In ancient cultures that lacked the benefit of calendars and patio lights, the shortening days as winter nears were met with terror each year. To compensate, the most contemplative hunter-gatherers from the frozen steppes of Russia to the steamy highlands of Mexico created all-powerful deities to whom they could pray for relief -- a ritual that, in some cases, included the sacrifice of virgins.The same pagan horror seems to beguile investors at the onset of August each year as they ceremonially slit the throats of thousands of innocent stocks, despite evidence that they'll just have to buy them back by October -- and probably at higher prices. To bring some sense and science back to the temple, I spoke with a couple of professional tape worshippers in Minneapolis and New York who have lived through more seasons than they care to count -- Edward P. Nicoski, chief technical analyst at US Bancorp Piper Jaffray, and Chrystyna Bedrij, chief investment officer at Griffin Securities. Both had the same admonition to private investors trying to play along at home this summer: Stick to a single strategic plan -- mostly price momentum, with a little value tossed in for good luck -- no matter what the thermometer reads outside. (I'll start with Nicoski's views today, and follow up with Bedrij next week.)
Beyond Simple ValuationsNicoski began his Piper Jaffray career as a mainstream securities analyst. He gradually gave up on that dark art, however, when a deep understanding of balance-sheet fundamentals just didn't help clients in the bear market of 1973-74. "Some of the companies that analysts insisted had the best fundamental stories took a decade to recover their 1972 values," he recalls. "And it will happen again, as a whole host of highly regarded stocks will never recover their 1999 values." He believes that the problem in 1973 and 1974 was that the methodology of assigning values was too simplistic. "If a stock sold between 15 and 30 times earnings and it got down to a 15x multiple, we called it a buy. And, if it was down to 10x, it was a strong buy, and, if it was down to 5x, it was a super buy! And that's when the fundamentalists gave up. The average stock lost two-thirds of its value by the end of 1974." Nicoski says he began to sneak technical analysis books into his briefcase, and before long, his "uphill battle" to gain respect for research on price and volume action led him to make a single observation that rules his view on stocks to this day: "The key to success for investors is to understand relative strength." He notes that even as tech stocks languished in a bear market from 1969 to 1974, other groups, like oils, surged to new highs. In the 1980s, the strong stocks were foods and drugs, as gold and other commodities languished. In the 1990s, it was back to technology. Buy strength and sell weakness, he says, and you will seldom go wrong. Indeed, the quantitative analyst believes private investors today should stock up to 75% of their portfolios with issues that are outperforming the market and put the final quarter in deep-value stocks that are emerging from long periods of consolidation. To sum it up in a catch phrase, he believes in breakouts and bases, and shares this view in a monthly report published at the excellent Piper Jaffray stock-analysis site,
Tech Stocks Not Yet Out of the WoodsPutting all these techniques together to make a broad market call, Nicoski believes tech stocks overall won't be out of the woods for a while because -- though many have been hammered -- most are not oversold compared to their prices a year ago. "We've had a huge bounce, but, in some cases, that's all it was. There's a very limited number of technology groups at new highs," he said. Among the current MACE uptrenders, he likes education-services stocks like Apollo Group ( APOL), Career Education ( CECO) and Learning Tree International ( LTRE). In health care, he likes generic drug makers like Alpharma ( ALO) and Barr Laboratories ( BRL). As for safely picking value stocks emerging from long-term bases, Nicoski suggests you stay away from recently crushed tech stocks and instead picture this cycle of infamy and redemption:
- Annihilation. A stock gets killed in a single day or a couple of weeks, usually resulting from news, such as a bad earnings report. Overselling. After a few weeks or months, the stock's six-month and 12-month momentum oscillators sink below 1.25 or 1.0. Consolidation. The stock moves sideways in a trading range at identifiable support for a long time -- and that's six to 24 months, not three weeks. Re-emergence. The stock's relative strength vs. the market improves even though the price appears to be mostly flat.