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Posted
7/28/2000
Kenner &
Niederhoffer
What's next for
Wall
Street
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Extra!
There's light at the end of summer
Yes, it was a
painful week. Yet the weighty factors that affect stocks most are as
bright as they have looked in past years. Every uplift must begin
somewhere.
By Laurel
Kenner and Victor Niederhoffer
The market ended one of the worst weeks in
history. In just six trading days, the Nasdaq Composite ($COMPX)
dropped 12% and the S&P 500 Index ($INX)
lost 5%. The Dow ($INDU),
the relative stalwart, fell 3%.
The Nasdaq closed at the lowest level since June
1, and the S&P ended the month just below where it closed on May
30, the day after Memorial Day, after going up and down Jacob's
Ladder from 1,422 to 1,510 on July 17 and back down to 1,419. It was
the worst July week in the past decade, and perversely followed the
best July week in the past decade.
Realize that Friday's declines in both the Nasdaq
and S&P were of magnitudes fortuitously visited on investors
only two or three times a year. These visitations are designed to
shake investors from their positions just before a major rally.
During the summer, there is not an excess of chips to go around, and
the evil invisible hand of the market often searches for weak
longs.
In the summers of 1997
and 1998, and now the summer of 2000, the market found stocks the
field of least effort. The S&P 500 also topped out on July 17 in
1998. In 1999, it peaked on July 16 (July 17 was a Saturday that
year).
Taking out the pencils
and slide rules from our pockets to calculate what has happened
after past routs of similar magnitude, we can say that to the extent
that past is prologue, the odds are 4:1 that in two weeks we will be
substantially higher than we are today.
The weighty factors look good
At times like this, it's good to reach for the
roots upon which investments are built. The three major determinants
of stock prices are earnings growth, interest rates and
risk.
Kenner &
Niederhoffer
Victor
Niederhoffer has traded stocks, currencies and futures worldwide for
the past 40 years; he is the author of "The Education of a
Speculator." Laurel Kenner is a trader and former Bloomberg markets
editor. In a special series of weekend columns for MoneyCentral,
they'll assess the past week's Wall Street performance and next
week's prospects. Let us know what you think in the Start
Investing Community.
The profit outlook is perhaps the best it
has ever been. With four-fifths of the companies in the S&P 500
having reported second-quarter earnings as of yesterday, the average
gain over last year's second quarter was 16%. If companies do well
in one quarter, they're likely to do well in the subsequent one.
Further, 65% recorded positive earnings surprises. This augurs for
raised estimates and better actual earnings for the
future.
Long-term bond yields,
the second leg of the stool, are at 5.78%, close to 16-week lows,
and well below the magic 6%.
As for risk factors, the market is likely to
maintain itself on an even keel until the presidential election, so
that incumbents will be able to maintain the power of the purse to
as great an extent as they can manage. With the federal, state and
local governments accounting for some 50% of personal income these
days, that extent is very large.
In short, the three factors that affect stocks the
most are as favorable as they have looked in past
years.
Is there a rally in the
offing?
The one negative is the
incessant drumroll of bearish imprecations emanating from those who
have missed the market for the last 10 years and still cling to
hoary rules of thumb that went out of date when Ben Graham threw in
the towel in the early 1950s.
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Market
Recap
Read Briefing.com's weekly
market recap on MSN MoneyCentral's Investor.
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With a feeling of supreme confidence,
then, we regretfully must report that we will be unable to share
calming words during the next month. We will be away on that eternal
summer quest to find the sources of good and bad in the market. Vic
plans to retrace the steps of Don Quixote in Spain with an entourage
of 10 family members, searching for the golden days when damsels
could wander through the woods unmolested and trees offered their
fruit to all who were hungry. Laurel, for her part, will look high
and low for truths about stocks, starting out in the Colorado
mountains at the annual Eris Society meeting and proceeding to the
California shores.
Before we
leave, we will share some uplifting results from a study of this
month's losses, as well as reviews of the performance of two of the
portfolios we have recommended since beginning this column in
April.
| The Week
Ahead |
Economy
Tuesday is loaded with economic reports:
The Commerce Department releases Personal Income,
Auto Sales and Construction Spending
figures. Wednesday brings New Home Sales from
Commerce. On Thursday, look for the Labor Department's
Initial Jobless Claims numbers and Factory
Orders from Commerce. Friday, expect Unemployment
Rate figures from the Labor Department.
Economic Calendar |
Companies
Earnings are slowing to a trickle again. On
the tail end is Hewlett-Packard's (HWP,
news,
msgs)
report, coming Friday. Hobnobbing with analysts this
week are Motorola (MOT,
news,
msgs),
Alcoa (AA,
news,
msgs),
Exxon Mobil (XOM,
news,
msgs)
and EMC Corp. (EMC,
news,
msgs).
At midweek, look for the Adams, Harkness & Hill
Summer Conference, featuring CMGI Inc. (CMGI,
news,
msgs),
Sapient (SAPE,
news,
msgs),
Scient (SCNT,
news,
msgs)
and Teradyne (TER,
news,
msgs).
Thursday is the start of the Morgan Stanley Dean Witter
Internet & Financial Conference, New
York.
Events
Calendar | Splits
Calendar |
Life
Summer
sunshine is interrupted Sunday with a partial eclipse
of the sun, visible in western North America in late
afternoon and lasting about 90 minutes. Monday starts
the Republican National Convention in
Philadelphia. The National Black Arts Festival
opens in Atlanta this weekend and continues through Aug.
6, showcasing 1,500 artists in music, theatre, film,
literature, dance and visual art. Ted Turner
speaks at the Bison Are Back 2000 conference next
week in Edmonton, Alberta (Turner owns some 17,000 of
the shaggy beasts). And don't forget the Maine
Lobster Festival, next week through Aug. 6, in
Rockland. The American Psychological Association
annual meeting begins Friday in Washington, D.C. Triple
word score: Don't miss the National Scrabble
Championship, through Aug. 10, in Greenport, N.Y.
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Every uplift must begin somewhere, and July has
provided more than its share of starting points. Many stocks
suffered tremendous one-day declines, some related to earnings
reports or profit warnings, and others seemingly just bystanders in
an ornery market.
When we
started counting, we found that no less than 43 of the Nasdaq 100
($NDX.X)
recorded one-day drops of 10% during July. Eight did it twice, with
the ignoble roster consisting of Ciena (CIEN,
news,
msgs),
MedImmune (MEDI,
news,
msgs),
KLA-Tencor (KLAC,
news,
msgs),
Vitesse Semiconductor (VTSS,
news,
msgs),
BroadVision (BVSN,
news,
msgs),
RealNetworks (RNWK,
news,
msgs),
QLogic (QLGC,
news,
msgs)
and Atmel (ATML,
news,
msgs).
Altera (ALTR,
news,
msgs)
got hit three times.
Twenty-two of those 10% declines occurred today
and Thursday. The biggest losers in the group Friday were ADC
Telecommunications (ADCT,
news,
msgs),
SDL (SDLI,
news,
msgs),
Ciena, Gemstar-TV Guide International (GMST,
news,
msgs),
Sanmina (SANM,
news,
msgs),
Nextlink Communications (NXLK,
news,
msgs),
Adelphia Communications (ADLAC,
news,
msgs)
and Apollo Group (APOL,
news,
msgs).
American Power Conversion (APCC,
news,
msgs)
was in a class by itself, with a 44% loss.
Always alert to the lucrative smell of panic, we
looked at the 18 instances where July decliners in past years have
had the opportunity to recover for one week. On average, they were
up 6.8% a week later, better than the 2.7% an investor would have
gained from buying Nasdaq 100 futures.
Stocks that have had two weeks to recover have
done even better. The average move was a rise of 10%, compared with
a 1.3% advance for the Nasdaq 100 futures.
|
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It is appropriate, now that almost half
of the Nasdaq 100 have experienced 10% corrections, to recall the
dark days of April and May, when dozens of stocks tumbled from the
firmament above $200 to the hell below $100. On May 5, we
recommended a list of 35 of those fallen stars. We are pleased to
report that as of Thursday's close, our Down 35 stocks were up an
average of 70%.
Using the
Nasdaq 100's 0.2% decline in that period as a benchmark, we might be
tempted to perform high fives if our rules didn't require us to
immediately get out of our positions whenever high fives are
exchanged.
Our Insider 20
portfolio also has outperformed its benchmark, with an average move
up of 3.8%, compared with a 0.7% gain for the S&P Midcap Index
($MID.X).
We will miss our readers over the next month, and
are sorry to take our leave. On our journeys, we will not refrain
from wireless communication with any correspondent who has wisdom of
a universal nature to share, whether we are in mountains, desert or
sea, beset by giants or within striking distance of
dragons.
We fully expect that
when we return in September, having gained knowledge from our
pilgrimages and wealth from our open long positions, that everyone
who uses proper money management in adding armor to their investment
portfolios will be in a much more halcyon state of
mind.
Until then, we leave you
with the words of Miguel de Cervantes, from Chapter 11 of "Don
Quixote":
Happy times, and happy ages, were those which the
ancients termed the golden age! In that blessed age, no other labor
was necessary than to raise their hands and take it from the sturdy
oaks, which stood liberally inviting them to taste their sweet and
relishing fruit. The limpid fountains and running streams offered
them, in magnificent abundance, their delicious and transparent
waters. In the clefts or rocks, and in holly tress, the industrious
and provident bees formed their commonwealths, offering to every
hand, without interest, the fertile produce of their most delicious
toil. All was peace, all amity, all concord. Then did the simple and
beauteous young shepherdesses trip from dale to dale, and from hill
to hill, their tresses sometimes plaited, sometimes loosely flowing,
with no more clothing than was necessary modestly to cover what
modesty has always required to be
concealed.
At the time of publication, Laurel Kenner was
long MedImmune.
MSN Money's editorial goal is to
provide a forum for personal finance and investment ideas. Our
articles, columns, message board posts and other features should not
be construed as investment advice, nor does their appearance imply
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strategy. An investor's best course of action must be based on
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