Market Watch : Technicians Are on a Roll

The stock market’s technicians advised in October that things were looking up--because they’d been looking down for so long, a rebound of some kind seemed almost a sure bet.

And so it came: The market took a sharp jump in November, closing the month with a big rally Friday that lifted the Dow industrials 40.84 points to 2,559.65. For the month, the Dow rose 4.8%, and broader indexes did even better. After five straight losing months, investors hoping for a turnaround finally got it.

Is that a good reason to put all of your faith in technical market analysis from now on? Well, probably not. But the technicians do have the trend on their side in suggesting that the current rally isn’t over. The first half of December could surprise the bears.

The technicians, who watch charts that track the market’s underlying tone--advancing stocks versus decliners, and stocks hitting new highs versus those hitting new lows, for example--had been saying in October that the market appeared primed to rally. Kenneth Spence, technical analyst at Salomon Bros. in New York, says the market in October had reached “the most oversold condition since the (1987) crash.”

In tech-speak, that just means that sellers were temporarily exhausted as the Dow hit a low of 2,365 in October from 2,999 in July. Even the slightest new interest in stocks at that point would have been enough to spark a rally. And that’s what happened.

The technicians were correct in spotting the first sign of the rally in the Dow utility index. Historically, utility stocks often have led the market higher, because they are proxies for the bond market: When investors expect interest rates to fall, utility stocks’ high dividend yields become attractive.

The Dow utility index began a strong rally in September, then soared in October. In November, the rest of the market caught on, led by smaller over-the- counter stocks, particularly high-tech issues. Hambrecht & Quist’s growth-tech stock index jumped 17%.

Traders say much of the buying has been by short sellers, who had bet that stocks were going lower and now are buying to cover their positions before the rally gets much stronger.

But traders also admit that the last few weeks have seen the emergence of bona fide bargain hunters, who are rummaging through the market looking for stocks that seem entirely too cheap. “You do have institutional activity again, there’s no question about it,” says William Rothe, chief over-the-counter trader at Alex. Brown & Sons in Baltimore.

Now, with another shift in the Mideast crisis--this time, the chance of talks between the United States and Iraq--the market rally is likely to gain steam. What stocks have going for them:

* Technical indicators still suggest that the rally has further to run, Spence says. Last Friday, 1,129 New York Stock Exchange issues rose in price while only 416 fell, a strong advance/decline ratio. Moreover, the leadership of the small stocks constitutes a “bullish divergence,” Spence says, indicating that interest in stocks is broadening. He believes that the Dow could run as high as 2,685, a 5% rise from current levels.

* Historically, November, December and January compose the market’s best three-month period of the year, according to stock historian Yale Hirsch. That is partly because year-end tax selling often has depressed stocks in November and early December, leading to a bargain-hunter-driven rally in late December and January. As more investors have caught on to this, the selling and subsequent buying have occurred earlier in the period each time.

This year, for example, the January rally lasted all of one day-- the first trading day of the year, when the Dow leaped 56 points. After that, the market plunged. Still, in the current rally, many stocks have just perked up over the last two weeks. That suggests that there is at least enough burgeoning interest to keep the bargain hunting going for a few more weeks, if not into January.

* Pressure will grow on money managers to join the rally. Most are sitting with large cash hoards. Their nervousness will increase if stocks continue to move higher this week. As Tracy Wheeler, over-the-counter stock trading chief at Seidler Amdec Securities in Los Angeles, notes, “These institutions do not get paid for managing cash.” They’re supposed to put that money to work.

But does any of this mean that the bear market is over? Not much chance of that, Spence says. “I think this is just a bear market rally, very similar to what happened in the fall of 1973 and the fall of 1981.” That is, stocks rally on good news, but after some traders make a little money, the market is primed to fall again to new lows. Notice the utility stocks, Spence says: Their rally came to an abrupt halt in November, after two strong months.

Weakness in the economy and the banking system point to much more trouble ahead for companies and thus their stocks in 1991, says Alex. Brown’s Rothe. Whatever happens in the Mideast, he says, at some point “people have to turn their eyes back to the U.S. economy--and when they do, it’ll be, ‘Oh my gosh!’ ”

It’s also true, however, that all stocks don’t bottom on the same day. If the overall bear market low occurs sometime in the first quarter of 1991, it may well be that stocks in some industries already have hit their lows. For long-term investors who want to bargain-hunt, this is a great time to shop. But unless you’re a trader, don’t buy any stock unless you’re convinced that it really is dirt cheap and that it can survive a very difficult economy in 1991.

NOVEMBER RALLY

How key stock indexes moved last month, plus year-to-date performance.

Percentage change Index Nov. Year-to-date H&Q; growth/tech +17.2% -1.3% OTC composite* +8.9% -21.1% NYSE composite +6.0% -9.7% S&P; 500 +6.0% -8.8% Amex mkt. value +4.9% -20.2% Dow industrials +4.8% -7.0% Dow transports +3.7% -27.6% Dow utilities -0.6% -9.8%

* NASDAQ index