The market has been extra erratic the last two weeks, and it will be instructive to see what has been happening to some key indices and to the 30 year Treasury bond, on the last 3 Fridays:

Let's try to make sense out of the cross currents apparent here. We see that the DOW JONES INDUSTRIALS has lost over 3% each of the past two weeks, while the RUSSELL 2000 has lost around 1% each period. At the same time, the NASDAQ has edged slightly higher. Then we note that the DOW JONES UTILITIES has decreased slightly, while the 30 YEAR TREASURY BOND yield has dropped modestly, meaning of course, that the issue has seen a modest price increase.

The first example is indicative of money managers taking year-end profits and losses which is normal. This excessive selling pressure probably has another week or so to run, and as you know, we have been expecting it for some time. It also shows that money managers have been piling into the technology laden NASDAQ COMPOSITE, probably doing their "window-dressing," showing the world that they own the hot stocks. By dumping losers, they can also show that they don't have large holdings of stocks in the dumpster.

The second example is even more curious, as you would normally expect Utilities and Treasuries to move in the same direction. I am not satisfied with any explanation of this divergent action, so I will just chalk it up to being a random walk. Over any short period, the activity of markets and individual stocks may be somewhat random, but over the longer term they will follow economic events and therefore be more logical. If Treasury yields continue to fall, the Utilities will eventually rise.

This was the easy part, doing historical analysis. The tough part as always is making an educated forecast of what we might expect. I believe that these choppy, down markets have another week or so to run, with perhaps the worst being this coming Friday, December 18 when options and other derivatives expire. If that day was only slightly weak, I might buy some laggards I've been following. If that day is nasty, I'll wait until the following week, and step in when I think the market has begun to steady.

I would consider buying High-Tech's only if I plan to sell them by month-end. Even though big money will be coming into the market in January, money managers will be through with window dressing, and I think they'll be looking more for value stocks and special situations like the Biotech's/Genomic's. If there was any one High Tech stock I would favor, it would be Microsoft. Even though its valuation is "too high", I think there is a reasonable chance that the U.S. Government will ultimately break up the company. If that were to happen, the sum of the parts would be greater than the whole; remember what happened with Ma Bell's split-up. In any event, I hope you have good timing in making your year-end buys. Fortunately, you are in a position to do so, as you have remembered that Cash is King! Stay tuned.

The Market Pro - December 11, 1998