Analysts Zig, Investors Zag: Seeing Opportunity in Stock Downgrades

Three days was the morning. My focus was three days old. My head, it landed to the sounds of cricket bows. I am a proud man anyway. Covered now by three days.

Three ways was the morning. Three lovers in three ways. We knew when she landed, three days she'd stay. I am a proud man anyway. Covered now by three days.

We saw shadows of the morning light the shadows of the evening sun till the shadows and the lights were one.

SAN FRANCISCO -- Tuesday, investors overcame the disappointing news from Nokia (NOK Quote - Cramer on NOK - Stock Picks). Wednesday, they surmounted cautious comments from Cisco Systems (CSCO Quote - Cramer on CSCO - Stock Picks). Today, they shook off the warnings from Yahoo! (YHOO Quote - Cramer on YHOO - Stock Picks) like so many dandruff flakes on Tim Koogle's black turtleneck.

In journalistic circles, the third time isn't just a charm, it's a trend. And the trend has turned decidedly positive for stocks, particularly of the tech variety.

The Dow Jones Industrial Average rose 0.1% today and the S&P 500 gained 1%, while the Nasdaq Composite and Nasdaq 100 each leapt 4.6%.

Market internals reflected the positive tone, with advancers besting declining issues 4 to 3 in NSYE trading, where 1.4 billion shares traded, and by 27 to 11 in Nasdaq trading, where 2.8 billion shares changed hands. New 52-week highs bested new lows 159 to 15 on the Big Board and by 67 to 24 in over-the-counter trading, only the fifth time that's happened on the latter since Nov. 1.

In addition to that and overcoming whatever concerns (few, apparently) Yahoo! generated, tech advocates looked past negativity on the chip sector from analysts at Merrill Lynch, Deutsche Banc Alex. Brown and Salomon Smith Barney.

Despite earnings estimate cuts from Merrill Lynch, Advanced Micro Devices (AMD Quote - Cramer on AMD - Stock Picks), Analog Devices (ADI Quote - Cramer on ADI - Stock Picks), Linear Technology (LLTC Quote - Cramer on LLTC - Stock Picks), and Texas Instruments (TXN Quote - Cramer on TXN - Stock Picks), each rose more than 5.5%. Applied Materials (AMAT Quote - Cramer on AMAT - Stock Picks) gained 3.6% and Teradyne (TER Quote - Cramer on TER - Stock Picks) rose over 6% despite earnings estimate reductions by DB Alex Brown. The Philadelphia Stock Exchange Semiconductor Index jumped 5.8%.

Yesterday, Charles Payne of Wall Street Strategies observed investors' growing tendency to look at analysts downgrades as buying opportunities. He returned to the theme in a report today (when chips were just one example of a repeat of the trend), expressing a sentiment I gather is widely shared.

"It just smacks of disingenuous[ness] that these [brokerage] firms would reiterate 'buys' all the way down, then try to look out for our best interests by sounding the alarm at such depressed levels," Payne commented. "Obviously it isn't working, and will only widen the chasm between Main Street and Wall Street."

But the influence of certain analysts was on display with Intel (INTC Quote - Cramer on INTC - Stock Picks), which rose 1.1%. Merrill cut numbers on the chip giant but investors paid more heed to Salomon Smith Barney's Jonathan Joseph, which is what should happen after you make a hall-of-fame call as Joseph did in July.

Those who doubted Joseph in the summer got burned. So folks took notice when he forecast today Intel would meet fourth-quarter expectations, but "may show weaker-than-expected results" for the first quarter. Joseph suggested Intel would have to "borrow from Peter" -- the first quarter -- "in order to pay Paul" -- make the fourth-quarter numbers, that is.

"Demand in the personal-computer makers appears to be approaching its weakest condition in nearly 15 years," Joseph also commented, presaging (it seems) the warnings after the close from Hewlett-Packard (HWP Quote - Cramer on HWP - Stock Picks) and Gateway (GTW Quote - Cramer on GTW - Stock Picks).

Still, Intel did rise on the session, suggesting that it really is starting to "look like the old days," as (among others) Scott Bleier, chief strategist at Prime Charter, said. "They're running and gunning" stocks.

Amid today's ascent, Bleier felt much better about his concrete floor call from Dec. 5 than he did on Dec. 24. He repeated that view today plus a more recent call that the Federal Reserve's rate cut has turned investor psychology to where the "sell-the-rallies" mantra is replaced by a return of "buy the dips." Notably, Cisco rose 5.4% today, recouping what it lost yesterday and then some.

The contrast of weakness in the Dow Jones Utility Average vs. strength in financials such as Merrill Lynch (MER Quote - Cramer on MER - Stock Picks) and Goldman Sachs (GS Quote - Cramer on GS - Stock Picks) both today and since Jan. 1 "tells you the bear market is over," Bleier declared.

That said, the strategist warned investors against becoming overly excited.

"It's not going to be easy," he said. "You need to do your homework and leave momentum investing to the pros. The lay public can't swing trade -- it's a losing game" for people who aren't 100% focused on the market.

The experience of most daytraders last year, particularly, showed even total immersion isn't enough for many people.

A few thoughts meant to further temper the enthusiasm, but (seriously) not to disparage the recent advance: First, the Nasdaq, Nasdaq 100 and SOX each retreated today after approaching or hitting key technical resistance points of 2700, 2550, and 700, respectively. Further attempts to breach said levels will certainly garner the attention of technical analysts (big and small).

Also, the euro resumed its upward move against the dollar today, rising 1.8% to 95.28 cents after trading as high as 95.51. Given the heavy inflow of money from Europe into U.S. financial assets, something has to give if the euro keeps rising.

Net foreign purchases of U.S. securities (government and corporate bonds, as well as stocks) totaled $347 billion in the first three quarters of 2000, according to the Department of Treasury, on track to eclipse the previous record of $388 billion in 1997. Of that total, $231.6 billion came from Europe (including the U.K and other nations not part of the euro), with $131.9 billion, or 57%, representing purchases of U.S. equities by European investors.

Random Thoughts

Oh the Irony, Part 1: Did Thomas Galvin at Credit Suisse First Boston signal the bottom is finally at hand when the uber-bull issued some cautious comments in today's Wall Street Journal? (Of course, we don't know what else Galvin said.)

Oh the Irony, Part 2: Merrill's tech strategist Steven Milunovich (featured in a James J. Cramer column earlier this week) tinkered with his "Techfolio" today, removing Adobe Systems (ADBE Quote - Cramer on ADBE - Stock Picks), which proceeded to climb 5.1%. Then again, SAP (SAP Quote - Cramer on SAP - Stock Picks), which replaced Adobe, jumped 9.7%.

Back on Dec. 20, Milunovich removed Cisco from the Techfolio and replaced it with Micron (MU Quote - Cramer on MU - Stock Picks).