isolationist bubble that many analysts have once again retreated into.  The lessons that were learned last year have been forgotten by many participants on the street, who have once again slipped into their old beliefs that the U.S. economy operates apart from the larger global economy.

While the bubble in internet stocks has received the press coverage this year, it will not be a decline in internet stocks that triggers a serious market decline.  Rather, it will be, as we said yesterday, an unexpected event from the forgotten global economy where the possible triggers continue to increase.

Oil producers meet in Amsterdam today, and the Bank of Japan's policy committee meets tomorrrow.  Both meetings will likely end on a bullish note and prompt short term rallies, but we have seen this same story unfold before, and always with the same results.  The likelihood of both OPEC and the B.O.J. being able to fulfill their promises is slim, at best...and then there's that pesky rupiah, which today broke sharply below the 9000 support level.

We do not view the current concern over semiconductor earnings, and the accompanying change in investor sentiment towards technology stocks, as a sign that sentiment in the overall market has changed.  The semiconductor stocks are anything but a bellwether for the overall market or for investor's attitudes towards the overall market.

Investor sentiment towards the overall market remains on the extreme bullish end of the spectrum, and yesterday's tech induced slide not withstanding, the market's bellwether stocks remain strong.  General Electric and the brokerage stocks gained ground yesterday amidst a decline in the major averages.  A reversal in sentiment towards these stocks will be needed before the market can begin a serious decline. 

There were no negatives in action in overseas markets overnight to put a damper on sentiment in the U.S. this morning.  The Hang Seng continued its surge, climbing another 2.05%.  The Sony rally continued in Tokyo, with Japanese stocks gaining another 2.54% and breaking above both the 15182 and 15374 resistance levels.  Europe has opened on the down side, but here too there exists a positive that will boost U.S. stocks.  U.S. Banks stocks are up in Europe on hopes that the pace of consolidation in the industry will pick up in the wake of the hostile Banque Nationale de Paris bid for its two French banking rivals Societe Generale and Paribas.

While yesterday's market was dominated by Intel's anti-trust settlement with the Justice Department, today's market will likely be dominated by hope.

Hope dominated overseas markets overnight. Hong Kong surged 2.6% and broke above resistance at 10462 on a continued rise in Hong Kong Telecom and renewed hopes that the economy and property sector have bottomed.  In Japan, the Nikkei surged 317.65 to close above 15,000 after Sony announced a restructuring and raised renewed hopes that Japanese industry is on the verge of a turnaround. 

Hope has also dominated market action in Europe this morning.  U.K. banks rallied on hopes that Britain will be able to avoid a recession this year.  European shares rallied on hopes that profits will grow after German kidney dialysis giant Fresenius AG reported stronger than expected profits.

This morning's market action in the U.S. is likely to be a tug of war between AMD's earnings warning and the dual hopes that Microsoft is nearing a settlement of its anti-trust suit and that the Fed will not raise rates.  After an initial battle, we expect hope to win out and the market to rally once again.

Hope can mask reality for long periods of time, but it can not overcome the facts in the end.  In Japan, the reality is that Sony's restructuring is a desperate move to stop its deteriorating profit outlook amidst a Japanese economy that is mired in a decade-long post-bubble slump.  In Europe, the German economy is contracting and the German government must take action if Germany is to avoid slipping into the same deflationary spiral that has gripped the Japanese economy.

In the U.S. stock market, hope has been able to overcome, and mask, historically high valuation levels and a continued deterioration in world economies.  We suspect that this blindness to reality may be about to change however.   The potentially negative effects of the rise in the dollar on the profits of large cap U.S. multinational giants has gone largely unnoticed by the average market participant, but earnings warning season is just around the corner.

No major U.S. economic news is scheduled until Thursday when retail sales figures will be released.  We look for the retail sales figures and Friday's Producer Price Index to meet market expectations and to have a minimal effect on the stock market this week.   The market's attention this week will be focused on the Dow's run at the 10,000 mark.

Excessive optimism is likely to propel the market over the 10,000 mark this week. The next overhead resistance levels are at 9813 and 10,061.   The party is likely to end soon after the market goes over 10,000 however.   The new highs in the Dow have yet to be confirmed by corresponding new highs in the Utilities and Transports. The advance/decline line continues to hover near October's lows. Investor sentiment is once again creeping up to levels that correspond with past market tops and the internet stock bubble continues to expand. 

In New York yesterday, the Dow Jones Industrials surged 191.52 after IBM and Dell announced a $16 billion dollar technology sharing pact that could translate into increased revenues for both companies.  What investors chose to ignore was that the move is largely a defensive one by both companies as industry participants struggle to deal with the effects of the PC industry's shrinking rate of revenue growth.   The deal will do little to arrest the slowdown in PC revenue growth. Even after their recent price declines, shares of both IBM and Dell are still trading near the upper end of their 3 year P/E ratio range and still do not reflect the slowdown that is taking place.  Investors however chose to put these fundamental worries temporarily aside as they were swept away by the excitement of yet another deal taking place.  Overlooked in the bullish excitement that many investors are caught up in when a new alliance is announced or a new merger is proposed is one basic fact: despite the increase in mergers over the last year, there has been a decline in corporate profit growth. 

In Tokyo today, investors also saw a half full glass as they bid the Nikkei up 5% on the day.  The reason for the optimism: low interest rates, and hopes that a falling yen will lead to increased profits for exporters.   What investors chose to ignore is that with interest rates already near zero the Japanese government has little room for error in its last ditch attempt to break the Japanese economy out of a downward deflationary trend that has it tottering on the edge of depression.  On Friday the latest wholesale price figures came out and the results were not indicative of a country about to break out of a deflationary cycle: prices have dropped 2.1% over the last year and are now at their lowest level since 1979.