THE OPTION ADVISOR Prepared by Schaeffer's Investment Research
(December 22, 2000) Liz Claman led off my December 8 CNBC "Taking Stock" appearance by asking me to contrast my negative outlook for the NASDAQ Composite (COMP-2340.10) with the bullish posture I had held on the COMP from the day after the 1987 crash (with the COMP at about 325) through October 2000 (see my October 26, 2000 Option Advisor market commentary with the COMP at 3272). My response was identical to what I said in my October 26 commentary: "But I'm not buying this (bottom) scenario yet. Yes, this is the same Bernie Schaeffer who screamed 'buying opportunity of historic proportions' in October 1990, November 1994, and October 1998. The problem is simply that I was virtually alone back then." And not much has changed since I spoke with Liz on CNBC. In fact, the degree of complacency with which a plunge of more than 50 percent in the COMP has been greeted on Wall Street and on Main Street is beyond the pale. Wall Street strategists are chirping "bottom" at every opportunity and market letter writers are as bullish now as they are during roaring bull markets. And this from the December 21, 2000 issue of The Wall Street Journal: "Indeed, 29% of average individual investors still think now is a good time to buy, compared with 4% who think it is a good time to sell, according to a Gallup/PaineWebber survey." Speaking of PaineWebber, I must note their full-page ad in the December 20, 2000 Journal headlined, "This is One of the Five Best Opportunities to Own Stocks in the Past Twenty Years." And I won't even quibble with why they used the word "own" instead of "buy" I guess it's just a great "owning opportunity." Looking at the averages from a long-term technical perspective, I continue to see a much stronger case to be made for a potential bottom in the S&P 500 Index (SPX-1274.86) than for the COMP. At today's lows, the SPX almost touched its super-long-term 40-month moving average at about 1250. The 1994 SPX decline was contained at the 40-month moving average, and the 40-month was clearly penetrated only during the bear markets of 1990 and 1987. In contrast, the COMP already closed below its 40-month moving average in November and would need to finish December above 2700 to avoid two consecutive monthly failures at this moving average. And note that the COMP managed to close above its 40-month in both September and October 1998. But haven't the big techs become "cheap" at current levels? "Cheaper" would be a much better description. Market caps on the "Four Technology Horsemen" include CSCO at $270 billion, ORCL at $165 billion, EMC at $130 billion and SUNW at $85 billion. Not exactly anemic, and the sum of these four market caps probably exceeds that of the entire biotechnology industry. Price/earnings ratios? Trailing p/es are 92 for EMC, 90 for CSCO and 43 for SUNW, with ORCL selling for about 60 times projected earnings. I don't want to exude total gloom here, as big tech has come down a long way and there will certainly be trading opportunities developing on the long side. But in the midst of this "great bottom hunt" with which most investors now seem to be preoccupied, I'm reminded of a quote from Jesse Livermore, perhaps the greatest trend-following stock trader of all time: "Stocks are never too high to begin buying or too low to begin selling short."
December 22, 2000 Bernie Schaeffer Schaeffer's Investment Research 1259 Kemper Meadow Drive, Suite 100, Cincinnati, Ohio 800-327-8833
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