Enterprise Software Is the Group to Watch

The Daily Meeting

OK, we've been through our daily strategy session. Everyone's already read The Wall Street Journal and The New York Times, listened to Bloomberg Radio and checked the newswires for Asian and European stock news.

Let's say the first five minutes is dedicated to baseball, football and the headline on The New York Post. And let's say that the following three points are what we are working with by meeting's end:

1. That for this week, the Dow will be able to hold support at the 10,100 area identified in last week's column (the intraday low on Sept. 28 was 10,081.13).
2. That for this week, the yield on the 30-year Treasury bond does not close above 6.27% -- the high set on Aug. 10. Incidentally, given the recent action in the government bond market, if the T-bond yield does not close above 6.27%, the '69 New York Mets will look like a minor miracle. I'm using yield here and not price because the December futures contract made a new low yesterday, closing under its support at 112 16/32, which was the former contract low from Aug. 14. The close beneath 112 16/32 is a bad sign, indicating the yield will make like Sir Edmund Hillary and climb straight up to 6.27% -- meaning that our morning meeting's notion about the 10,100 level holding for the Dow may be tested.
3. And that for this week, because institutional investors are so thoroughly and rightfully cautious, we're going to game it a little bit and guess that this Gary Coleman-sized rally continues for a little bit.

Let's say this Reader's Digest review of the market, the bonds and sentiment provides a framework for action, so what sector should we be focusing on?

The Group to Watch

In a grouping of nearly 50 enterprise-software stocks that I monitor, 65% are above their 50-day moving averages. This number is a lot better than the 20% of stocks on the New York Stock Exchange above their 50-day moving averages -- so the group is doing well on an absolute basis and is rockin' the rest of the market on a relative basis, too. Meanwhile, of the 11 enterprise-hardware stocks that I monitor, only 36% are above their 50-day moving averages, and the action in Hewlett-Packard (HWP Quote) and IBM (IBM Quote) doesn't give me confidence that the sector is going to right itself anytime soon.

The larger-cap stocks in the enterprise-software group -- BMC Software (BMCS Quote), Business Objects (BOBJ Quote), Mercury Interactive (MERQ Quote) and Oracle (ORCL Quote) -- have been strong for some time. So I'm not going to offer anything other than the fact that they're all bullish, all overbought and should consolidate a little more before their next leg higher. But there is nothing in their charts that suggests their moves are over.

Instead, here are some other names in the same group that I'm going to focus on this week:

Documentum (DCTM Quote). Two weeks ago, this stock completed a base in force since late April in which it traded between 19 1/8 and 12 3/16. The breakout above 19 1/8 suggested a target of nearly 26, or 10% from Friday's close. Beyond 26 a target of 30 seems more than reasonable.

JDA Software (JDAS Quote). This stock broke out of a three-month base more than a week ago and pulled back immediately, but it did not do any damage to the pattern. A close above 12 tells me that 16 will follow.

PeopleSoft (PSFT Quote). This one is improving slowly as it is trading at the high end of a range in force since March. Resistance at 18 29/32 says a close above here is needed before it accelerates higher. My target becomes 24 if we see a close above 19.

Progress Software (PRGS Quote). This stock is not unlike PeopleSoft, in that it is trading near the top of a range in force since March. It needs to show a little more spunk to be considered bullish, which would happen if the stock closes above 35. If it does that, I see a target of 42.

SAP (SAP Quote). In the interest of full disclosure, I have recommended this stock for purchase since April in a number of my daily analyses. (Arnhold & S. Bleichroeder has done no underwriting for SAP.) When I first recommended it, it was a contrarian buy because the stock had released lower-than-expected earnings and was downgraded by a fundamental analyst at a major brokerage. Nevertheless it rose on the news. I figured the worst was over. A close above 39 5/16 says 48 5/8 is the next upside target.

Santa Cruz Operation (SCOC Quote). Again, in the interest of full disclosure, I have recommended this stock for purchase since August in a number of my daily analyses. (Arnhold & S. Bleichroeder has done no underwriting for Santa Cruz Operation.) Santa Cruz should consolidate a little before working higher and has resistance up to 15, the all-time high going back to 1995. There's no reason to believe a target of 20 can't be hit after a period of basing.

The construction of the six patterns listed above and of the big-caps already in bullish trends strongly suggests the soft will rule the hard, at least for the next quarter. It's not quite The Corporation vs. D-Generation X, but, hey, it'll do.