Stock Market Direction by Steve Zito Bulletin Board 2001 Page a

BULLETIN BOARD 2001- STOCK MARKET DIRECTION- BACK

July 4, 2001
Lucent cut a $1 billion deal with Sprint last week. Is that great news? Investors are not going to put money into Lucent based on that. Long-term investors are not going to put money in Lucent until they are convinced that business is getting better, which will be in November, 2001. The stock would have to be at $15 by then. Traders, on the other hand, can move Lucent to $11 in a month on no news at all. They did it in April/May, 2001, and I don't remember news getting better for Lucent in April and May, if anything, the news got worse. A third group are the mutual growth funds, who may have completed selling (dumping) their positions. Lucent's retest of $5.50 on June 26, 2001 was the final capitulation, occurring right at the end of the quarter ending June 30.
Now if Lucent is a big percentage winner by September 15, 2001, let's say trading at $11 to $15, the mutual growth funds will jump all over it in the last two weeks of the third quarter, JUST LIKE THEY JUMPED ON PRICELINE and EXPEDIA in the last two weeks of the second quarter. Do you realize that Expedia soared from $29 to $47 between June 1 and June 29? That Priceline soared from $5 to $10 in just over a month? Business did not get twice as good for these two companies in June. Business for the airlines went south in June. More capacity from Delta and ComAir came on line, fare wars broke out, gasoline prices fell (automobile transportation competes with air traffic). The stocks soared because funds wanted to show them at the end of the second quarter. This is classic herd behavior. No analyst will predict this because analysts are too busy analyzing company balance sheets and industry prospects INSTEAD of investor psychology which drives stock prices. If you can position yourself in stocks based on my thesis, you can achieve abnormal stock returns that others only dream about. I proved this by coming in Second Place in June's Investment Challenge, where my trades on Priceline and Expedia are all available for verification. I turned $500,000 June 1 into $1,008,396 by June 29, 2001.
Very few will agree with me, which is why I am not working for a Wall Street firm. On the other hand, no one working on Wall Street has consistently picked stock winners over a long period of time because they are too caught up in their own methodology. I consider myself as more of a writer and a market observer/historian than as an analyst.

June 24, 2001
I did some research on EDGAR, and Fidelity Investments and Janus Funds both lowered their positions in several key Internet infrastructure and telecom equipment stocks to less than 5% in Jan. and Feb. of year 2001. As such, with 4.9% holdings, those funds were no longer required to file changes in position. It is possible that large growth mutual funds were dumping their last 4.9% positions in these stocks and rotating the money into over-valued banks and financial stocks last week. That is how mutual fund managers behave. They are measured by relative performance versus their peer group, and not absolute performance. If the majority of fund managers were moving to financial stocks and out of telecom and Internet, then what you saw last week may have been a capitulation stage for telecommunications equipment and Internet infrastructure groups. Those sector groups may start rebounding sharply near the end of July to the end of August after bottoming.

UPDATE:
Since June 25, Exodus, Metromedia, and Level 3 are moving sharply higher on heavy volume after this group crashed last week. They should only be bought with stop loss orders. No stop loss order is "protective" enough to prevent you from having a loss on these stocks. Stop Losses are designed to prevent "catastrophic losses". For example, please consider the trading history for my trades in Metromedia Fiber Network. I kept getting stopped out again and again, incurring a series of 5% losses. But several times I caught a 40% to 50% pop to the upside on short-covering rallies. Last week (June 2001) MFNX traded down to $3.00, and my technical analysis indicated that it should have held that price level. It did not. Last week instead, MFNX crashed through $3.00 and went straight down to a very depressed level of $1.40. At that point it was selling below book value. One of two things can happen. Either MFNX writes down their inflated asset values (PP&E) to reflect the market assessment of the value of the company and takes a huge one-time charge, or the growth mutual funds stop dumping MFNX with the end of the current quarter and the stock has a very significant rally. Please examine a 5-day and 10-day chart for MFNX to see what is happening. Same story for Exodus-EXDS and Level 3 Communications-LVLT. In fact, these stocks were highlighted in a very negative Wall Street Journal article (Page C-2) Monday, June 25, and markets reacted to the article by driving their stocks sharply higher.

Some MESSAGES I posted at marketwatch.com June 25 which were promptly deleted from their message board. I wonder why? Probably same reason CBS Marketwatch stock is trading around $2.00!!!

IN DIRECT RESPONSE ONLY TO ANOTHER MESSAGE POSTED FOR LUCENT in which the message writer said that Lucent management was responsible for the drop in Lucent's stock price and that Lucent employees did not know what Lucent management is doing, MY ANSWER TO THAT MESSAGE WAS:
"Your assumptions about Lucent management are all wrong. There are tens of thousands of Lucent employees who know exactly what Lucent management is doing. Otherwise, they would all quit and go work elsewhere. Those Lucent employees are the smartest electronics and software engineers in the U.S. They can write their own ticket. As for why Lucent is going down, aren't you forgetting the media, one Wall Street reporter in particular, who have been badmouthing Lucent for a year just to make headlines? If you don't know to whom I am referring, just watch cable at 7 AM. By analogy, if a TV personality said that "your bulletin board messages" are no good, I bet that most people would believe that TV announcer and stop reading your messages. There was one TV pundit who was asked last month, "About Lucent, what do you think of Schact?" The famous TV analyst (who has a competing website to this one) said, "76ers in four, they can double up Shaq, but they can't stop Iverson." Now with analysis like that from the Street on Lucent, is it any wonder the stock is falling?"

IN DIRECT RESPONSE ONLY TO ANOTHER MESSAGE POSTED FOR JDSU in which the message writer said that JDSU was having a nice 20% rebound from under $10, and that it had finally made a bottom, MY ANSWER TO THAT MESSAGE WAS:

"JDSU-You are all missing the point. The growth oriented mutual funds are dumping telecommunications equipment stocks at any price (panic selling) and getting out of the Internet infrastructure stocks entirely. This can be verified by reviewing SEC filings for your favorite stock at EDGAR. See who was selling in January when Nasdaq advanced to 2800. Some well known funds. Why would they get out of those stocks in what appeared to be the beginning of a new bull market after the Fed cut rates Jan. 3? Those funds are moving all of their money into financials, banks, and long cyclicals (autos). Remember, fund managers are judged on relative performance. The herd instinct is pushing them into interest sensitive plays. The only correct assumption that I have read in the preceding five messages posted here is that JDSU may take a year to recover. Unless you have MORE MONEY than the two largest mutual fund groups, you are not going to be able to push up the price on JDSU. Those funds are dumping all of their holdings (won't mention their names, because then they immediately delete my bulletin board message because those funds are the advertisers on this site). You are up against the strongest, best-capitalized funds, they are selling telecom equipment stocks indiscriminately."

IN DIRECT RESPONSE ONLY TO ANOTHER MESSAGE POSTED FOR EXODUS in which the message writer asked why EXODUS is falling in price, MY ANSWER TO THAT MESSAGE WAS:

"Exodus, Level 3 and Metromedia Fiber Network have all dropped an average of 77% since May 2. What do the three companies have in common? The single most important factor is that all three are being dumped by very large growth-oriented mutual funds. Go to EDGAR at the SEC and read the filings for the last six months on these Internet infrastructure companies, and you will see listed as sellers the same funds that advertise next to this while you are reading it. Where did you think all of the volume came from last week? Small investors? No, small investors are holding the bag. The mutual funds are teaching them a lesson in portfolio diversity. With most small household investments over-weighted in tech and telecom, the heads of the mutual fund groups are laughing through their power lunches while dumping Exodus and MFNX at $1.50, BECAUSE it is not their money!"

IN DIRECT RESPONSE ONLY TO ANOTHER MESSAGE POSTED FOR COMPAQ in which the message writer said that COMPAQ rose in price last year because of great products and quality, MY ANSWER TO THAT MESSAGE WAS:

"COMPAQ-The only reason Compaq rose last year was because of a large investment in CMGI which Compaq received as part of its spinoff of AltaVista. Since CMGI has crashed along with its Internet brethren, there is nothing in Compaq's portfolio of businesses to add value"

A READER SENT ME AN EMAIL AND WANTED TO KNOW IF MY STOCK PICKS BECAME AVAILABLE BEFORE I POSTED THEM ON MY BULLETIN BOARD. HERE IS MY ANSWER.

No, first I buy these very same stocks on the same date and at the same price as shown, either in the current Investment Challenge, or other contest, and shortly after that I post the stock picks on my BULLETIN BOARD. That way my readers can see how I repeatedly finish high in stock market trading contests, and they can also see how I do my trading. For instance, review all of my trades on Priceline.com or Metromedia Fiber Network. Those are the actual trades I made. I did try to buy Priceline for exactly $1.00 in January 2001 but the lowest trade was $1.06 this year. Since I did not ever buy it at $1.00, I never posted that one.

One reader (who has a competing website promoting BUY AND HOLD strategies for BANK STOCKS) questioned the validity of my stock prices and gains on my Bulletin Board. I referred that reader to the June Investment Challenge where all of the trades (complete transaction history) are available for the TOP 20 players. Since my account (S ZITO) finished second, it should be fairly easy to click on the TOP 20 accounts, click TRANSACTION HISTORY, and easily review (or print out) my trading history for June, 2001. Compare to the stock prices on my BULLETIN BOARD, and note a direct correlation. I never heard from that critic again.

If your question relates as to whether I make the stock picks available before I actually act on them, or post them to the Free Reading Public, the answer is yes, but not for free. This analysis is hard work, and it is my living. Any paying subscribers on a monthly basis maintain a daily dialogue via email where they ask questions, I do the research, and give them the info they need to make informed decisions. I also provide to them a list of stocks I feel that justify the risk of loss in what I would have to describe as the mother of all bear markets. I provide the list but do not tell people to buy or sell, just provide the information, and subscribers make up their own mind. Most important is that subscribers have some degree of diversity and maintain at least ten different stock positions. Note that my picks posted July 11, 2001, number ten, and that diversification reduces individual risk of any one company going out of business. The date July 11 coincides with what I told readers to expect July 10 with regard to Nasdaq 1950, and timing of a 5-day rebound. Some readers still do not make money even with my service. The reason for this is simple, they continue to trade and/or invest the same way they have for their entire investing life. Buy high. Sell low. Brokerages love them.

On July 10, 2001, not one mainstream technical analyst for any Wall Street firm had 1950 as a Nasdaq support level. Most had 2100, 2000, 1860, or 1600. Not one of them with an 1860 support level adjusted it upward for lowered volatility (measured by the VIX or the VIN index), reduced trading volume (due to summer season), and lowered interest rates (measured returns on stocks have a lower interest rate benchmark to outperform, which means that traders can buy at higher levels and sell at lower levels. The lower rates go, the smaller the spread between short-term stock market trading highs and lows). If you understand all of this technical talk, that's great. If not, that is fine, too. I did not learn all of this overnight. I am more educated and just as intelligent as any $200,000/year securities analyst on Wall Street, but unlike them, I do not have a stuffed shirt brokerage CEO with a hyphenated last name ordering me what stocks to foist on an unsuspecting public.

The reason I work for myself is that I am handicapped, and have been denied employment by those Wall Street firms. In fact, I scored a perfect score on Dean Witter's aptitude test in 1993, took three job interviews, and the African-American general manager of the Philadelphia office (John Anderson) showed me the door only 10 minutes into my final interview with him. He did not even send me a rejection letter. On my way out of the main Philadelphia office, I noticed many new hires, mostly African-Americans in their early 20's, were manning the Dean Witter desks and making cold calls. So much for equal opportunity in America. Between 1985 and 2001, I have applied to every Wall Street brokerage numberous times and did not even get the courtesy of a rejection letter from (Morgan Stanley) Dean Witter. Thus I need to find paying subscribers in order to continue posting Stock Market Direction online as a FREE service. If you have read this far, I can guess that you are very smart, that you have money to invest, and that you want to maximize your gains. Let me know what kind of investor, trader, or other interest you have, in specific terms. EMAIL ME.

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