High Volatility
Will Continue
in 1999
High Volatility
Will Continue
in 1999
by Eugene Peroni
The Peroni Report
Janney Montgomery Scott
Skeptics
might argue that the stock market does not have a good grip on reality.
Internet stocks with no earnings produced colossal gains in 1998 and investors
seemed little fazed by such historical events as impeachment proceedings
against President Clinton and military actions against Iraq. The severe
decline between late July and early October last year might have been the
market's most dramatic bout with the realities of economic globalization,
but stocks seemed to overcome the resulting valuation "blackhole".
The
Asia-driven lows of October 1997 and October 1998 may have proven to be
a double bottom, of sorts, that effectively reckoned with the economic problems
in Japan. The bullish configurations that emerged in numerous individual
stocksespecially growth cyclicalsafter early October 1998 render a strikingly
positive investment environment. Stocks have advanced defiantly in the face
of political, economic, currency and military uncertainties.
From
my technical perspective, reality for the market is defined by the parade
of stock symbols, volume indications and price fluctuations on the ticker
tape. The ticker tape remains an invaluable tool for deciphering supply
and demand based on investors' perceptions of timely opportunities. Taken
a step further, it is often the subtle changes in an individual stock that
denote the most important and lasting shifts in its historical behavior.
These subtle changes are often telegraphed by smaller trades rather than
large block activity. It was the non-block activity that most explicitly
indicated burgeoning improvement in the stock market last October. It is
non-block activity today that may provide the most important insights for
determining market conditions in 1999. Several predictions for this year
follow:
1.
Growth cyclicals should remain dominant market leaders. It is unlikely
that there will be a major change in industry sector leadership in 1999.
Stunning recoveries in a broad range of technology, telecommunications and
retail stocks after early October last year make them strong leadership
candidates during the next 12 months. Technology leadership should also
find the Nasdaq Composite outperforming other major market averages again
this year.
2.
There should be a significant gap between leaders and also-rans. Momentum-driven
factors are alive and well and are the result of both high liquidity and
short-term performance demands. High quality, name recognizable stocks should
continue to deliver the most consistently bullish behavior in the next 12
months. In most major declines since October 1987, the best recoveries have
been realized in the more trading liquid, high quality tiers of the market.
Therefore, there is a historical advantage to participating in stocks with
the best long-term uptrends that are trading at or near their 52-week highs.
Stocks with these qualifications should offer the best risk/reward ratios
going forward.
3.
Too much diversification could hinder performance and degrade a portfolio's
risk/reward ratio. Investors should hone portfolios, focusing on the
groups most likely to lead the market in 1999. Among the core leadership
groups for the next 12 months: broadcasting, computers, department stores,
drug store chains, financial services, information services, long distance
carriers, pharmaceuticals, publishers, software, specialty retailers and
telecommunications equipment.
4.
High volatility will continue in 1999. With most major averages at
or near all time record levels, even a relatively small percentage move
can cause expansive trading swings. This volatility could be unsettling
at times just as it was during episodes in 1997 and 1998. For this reason,
a buy and hold strategy is recommended. Forecasting and trading the market's
peaks and valleys precisely will be a difficult task. Near-term traders
run the risk of being out of the market on critical days that could substantially
affect yearly returns.
Editor's Note: Eugene E. Peroni, Jr. is Senior Vice President, Director
of Research for Janney Montgomery Scott Inc., members of the NYSE, ASE and
Philadelphia Stock Exchange. Visit the web site at www.janneys.com.
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