By Suzanne McGee
Want to know what the stock market looks like these days when viewed through the prism of a technical analyst's charts?
"The market is full of frustrated bears," says John Roque, senior technical analyst at Natexis Bleichroeder, a New York-based investment dealer. "But they're not going to get any satisfaction anytime soon, even if this market is equally full of dissatisfied bulls. No one is running around waving their hands in the air and yelling 'yippee' in excitement" in response to the market's big gains this spring.
Yes, the technical analysts -- those folks who scrutinize price charts and trading volume in search of clues as to which market, industry group or stock is poised to generate outsize returns or tank -- are no more ready to return to the irrational exuberance of a decade ago than their counterparts, the fundamental analysts. Both camps, it seems, are united in a wary acceptance of the market's recent gains.
More than a hundred devotees of the art of technical market analysis showed up two weeks ago to listen to Roque and some of his fellow trend-chasers discuss what investment opportunities they can detect in the midst of the rally. Few of the speakers are household names to most investors, with the possible exception of Ralph Acampora. He made his name as one of the Street's biggest bulls back in the 1990s, when he correctly predicted that the Dow Jones Industrial Average would smash through milestone after milestone on its way to 10,000. In 1997, Acampora's grateful boss, then-Prudential Securities CEO Hardwick Simmons, presented him with a vintage red 1962 Corvette, wrapped in a white bow and with a license plate reading Dow 7000, one of the milestones the market eclipsed along the way.
A decade later, Acampora plies his trade at Knight Equity Markets, two years after Prudential axed its technical research department. And his charts are telling him something interesting right now: Large-cap stocks -- names like Xerox (ticker: XRX), Schering Plough (SGP), Qwest Communications (Q) and Verizon Communications (VZ) that have been out of favor for years -- are showing signs of new life.
Eyeing those companies' stock charts, he says, it's easy to spot the "smile patterns" taking shape: a sharp price decline, followed by a flat line, and finally, an upturn. "I see those smile patterns emerge, and I just want to grin myself," he says. "When you have a huge base" -- that's tech-speak for a long period when a stock languishes in a narrow trading range -- "you can see giant moves; doubles, even triples. And you see them last for two, three years."
Of course, there are some frowns taking shape as well. Onetime market darlings like Starbucks (SBUX) and Whole Foods (WFMI) may have had their day in the sun, Acampora cautions. "But that kind of rotation just feeds a bull market," he argues.
Indeed, many market technicians say they're spending a lot of time trying to talk their clients out of being too bearish. "I point out that bear markets are very rare, and when the Dow comes out of a bear market it goes into a 20-year bull market," Merrill Lynch's Mary Ann Bartels told an eager audience. With the Dow having finally broken out of an eight-year-long trading range and moved higher, Bartels said she would advise her clients to use any pullbacks to add exposure to large-cap stocks.
If there is one trait that sets a technical analyst aside, it is his or her devotion to the concept that historical data patterns can help predict the future. Fighting those patterns, on the other hand, is a recipe for disaster. "If you want to make one mistake consistently that will end your career, fight the trend," says Jeff deGraaf, head of technical research at New York-based investment research group ISI. "Right now, that trend is obviously for the market to move still higher."
Not that there aren't risks out there. DeGraaf is paying close attention to the Chinese stock market, which he calls "one of the most artificially propped-up markets in the world," thanks to the Chinese government's policy of pegging its currency, the yuan, to the dollar at a level widely regarded as well below fair market value.
The result is a liquidity-driven boom in Chinese stock prices, and while deGraaf says it may take months for that market to implode or deflate, he expects it will happen. "That is the looming danger in global markets," he predicts. So he's keeping a close eye on the Shanghai Stock Exchange, which has been rising steadily higher than 200-day moving average. The more that happens, the greater the risk.
For his part, Roque is betting on commodities as the best way to play a global liquidity boom. He has studied the price patterns of gold relative to the Dow Jones Industrial Average dating back more than a century. While some fundamental analysts argue that the precious metal's run is due to run out of steam soon, Roque says his reading of those absolute and relative price moves suggests that it may be only halfway over.
"We're going into the eighth year in which gold has outperformed the Dow," he points out. "There have been two prior cycles like this, and both have been 14 years in length."
He's also a fan of the energy sector. Despite their big gain in response to higher commodity prices, energy stocks still make up only 10% of the S&P 500. (For more on this group's outlook, see page 44.) Roque says historically, the sector has averaged a 12% weighting. "The charts tell the story to anyone who cares to look."
"The market is full of frustrated bears," says John Roque, senior technical analyst at Natexis Bleichroeder, a New York-based investment dealer. "But they're not going to get any satisfaction anytime soon, even if this market is equally full of dissatisfied bulls. No one is running around waving their hands in the air and yelling 'yippee' in excitement" in response to the market's big gains this spring.
Yes, the technical analysts -- those folks who scrutinize price charts and trading volume in search of clues as to which market, industry group or stock is poised to generate outsize returns or tank -- are no more ready to return to the irrational exuberance of a decade ago than their counterparts, the fundamental analysts. Both camps, it seems, are united in a wary acceptance of the market's recent gains.
More than a hundred devotees of the art of technical market analysis showed up two weeks ago to listen to Roque and some of his fellow trend-chasers discuss what investment opportunities they can detect in the midst of the rally. Few of the speakers are household names to most investors, with the possible exception of Ralph Acampora. He made his name as one of the Street's biggest bulls back in the 1990s, when he correctly predicted that the Dow Jones Industrial Average would smash through milestone after milestone on its way to 10,000. In 1997, Acampora's grateful boss, then-Prudential Securities CEO Hardwick Simmons, presented him with a vintage red 1962 Corvette, wrapped in a white bow and with a license plate reading Dow 7000, one of the milestones the market eclipsed along the way.
A decade later, Acampora plies his trade at Knight Equity Markets, two years after Prudential axed its technical research department. And his charts are telling him something interesting right now: Large-cap stocks -- names like Xerox (ticker: XRX), Schering Plough (SGP), Qwest Communications (Q) and Verizon Communications (VZ) that have been out of favor for years -- are showing signs of new life.
Eyeing those companies' stock charts, he says, it's easy to spot the "smile patterns" taking shape: a sharp price decline, followed by a flat line, and finally, an upturn. "I see those smile patterns emerge, and I just want to grin myself," he says. "When you have a huge base" -- that's tech-speak for a long period when a stock languishes in a narrow trading range -- "you can see giant moves; doubles, even triples. And you see them last for two, three years."
Of course, there are some frowns taking shape as well. Onetime market darlings like Starbucks (SBUX) and Whole Foods (WFMI) may have had their day in the sun, Acampora cautions. "But that kind of rotation just feeds a bull market," he argues.
Indeed, many market technicians say they're spending a lot of time trying to talk their clients out of being too bearish. "I point out that bear markets are very rare, and when the Dow comes out of a bear market it goes into a 20-year bull market," Merrill Lynch's Mary Ann Bartels told an eager audience. With the Dow having finally broken out of an eight-year-long trading range and moved higher, Bartels said she would advise her clients to use any pullbacks to add exposure to large-cap stocks.
If there is one trait that sets a technical analyst aside, it is his or her devotion to the concept that historical data patterns can help predict the future. Fighting those patterns, on the other hand, is a recipe for disaster. "If you want to make one mistake consistently that will end your career, fight the trend," says Jeff deGraaf, head of technical research at New York-based investment research group ISI. "Right now, that trend is obviously for the market to move still higher."
Not that there aren't risks out there. DeGraaf is paying close attention to the Chinese stock market, which he calls "one of the most artificially propped-up markets in the world," thanks to the Chinese government's policy of pegging its currency, the yuan, to the dollar at a level widely regarded as well below fair market value.
The result is a liquidity-driven boom in Chinese stock prices, and while deGraaf says it may take months for that market to implode or deflate, he expects it will happen. "That is the looming danger in global markets," he predicts. So he's keeping a close eye on the Shanghai Stock Exchange, which has been rising steadily higher than 200-day moving average. The more that happens, the greater the risk.
For his part, Roque is betting on commodities as the best way to play a global liquidity boom. He has studied the price patterns of gold relative to the Dow Jones Industrial Average dating back more than a century. While some fundamental analysts argue that the precious metal's run is due to run out of steam soon, Roque says his reading of those absolute and relative price moves suggests that it may be only halfway over.
"We're going into the eighth year in which gold has outperformed the Dow," he points out. "There have been two prior cycles like this, and both have been 14 years in length."
He's also a fan of the energy sector. Despite their big gain in response to higher commodity prices, energy stocks still make up only 10% of the S&P 500. (For more on this group's outlook, see page 44.) Roque says historically, the sector has averaged a 12% weighting. "The charts tell the story to anyone who cares to look."
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