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Today's WrapUp by Martin Goldberg 10.06.2005  Mon   Tue   Wed   Thu   Fri   Archive


Analyst Timing Is Off at Key Market Turning Points


Last Thursday, the technically damaged Homebuilder stocks got a much needed sentiment salvo, courtesy of Deutsche Securities who initiated coverage of the homebuilders with a “Buy” rating. This “good news” was followed up promptly Monday morning when Standard and Poor’s announced that homebuilder Lennar Homes (LEN) was going to be included in the S&P 500. These two pieces of positive sentiment resulted in healthy daily rallies in the homebuilding stocks. Will the analyst upgrades result in a sustainable uptrend? As part of the crowd, analysts tend to be right and bullish through impulse waves, 3 and 5 of typical 5-wave advances; but the bullishness becomes misguided and dangerous during important changes in trend. The technical charts of the homebuilders are suggesting that after an amazing run, these stocks have seen their top-of-the-real-estate-bubble tops. Now is probably the time to break with the bullish analysts. Tonight I will examine analyst opinion changes near and after the technology market top because real estate stocks are likely to behave similarly.

There is some relatively recent precedent for the correctness of parting with analyst opinion after a major top. Technology stocks were among the most loved throughout their 1990’s bubble. They led the market as a continuous rhythm of positive sentiment was drummed into the speculating public by Wall Street analysts. For the most part, the positive beat continued even after the music stopped and the Nasdaq market topped. As the Nasdaq started its trek toward its October 2002 bottom, there were analyst upgrades with a peppering of downgrades. It was not until most technology stocks lost one-half of their value or more that the majority of analysts turned negative on these stocks. While there were a few well timed negative analyst calls, the broad majority of Wall Street analysts were the most wrong at the exact moment when being wrong turned out to be most expensive.

The charts featured below include four popular and excellent performers of the bull market in technology stocks – Intel, Dell, AMD, and Gateway. The time frame includes calendar year 2000. In 2000, the Nasdaq topped in early March, before entering into a vicious bear market until October of 2002. On the charts, a green up arrow indicates when there was an analyst upgrade, or when an analyst initiated coverage with a buy rating or better. Similarly, red arrows indicate analyst downgrades or initiated coverage with a hold rating or worse. As can be seen from the charts, with the exception of Dell Computer, market tops were reached with a fairly even division of analyst opinions. Analyst downgrades occurred en masse, only after the stocks made their initial large drops. Intel, which reached the mid-70’s, lost over 30% of its value before analysts turned negative en masse on the stock. Note how the consensus turned bearish – but only after severe losses were inflicted.

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Dell Computer topped at about 58 in Mid-March of 2000 and then dropped almost 40% to 35, before analysts turned decisively negative on the stock. After topping, it was over 4 months before Dell received its next analyst downgrade. There were 4 analyst upgrades during that time frame.

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Advanced Micro Devices (AMD) topped at over 47 in the summer of 2000, and it had dropped to about 30 before analysts finally turned negative. Between that time and its summer top, AMD received three analyst upgrades and only two downgrades.

After topping at over 70 almost concurrently with the Nasdaq in the early spring, analysts remained positive on Gateway through the spring and summer, as upgrades were many and downgrades were few. After closing November 29th at just under 30, a loss of almost 60% from its summer high, “value investors” were greeted on the morning of November 30th with eleven (11) Wall Street analyst downgrades. The stock closed that day at about 19, a one-day loss of about 35%.

In all technology-stock examples cited above, there were damaging losses that occurred both before Wall Street sentiment turned negative, as well as after the Street turned against tech stocks. Is there a lesson to be learned from this exercise? If you believe the premise that nothing has changed on Wall Street, and that real estate related stocks have topped after an amazing bull market (or bubble), then the behavior of real estate related stocks should be similar to the technology stocks near the 2000 top. Let’s look at the stock of a homebuilder and a couple of mortgage-related stocks – Fannie Mae and Countrywide (CFC).

The one year daily chart of TOL seems to show that the stock has probably topped. After reaching a high of almost 60 in July of this year, the stock has had a precipitous drop back to about 40, a loss of about 33% in less than 3 months. While there were two brave analysts – Wachovia and JPM Securities that downgraded the stock near the top, there have been three recent analyst upgrades. The stock has not responded in any lasting way to the upgrades. After a quick bounce, the stock headed south again. If the pattern established for technology stocks at the top of their bubble is any indication, the Wall Street consensus will turn negative on the stock, and this will result in additional painful losses for holders of TOL. The behavior of TOL is similar to most of the homebuilders.

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Over the last year, Countrywide Financial Corp. (CFC) has been in a wide trading range between 40 and 30, while there have been 7 analyst upgrades and only 3 downgrades. The consensus has yet to turn bearish on CFC.

It appears as if Fannie Mae’s drop from over 70 to about 42 is one of the well-kept secrets among Wall Street analysts. Even though a total of 19 analysts cover the stock, only three have updated their opinions on FNM in the last year. Bank of America initiated coverage with a “sell” in July. No other analysts have expressed a change of mind (or initiated coverage) since last winter. Such quiet among the Wall Street consensus seems strange for such a liquid and widely held stock. Was there a memo or e-mail suggesting wide-spread quiet among analysts? I doubt it! I think it’s just a coincidence.

Today’s Market

Today’s technical market is almost as compelling as the fundamental market in that there are crucial crosscurrents which are bound to resolve themselves by the holiday shopping season. Two weeks ago, this writer declared, “Say Hello to the Bear Market in Consumer Stocks.” For the moment, this turned out to be, as they say, “a good call.” Yet, although there is nothing in the intermediate term charts of most consumer stocks to refute this call, there is action in the oil market that suggests there may be one more good run in US consumer spending before Christmas. Also, recent stock action suggests that one more US consumer spending spree will be sufficient to propel consumer stocks to a strong and tradable rally soon. Below is the 3-box reversal point-and-figure (PAF) chart of light sweet crude oil.

Today’s action brought about a quadruple bottom breakdown, and PAF techniques suggest a price target of $54.00 crude oil. As Dorsey explains in his book, Point and Figure Charting, 2nd Edition (page 60):

“In analyzing the triple bottom pattern, keep a close watch for declining tops. Think back to the Double Top formations. When the stock declined but was unable to decline as far as it previously did, it implied that selling pressure was drying up. Conversely, if the tops or columns of X’s are making lower tops, it suggests that demand is drying up. These two clues make the chart more bullish or bearish respectively….”

While no charting method or chart pattern is without risk or 100% reliable, it would appear that the odds may favor lower prices of light sweet crude oil. If this happens, it may result in one more shot of psychological adrenalin for the US consumer and US consumer stocks. On the speculating side of things, it appears that what we are seeing is the inevitable shakeout in energy stocks. The current speculative gambling environment that we operate in has spawned a large contingent of “dumb money” who is buying into the premise that, “there’s always a bull market somewhere.” This over speculative environment is best understood by observing CNBC’s Cramer staring madly into a TV camera and shouting at the top of his voice the name of Canadian oil stock, “ENCANA!,” while sound effects loudly blare the sound of a raging bull in the background. Indeed, the fundamental case for oil and energy stocks is probably as right as rain. Yet if you consider yourself to be an “investor,” you must be cognizant of some basics of trading and avoid the urge of “chasing” these stocks when they are over-extended, except perhaps, to add small percentages to existing positions that are firmly in the black. While the crowd is sometimes right in the throws of a bull market, even this has its limits. It got a bit too overheated in the energy sector and there needs to be a shake out which will be healthy in the longer term.

And while we are on the subject of the speculative environment, even though the stock market looks to be under serious distribution, there is evidence to suggest that this will be far from a bear’s cakewalk. Consider the action of a much referenced stock, PF Changs China Bistro, which occurred yesterday in an ugly market. The stock is clearly in a bearish intermediate pattern; yet this didn’t stop it from launching a tradable rally on mediocre fundamental news that left momentum short sellers about 10% underwater.

While it may be OK to say hello to the bear market in consumer stocks, it would be prudent to know just what you are saying hello to. This is a bearish yet choppy market, where caution is needed as well as a keen eye for momentum and patience in finding low risk and appropriate entry points. Whipsaws still abound, and hope springs eternal – but the trend for US consumer stocks is probably still down.

Today’s market saw healthy action in retailers and transportation stocks suggesting that there may be more to follow. Notable ups included Best Buy, and several teen apparel clothing retailers. Notable downs included former star of the Iraq war rally, Jo Ann stores, and Checkpoint Software. Defensive stocks seemed to outperform the small and mid caps. Gold finished near a multi-year high, and silver is at the top of a critical trading range as shown below.

Finally, back to analysts, William Lyon Homes (WLS) was downgraded by JPM Securities today. That’s the same JPM Securities that correctly downgraded Toll Brothers near its major top. William Lyon primarily operates in Southern California, San Diego, Northern California, Arizona, and Nevada. On that note, I’ll say, tongue-in-cheek, “looks like a buy to me!”

Have a great evening.

Martin Goldberg

Copyright © 2005 All rights reserved.

Martin F. Goldberg, MS, P.E.
Market Analyst

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