How to Play in a Chronically Falling Market

By Chris Lau
Written on October 10th 2000

1) Reading the Nasdaq chart

Don't we all wish October were over? The technology-heavy Nasdaq does not seem yet to have found a bottom, and there are still 15 trading days left in October. The problems began when the price of oil kept rising, leading to speculation that profits for big companies would shrink. Then markets began to realize that continuous of the Eurodollar against the US dollar would be troubling for companies that derived a significant proportion of their revenue from Europe.

The red line I drew on the daily Nasdaq chart (created from http://www.bigcharts.com) shows that the index is testing critical support levels. Forget about the "great rally of November 1999 to March 2000. What we should be more interested in is the trend that the Nasdaq is headed, so at least we know how much further down technology stocks have to fall. Between April and May, the index came "crashing down" but then found support at a level just above 3,000. From the end of August to today, the same thing is happening. The index needs to find support at 3,000 or things get worse before they get better.

What the Market Needs for a Rally:

The decline in blue chip bell weathers like Intel, Microsoft, Cisco Systems, and Texas Instruments is not making a rally look possible. What the market needs is leadership. In many of the major rallies we had over the past two years, we had some bell weather leading the pact. Without a reason for stocks to rally, it looks like many stocks are headed in a downward spiral. It is extremely important for an individual investor to make a small (but significant) guess as to what sector will be that leader of the next rally, and to make a list of stocks that will be the leader of that sector. For example, I believe that the demand for wireless phones will remain strong, and that the demand for devices, chips, and software that simplify the way Internet content is presented to a wireless device will grow even more. As a result, as stocks like Nokia, Texas Instrument and Motorola are getting hammered, value is being created and eventually these stocks will lead the market higher. My shopping list would therefore include "NOK, TXN, MOT". Without a "shopping list", you will not be in a position to find value in today's markets, nor will you be in a position to act on a market if indeed the decline in the nasty Nasdaq is merely an extended blip in the long running bull market.