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THE REAPER
P.O. Box 84901, Phoenix, Arizona
(September 25, 1997) STOCK INDICES: While Value Line made new highs, as did many secondary stocks, the blue- chip Dow Jones Industrials have not. Neither did December S&P. The New York Composite Index effectively double-topped. The secondary stocks moving higher, while blue chips such as Coca Cola, GE, Disney, IBM, McDonalds and Gillette have been hit, is of concern. Are the dogs and cats running? The strong U.S. Dollar, the devaluation of the Asian currencies, the depressed economy in Europe–all are hurting blue-chip multinationals' exports. Investors have been chasing utilities and REITs for yield. However, it's time to take some profits in utilities and REITs, or at least protect long positions with close protective stops. The disintermediation of funds into bonds out of stocks continues. The increase in specialist short-selling is bearish for U.S. stocks. We have been/are in a blow-off. And we're entering the time of year when stocks are historically under selling pressure. Jim Stack of InvesTech noted that the DJIA, based on price-to-earnings data, could fall to 4100 and only decline to its average valuation of the past 76 years; that the price-to-dividend ratio of the DJIA could fall to 3317, before reaching its average valuation of the past 72 years; and that based on price-to-book value, the DJIA could tumble to 2719 before reaching its average valuation of the past 74 years. That's a long way down. We are in my turning point time frame right now, September 25-29 for financials. Also watch the October 10-13 dates. There is concern at the roughly 2800 stock market mutual funds, because some of these young fund managers, under 30, are beginning to behave wildly like rock stars, throwing temper tantrums, heaving TVs out of hotel windows and the like. Playing god never lasts for long. With the firming of gold and silver, the mining stocks could very well improve. Newmont Mining, Barrick Gold, Franco Nevada, Euro Nevada, Crystallex, Berna, Silver Standard, Yuma Copper, Metallica Resources, Gitennes, Francisco Gold–all have been mentioned here before. With energy firming, so could the energy stocks. Royal Dutch, Exxon, Shell, YPF, Ultra Petroleum, Seitel, Sonat and Enron (two natural gas stocks on the NYSE) could improve. Stocks in Singapore (the Singapore Fund) could be close to being a buy, buying when blood is in the streets. Many of the emerging stock markets in Asia have given up all of their gains over the past three years, with many down 50% or more. Moreover, some of the Asian currencies have been devalued 20% or more. Along the same line, Bangkok Bank in Thailand (BKKPF:OTC) could be close to being a long-term buy and hold. Other stocks which have captured my attention include Dresser Industries (DI:NYSE), which provides products and services to the oil and gas industry; Helmrich and Payne, Inc. (HP:NYSE), a provider of contract drilling services, and an oil and natural gas producer; Norsk Hydro (NHY:NYSE), a Norwegian producer of fertilizers and chemicals, oil, gas and light metals. The DJIA has resistance now at 8000. A close below 7600 will issue an impressive intermediate sell signal. December S&P has effectively double topped at 970. A close below 900 will issue a strong intermediate sell signal. The stock market is overbought on the stochastic indicator.
RECOMMENDATION–Up to 10% in the long term investor's portfolio is invested in the speculative stocks discussed in each issue of this section of The Reaper, including utilities, oil stocks, REITs, and natural resource stocks, and another 10% is invested in mining stocks. Investors who have hedged against a bear market in stocks generally should continue to hold a 10% position in the Rydex Ursa Fund, as also discussed in the long-term investor's portfolio. Cautious and speculative investors have hedged stocks by purchasing and holding LEAP puts on the S&P, such as the December 1998 55 and 65 puts. High-risk speculators who expect a bear market in stocks before year-end have purchased put options in the December S&P futures contracts. Very high-risk futures investors may sell December S&P short preferably on strength, with 975 close–only protective stops, holding for a test of 800.
R. E. McMaster, Jr.
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