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The Bull Market: Bull Exhaust?

Column
Column
Column
8/17/2000

Despite what the daily paper says, despite what CNBC pundits say, and despite what any sell-side analyst tells you, this is a troubling time on Wall Street.

It's troubling for those of us searching for the good technology deals, the fairly priced stocks of good companies with prospects for growing into their valuations — especially optical neworking companies. Of course, technology like optical networking has years of growth ahead of it, but such optimism has already been priced into most of these stocks. Many of the deals seem to be gone, even after the crash. In other words, it's become a lot harder work as a technology investor.

If you've invested wisely over the long term in the most fundamental sort of technology plays — the leaders and the gorillas — you're fine, though it's highly possible the market's going to give you one more haircut on the most overpriced stocks. And if you were caught up in the moment — the worst kind of blind bull, TNT-mini-series moment during the peak of the Godzilla-powered market of 1999 — you may be in serious trouble.

That's why, lately, it pays to listen to the technical analysts. With fundamentals thrown out the window, there's nothing left to depend on but the technicals. The technical analysts — or even those fundamentalists that lean heavily toward the technicals — have the most unemotional view of the market. They can look at a chart and dissect the market signals, without letting emotions interfere.

To a neophyte, watching a technical analyst at work is a little like watching black magic. They get out various colors of pens and paper — or simply use colored lines generated by a computer — and criss-cross a stock chart with "support" and "resistance" lines. But to the expert, it's a crucial exercise. For many investors, entering the market without analyzing the charts is akin to wandering into the Alaskan wilderness without a compass.

That's not to imply that any two technical analysts are alike. Don Luskin, the CEO of Metamarkets, who writes a daily technical analyis column on Metamarkets.com, leans heavily toward the short-term view. "Kensey," the founder and leader of the techically inclined community over at Clearstation, sometimes seems deeply cynical and reactionary in his emails to members (you can get Kensey's daily updates by becoming a member at Clearstation), eager to bail on or short companies whenever a chart starts breaking down. And a man I will call "Mr. C," a private money manager in Manhattan who asks not to be named, is skeptical of all the easy money that was earned last year: He believes we are all going to pay for the foolishness that has bid up many technology issues to unsustainable prices.

"The complexion of the market has changed," says Mr. C. "There are now greater forces at work."

The greater forces are the underlying economy and the inherent value of stocks. Mr. C comes to the conclusion that there is an underlying uneasiness in the market, after flipping through an impressive number of technology charts — including those of individual stocks as well as indexes and leading indicators —and finding that many of them are breaking down, in spite of the July mini-rally. He says the charts show that the July buying spurt confirmed what he was starting to suspect: There would be no imminent return to the "majestic" bull market of 1999. The charts of many of the stocks that surged in July showed them making lower highs accompanied by declining volume. When overlaying technical indicators such as the various short- and long-term moving averages and a technical indicator known as an MACD, these charts paint a very ugly picture. The recovery has been weak. In short, it's a false rally, according to Mr. C.

One example of an individual chart that's breaking down? Teradyne Inc. (NYSE: TER). "The moving averages flattened out, and then the price fell below a flattened moving average," says Mr. C. "When that happens, it's bar-the-doors time."

A rally after good earnings news? Mr. C shakes his head. It means nothing. The rallies in many such cases have been progressively weaker. And besides, the earnings news can't possibly be good enough to meet the expectations, especially in the case of some of the nosebleed stocks trading at 300- or-500 times forward earnings. "Earnings are a reflection of what has been, not what will be," he says.

In short, he thinks we've priced years of future optimism into the tech stocks we love. If the economy stumbles, we're in for some more serious house-cleaning.

Feeling depressed by Mr. C? You can always wander over to Metamarkets, where Mr. Luskin always manages to glimpse a patch of blue sky, no matter how grim the market looks. Lately, his charts show the Nasdaq Composite bouncing off one of his lines of heavy resistance, establishing a tertiary higher low from the May crash. Such a progression of higher bottoms in the charts is positive, according to Mr. Luskin, giving him the gumption to write "Great Bull Market Lives!" in Wednesday's long-term prognosis.

Of the next-generation networking plays, Mr. C thinks the valuations are insane — as many people do — but some of the charts show near-term strength. The greater question is whether these stocks can challenge their all-time highs. Of that, Mr. C is skeptical. He likes (and owns) stocks such as Redback (Nasdaq: RBAK) and Sycamore (Nasdaq: SCMR), but can't fathom buying them at their current prices.

"Investing in Sycamore at a $35-billion market cap does not seem like smart investing to me."

-- R. Scott Raynovich, Executive Editor, Light Reading (http://www.lightreading.com)

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