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The Dow Still Has Clout

Stodgy, Old & Relevant

SAN FRANCISCO -- When it comes to the Dow Jones Industrial Average, investors these days have adopted the mantra made famous in the 1979 (!) Bill Murray classic Meatballs : It just doesn't matter. It just doesn't matter (repeat).

But before you relegate the Dow to the dung heap of market history, note that Monday's action suggests the blue-chip index still has clout extending beyond its 30 constituents.

To recap, U.S. stocks were heading to the woodshed Monday morning on the heels of the beating sustained by their overseas brethren. Following a government report showing Japan's GDP slid 1.4% in the fourth quarter, the Nikkei fell 2.8% and Hong Kong's Hang Seng Index dumped 4.1%. That selloff spilled over into Europe and Globex futures trading, where major U.S. averages suffered big losses, including a limit down decline for the Nasdaq 100 futures.

As is often the case, futures activity accurately depicted the open on Wall Street, which was U-G-L-Y (you ain't got no alibi). But the initial declines proved to be session lows as major proxies reversed course about 15 minutes into the trading day. Sure, the Nasdaq Composite closed down 141, but that was still an improvement vs. its initial decline of more than 205.

Leading the path back from the brink of even bigger losses was the Dow, which held what is considered significant support at 9731 (it traded as low as 9735.54).

The level is significant because it represents the low hit on March 8, and what is still the nadir of this year.

"The critical thing is the Dow held and the S&P didn't break down," said Harry Schiller, editor of Short-Term Consensus Hotline, a market-timing newsletter. "As the Dow turned back up, it looked like the danger had passed. I like the reversal and think it's very bullish."

Schiller said the S&P 500 June futures contract also held a key level at 1382, noting "it has been a clinic the last few days in support and resistance and what they do."

For the S&P 500 March futures contract (which expires in this Friday's triple-witching session), the market-timer said 1432 is a key resistance level on the upside. But the contract -- which settled at 1383 Monday after trading as low as 1364.60 -- was "a ton above" its important support around 1350, he said.

The Dow's ability to hold key support while the S&P never threatened its own is a "positive divergence" and is a "good sign for a good recovery" for those averages, Schiller said. "It's beginning to look like people are taking seriously the undervaluation in the blue-chip stuff."

Still, Schiller notes the Nasdaq 100 futures contract still has "a strong upward bias," despite Monday's decline of 141.50.

Talk of the potential resurgence of blue-chip (aka "value") stocks and the inherent danger of most high-tech names is not, of course, new. What's (a little) different this time around is even such stalwart bulls as Edward Kerschner, chairman of investment policy at PaineWebber, are beginning to openly worry about high-tech valuations.

In a report titled "New Economy: Yes; New Metrics: No," Kerschner stops short of forecasting a major correction (or crash) in tech stocks. But he does make numerous references to 1987 and uses the term "mania" frequently.

The investment chief compares investors' current love affair with tech and biotech names to the "manias" for conglomerates in the 1960s and leveraged buyouts in the 1980s. Kerschner recalls the end of each of those eras was triggered by seemingly "relatively minor" events. Past and present manias also shared a belief that the "old rules" didn't apply.

Specifically, "the reasoning behind today's mania for high-tech Nasdaq stocks is eerily reminiscent of the reasoning behind 1987's mania for private market values," he wrote. Then and now, investors were convinced that higher interest rates, traditional earnings metrics, and the relationship between stocks and bonds (among other things) didn't matter anymore.

" 'New metrics' can lead to astronomical valuations for a short period of time, but -- in the end -- the market value of a company is based on some constant multiple of that company's sustainable earnings power," Kerschner argued.

Finally, he writes that just as market players today believe the ease of trading online will allow them to exit safely should a serious reversal occur, investors in 1987 believed portfolio insurance would protect them. (Hint: It didn't.)

Of course, whether tech stock investors will get a comeuppance or continue to have the last laugh (all the way to the online bank) remains to be seen. I just figured amid all the talk about "profit-taking" and "bargain hunting," you might enjoy/benefit from some insight into how market professionals view strange days like these (which nobody told me there would be).

That Time Again

Yes, it's time again for my semi-regular look at how forecasters' picks in this column have fared. As always, this is for educational/theoretical purposes (mainly) because the sources listed below may have changed their stances since being quoted here.

Still, it's fun to look back and see how folks have done (isn't it?). It also gives some insight into the risks faced by investors who've bet against tech stocks in recent months.

Accountability Report Card
Date Source Recommendation/forecast Performance* TaskMaster Says ...
Nov. 30 David Hale, global chief economist of Zurich Insurance Group Hale laid out a rationale for why the dollar could face continued downward pressure in the coming 18 months. He also forecasts that oil will "sustain" a range of $20 to $30 a barrel. The dollar index is up 3.6% , while oil has risen $7.16 to around $31.75. One out of two ain't bad.
Dec. 1 Frank Husic, managing partner of Husic Capital Management Buy: Electronic Arts (ERTS); 3DO (THDO); Broadcom (BRCM); Gemstar Communication (GMST); BSQUARE (BSQR); SanDisk (SNDK) ERTS: -8.7
THDO: +60
BRCM: +156
GMST: +76.8
BSQR: -12.2
SNDK: +285
I'm guessing the two losers didn't hurt that much.
Dec. 2 Rick Ziesing, founder of Bonanza Capital Management JDS Uniphase (JDSU) "has sizzle, but for a reason. You can make the argument it's worth the valuation. I can't find a better company to buy." JDSU: +130 That's a powerful argument.
Dec. 9 James Samuels, managing director at Banc of America Securities Tyco International (TYC) will "find a reasonable floor" in the mid-20s and rally come January. TYC: +68.6 He rode it down but the comeback call was on the money.
Dec. 15 Peter Green**, director of technical research, Gruntal "Negative divergences" are occurring all over the Nasdaq 100, suggesting "traders are setting up for more weakness in this area." NDX: +41.6 Buy the dips.
Dec. 21 Brian Belski, chief investment strategist at George K. Baum Buy: Dupont (DD): International Paper (IP); Weyerhaeuser (WY); Deere (DE); Caterpillar (CAT); Schlumberger (SLB); Halliburton (HAL); BP Amoco (BPA). DD: -28
IP: -32.2
WY: -20.3
DE: -11.9
CAT: -19.6
SLB: +54.6
HAL: +6.4
BPA: -11.7
I'm guessing the two winners didn't ease the pain.
Dec. 21 Dwight Anderson, Tudor Investments Buy: AK Steel (AKS); Fort James (FJ); Bowater (BOW) AKS: -43.2
FJ: -27.6
Bow: -12.9
Pity the value players.
Jan. 5 Tom Brown, Second Curve Capital Buy: Capital One Financial (COF); Providian Financial (PVN); S1 (SONE); BroadVision (BVSN) COF: -13
PVN: -19.8
SONE: +51.1
BVSN: +61.5
Wither the "Old Economy" financials?
*Percentage move through close of trading 3/10/00. ** No longer with Gruntal. Source: Baseline.

Aaron L. Task writes daily for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. He welcomes your feedback at taskmaster@thestreet.com .

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