• The new all-time highs recently reached by the utilities and
financial sector indexes are probably a positive major-trend sign,
but they don’t rule out interim stock-market weakness. Sentiment
and speculative-activity measures probably need to improve further
before a full-fledged’tnarket advance can begin.
4! Besides the positive implication of the utilities and the financial
indexes’ new highs, we have often noted that the general market
( excluding technology issues) has been in a bear cycle since the
spring of 1998 or earlier. It now appears to be in a gradual or rotational
bottoming process from a major oversold condition.
• The market recently responded positively to the short-term
momentum indicators’ oversold condition of late July with a moderate,
albeit selective, rally. With those indicators now near
overbought positions, further short-term upside potential
appears to be limited. Although the DilAmight make a new recovery
high in the 1100-to-11500 area, the technology-heavy S&P
and Nasdaq Composite would probably fail at or below their midJuly
recovery peaks ofroughly 1510 and 4275, respectively. IBtimately,
we still expect further weakness or downside tests, particularly
in the tech sector, during the late-summer/fall period
before a durable advance begins.
Moreover, we believe that further periods of testing will be needed,
especially in the tech sector, to trigger substantial improvement
in sentiment indicators. Those measures continue to show too much
optimism about further market gains to suggest that the market is
starting an immediate major advance.
• Meanwhile, the offering calendar, which includes initial public
offerings and secondary offerings, remains heavy as corporations
apparently try to take advantage of the market’s late-spring/summer
recovery sequence. In our view, investors’ willingness to buy
such stocks, most of which are in the tech sector, does not reflect
the kind of overly pessimistic condition that usually characterizes
a strong bottom in the general market or in a specific sector.
• The groups we favor on weakness include aerospace-defense electronics,
airlines, health care, medical products and technology, education
and training, natural-gas pipelines, electric utilities and fmancial
services (particularly trust-services banks, REITs, securities
brokers/dealers and selected money-center bank insurance
issues). Although we suggest using any short-term rebound in the
tech sector to reduce exposure in that area, some exceptions are
biotech, computer hardware and telecom-equipment issues.
