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Look for a Renewed Bull Market in 2001
by Brian Hicks
If you're a disciple of Malkiel's "A Random Walk Down Wall Street" you're probably not feeling too good right now. In that book, Malkiel suggests that a blindfolded monkey would have as much luck selecting a portfolio as a pro.
I was born in 1968. According to Chinese astrology, that was the "Year of the Monkey." Therefore, I must be considered a walking freak show. But maybe my wacky wig and Kentucky teeth have taken a back seat to the first market-flooring clown, Mr. Malkiel.
Malkiel's core premise is: stock prices cannot be predicted in the short term. As a result, individual investors are better off buying and holding on to index funds than meddling with stock trades or actively managing mutual funds.
Hmmmm. Luckily, you follow Taipan. But if you indexed your portfolio to one or all of the major indices like Malkiel recommends, you're probably not too crazy about the resulting performance.
As I write, the Dow is down 6% for the year, the NASDAQ is down 30%.
Taipan's microcap holdings, however, are up 26% for the year. Much of this success has been driven by the performance of biotechs.
But what you really want to know is how to profit from the current market. That's exactly what the Taipan forecast issue is for.
If the recent bear market has you questioning your involvement in the investing arena, just take a look at the chart of the Dow Utilities Index on the next page.
I'll quote from one of my favorite books on the subject, Stock Market Logic, by Norman Fosback.
"Utility stocks are so sensitive to interest rates that bond and money market developments are often reflected in the Dow Utility Average long before they exert any influence on the stock market generally. For this reason, utility stocks are frequently a useful leading indicator of general market trends.
"There are several reasons for the interdependence between utility stock prices and interest rates.
"First, owing to their customarily high dividend yield, utility stocks are often treated as a substitute for bonds, whose price fluctuations are almost totally dependent on interest rate changes.
"Second, most utilities have large amounts of debt in their capital structure, on which they must pay interest. The amounts of such payments are critical to their profitability.
"Third, the utilities are dependent upon easy availability of funds in the capital markets to finance the expansion on which their long-term profitability depends.
"Given the dependence of all common stock valuation on interest rates, it is not surprising that utility stocks frequently change trend ahead of the general market.
"Although over 150 utility stocks are listed on the NYSE, the 15-stock Dow Jones Utility Average serves as a useful proxy for market forecasting purposes.
"One useful refinement is to compare the current Dow Utility index with the level of 15 weeks earlier. If the present reading is higher, utility stocks may be classified as in an uptrend and the stock market should follow upward as well.
"If the current Utility index is lower, a downtrend is established and the broad market should the follow the utilities lower. Since the utility average has a greater chance of embarking upon a sustained trend over a 15-week period than in a single week, buy and sell signals are less frequent and whipsawing is reduced (although it is not completely eliminated).
"The utility stock average provides a unique, money sensitive measure of investor sentiment. It is a valuable leading indicator of the market's future trend — a real bellwether."
In other words, if the utility index is rising, the broader market will probably rally as well. Now take another look at the Dow Utility chart...
 The index has been in a very robust rally since the beginning of 1997 (remember those days — before anybody heard of B2B?). The Utility index went from 210 in early 1997 to about 340 in mid-1999, a gain of 62%. That ain't bad for safe haven stocks with dividends.
Subsequently, the Dow followed the Utilities, posting a gain of 69% in the same period. The NASDAQ went on to post a massive gain of 150% during that time. But the Utility index sold off in 1999 in anticipation of the three rate hikes by the Fed. It was clockwork. However, take a look at the progress on the chart ever since it made a double bottom formation. The index has repeatedly set record highs this year.
In other words, utilities are indicating low inflation and lower interest rates for the future. This is always bullish for stocks. That's all you need to know to be fully invested in the market.
Read on...
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