They might just be grumpy from the summer heat, but it suddenly seems like large-company stocks are glowering at bulls with their once-famous thousand-mile stare.
From 1965 to 1982, the
bumped up against the 1000 level five times without punching through, as investors were repelled at the millennium mark in June 1966, November 1968, December 1972, September 1976 and April 1981.
Now it looks like d¿j¿ vu all over again, admittedly in a much more compressed time frame, with the
. Disappointed big-stock bulls were first punched back at the 1015 level in June, then in July at 1015 again and at 1011 on Friday. (Meanwhile, the Russell 2000, which tracks small-company stocks, hit a new two-year high last week.)
A trivial, short-term phenomenon? Perhaps, but bears and worried bulls will point out that the S&P recorded its first "outside reversal day" since Jan. 15 on Friday. That's a technical pattern, you may recall, in which the day's high is higher than the previous day's high, the day's low is lower than the previous day's low, and the close is at the extreme of the range, which amounts to a reversal of a strong prior trend.
What's It All Mean?
As I noted in a column
last December and in my book,
, this is a rare event that often plays out as follows: If the stock or index was trending down during the weeks prior to the outside bar, then an outside reversal bar that closes at or near the top of the day tends to be bullish. It means that sellers gave it their best shot that day, but were swamped by buying pressure and laid down their arms.
In contrast, if the stock or index was trending up during the prior weeks, an outside reversal bar that closes near the bottom of the day is bearish. It suggests that buyers gave stocks a final hard push but were overwhelmed by selling pressure.
The Jan. 15, 2003, outside reversal led to an immediate 11% decline through mid-February. The prior occurrence, on Dec. 2, 2002, led immediately to a 6% decline in the S&P 500 through the end of that month.
An outside day's initial spike upward or downward typically occurs on unexpected news. On Friday, the news was a bullish midquarter update from
, which gapped up from a $26.39 close on Thursday to a $29 high on Friday before fading badly to close at the bottom of its range at $27.39.
So does the outside reversal signal the end of this summer's rally? Not so fast.
How to Play the Reversal
The market has a way of tricking us with neat historical comparisons. And there is one odd thing about Friday, which, if used as a clue in one of the mystery novels you may have read at the beach this summer, might have seemed just a little too cute. And that is that the same date, Aug. 22, proved to be a significant top for the market last year: The S&P 500 reversed and plunged 19% from that Thursday into its Oct. 9 low. The threat of an anniversary fade to darkness strikes many observers as just the clever sort of ploy that the market would employ to fake us out.
So if you're considering how to put cash to work at this confusing juncture, split the difference: Fade the big-cap growth stocks that dominate the S&P and focus instead on small-cap growth stocks. Or, if you're patient and have a contrary streak, consider beaten-up big-cap value stocks.
This makes sense in the context of the larger economic climate today, after all, as away from the equity action -- in the obscure but critically important world of currency traders -- the U.S. dollar has just completed one of its most epic shows of strength in history. Since its low of 0.8432 against the euro on June 16, the buck has shot up to 0.9217, a gain of 9.3%. That's a huge move in the world of currency trade, nearly equaling the shock value and size of the June-July moonshot in the price of U.S. Treasuries.
The implication of the currency move for stocks could be significant, for as the dollar rises, the cost of U.S. goods in Europe and Asia soars. This makes the products of big U.S. conglomerates such as
Procter & Gamble
much more expensive, trimming sales prospects.
Likewise, currency conversions from those sales will put large U.S. exporters, those big-cap growth companies, at a disadvantage in the third quarter. In contrast, small companies generally don't export much as they focus on the domestic U.S. market; their sales are, for the most part, unaffected by currency fluctuations.
To find annihilated big-caps that could be sold out and ready for accumulation by patient, early value buyers, look for stocks that are down in the past year and in 2003, sport fat dividend yields and are rated "hold" or "sell" by most brokerages. These down-and-out, much-hated stocks are largely the sort of defensive names that falter when the market rallies, but can hold their own in a widespread decline. Without picking just one, I would bet a small sum that, as a group, the stocks in this table outperform the broad market by the end of the year.
, which was obliterated for the umpteenth time this year on Friday after it cut its dividend and growth forecast, seems particularly interesting. One shell-shocked owner, John LaForge, co-manager at
Phoenix-Hollister Value Equity, says his analysis suggests that at $14, the price is "ridiculous," but if it were to sink to $12, it "becomes hilarious." Believing that the company's breakup value is at least $17 and probably much higher, he adds: "If you don't buy Schering at $12, you will be the laughingstock of the investment world."
Somewhat less compelling at this time are consumer stocks such as
, which owns a fantastic portfolio of brand names -- such as Sharpie, Waterman and Parker pens, Rubbermaid containers, Calphalon cookware, Little Tikes toys and Levolor blinds -- but cannot seem to wring significant growth out of any of them. The company's relatively new chief executive, Joseph Galli, showed confidence in the stock by buying $580,000 worth of shares in the open market this month. But he also recently lowered earnings guidance, in part because of weakness in a segment as seemingly inconsequential as its picture-frame business.
As for growth stocks, one industry that seems to have its customers by the neck is software security. It doesn't take a genius to see that
have nailed down annuitylike businesses of selling consumers and enterprises antivirus software packages that need to be updated every few weeks to knock down the latest threats. I enhanced Symantec's bottom line by buying three new licenses myself last week for my work and home desktops, plus my work laptop.
The stocks aren't cheap, but Symantec is one of the few companies for which the bear market basically did not exist. Every so often, it gets hammered for a few days or weeks, though, so try to buy it under $45 in the fall, once the Sobig and Blaster furor dies down.
Mail sent to me in the last two weeks to my firstname.lastname@example.org address has been obliterated by the Sobig virus. I have a new address,
Jon D. Markman is senior investment strategist and portfolio manager at Pinnacle Investment Advisors. While he cannot provide personalized investment advice or recommendations, he welcomes column critiques and comments at
email@example.com. At the time of publication, he owned none of the equities mentioned in this article, but positions can change at any time.
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