Shhh, Stocks Are Resting

Despite the record-setting indices, many stocks are overbought and resting, and that's a good thing.
Author:
Publish date:

Nov. 19, 1999

With a cursory glance at the big three averages, one might think there is no rest for this market. But the underlying statistics tell us something different.

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As I sat here watching

CNBC's

market recap of the day's trading, I was amazed at the chattering about the

VIX

(the

CBOE's

Volatility Index), but yet no one has mentioned that the advance/decline line on the

NYSE

was negative yesterday! Sure, the VIX is hanging around in the low 20s, typically a level that makes investors wary, but why not mention the glaring A/D line?

It just doesn't make sense.

The flat or negative advance/decline line tells me stocks are resting, despite what we see in the averages. We've even seen the resting period in some of the big technology winners.

Qualcomm's

(QCOM) - Get Report

action earlier this week and the reaction to

Applied Materials'

(AMAT) - Get Report

earnings report tell us that these stocks are overbought and currently digesting their gains, despite what the averages tell us. My experience is that initially we will see the tired action beginning in individual stocks, not in the averages themselves.

Usually about one-third of the stocks will stop before the averages, one-third will stop along with the averages, and one-third will correct after the averages have made their highs. We are now seeing some of the early winners in the early stages of resting.

You see, if the early winners were still rising with unparalleled enthusiasm, then it would be logical that the number of stocks making new highs would be expanding at an equally enthusiastic rate. But that is not so. This action means there is already some resting going on.

Resting is good, not bad. Corrections are healthy in that they relieve the excesses. As stocks (and the major averages) reach targets, they tend to correct for an undetermined period of time. A correction can be sideways and simply mark time, or it can be much deeper, truly shaking out the weak holders.

Let's take a close look at

Hewlett-Packard

(HWP)

. The chart goes back about 18 months, long enough to show the base Hewlett emerged from last spring. There's a high around 81 in May 1998, followed by a big swing down and back up. It took almost a year for Hewlett to build the base, so when it broke through 81 in April, it just kept going. At the time, I calculated the measured target by subtracting the low -- these numbers are rounded -- at 47 from the high at 81. That gives us 34. I then add 34 to the 81 breakout and get a target price of 115. Some of you may remember I went through this

exercise on Hewlett with you in July, suggesting that at 115 some profit-taking may be in order.

Hewlett actually went on to make a high of 119 and then went into what looked like a shallow, sideways corrective move. When I suggested taking some profits, I had no idea Hewlett would eventually fall as low at 67! I just knew Hewlett had hit its target price. And what do I think of Hewlett now? It has surely seen its low and yesterday's move made it look more like an Internet stock than sleepy old Hewlett, making me think the stock needs a little rest, but dips should be bought.

I bring up the matter of hitting price targets because one of the most-watched stock averages is now just pennies shy of its price target: the

Nasdaq

. In this chart, you can see I've marked off the consolidation period the Nasdaq went through from July through October. If we do a back-of-the-envelope calculation, taking the July high of 2875 and the August low of 2442, we get 433. We add 433 on to the 2915 breakout -- that's where we left the gap up on Oct. 28 -- we get 3348. We closed Thursday at 3347.

As is the case with Hewlett, sometimes they exceed their price targets -- sometimes by more than just a few bucks! -- but more often, the target prices are quite close. This is not a bearish call. It is simply a call for a much-needed rest as the statistics on the Nasdaq certainly make for much better reading than those on the NYSE.

On the NYSE, we've got that lousy A/D line coupled with the pathetic number of stocks at new highs. And have you seen that giant pickup in stocks making new lows? I have often mentioned using the momentum of the new highs minus new lows on a 10-day moving average. On the NYSE, it is now in the process of rolling over, which is not a good sign for that market in the near term.

The list of stocks to buy would probably expand if some of them came down a bit, but for now we're stuck with many of the same old names.

International Paper

(IP) - Get Report

still looks OK to buy into dips.

McDonald's

(MCD) - Get Report

is digesting its gains rather well, too.

Merck

(MRK) - Get Report

has had a nice little dip in here.

Procter & Gamble

(PG) - Get Report

is still a good chart, too. And

3M's

(MMM) - Get Report

target is up somewhere near 120.

The airlines seem to be struggling to find some sort of bottom. If they weren't trying to bottom, then they'd be at new lows with oil up here, but they're not. In the financials,

Citigroup

(C) - Get Report

and

Chase

(CMB)

are still good charts as well.

On the negative side, I can't help writing down

Kodak

(EK)

on a daily basis.

DuPont

(DD) - Get Report

is also struggling to keep itself alive.

Bristol-Myers

(BMY) - Get Report

seems to correct every time it reaches the upper 70s.

With the Thanksgiving holiday next week, I would not expect the market to begin its correct immediately since this is typically an "up" week in the market. With the Nasdaq market so overbought and it trading so close to its target, it is best to wait and buy 'em when they're down, as they are beginning to feel quite vulnerable to profit-taking right now.

Helene Meisler, based in Singapore, writes a technical analysis column on the U.S. equity markets on Tuesdays and Fridays, and updates her charts daily on TheStreet.com. Meisler trained at several Wall Street firms, including Goldman Sachs and Cowen, and has worked with the equity trading department at Cargill. At time of publication, she was long Hewlett Packard, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. She appreciates your feedback at

KPMHSM@aol.com.