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|  | FEBRUARY 15, 2005
A Basically Bearish View Chris Johnson of Schaeffer's Investment Research sees "a market that continues to move lower," though he has a few picks in telecom and oil "The stock market looks a little too precarious to me," says Chris Johnson, director of quantitative analysis for Schaeffer's Investment Research. Johnson describes himself as short-term bearish and adds that, longer term, "You're likely to see a market that continues to move lower, rather than higher." Johnson bases his forecast on the technical factors he watches, as well as such fundamental forces as the difficulty he expects companies to face in continuing to keep earnings growing. He's also concerned about, among other things, the prevalence of optimism among investors, which he reads as a negative sign. Looking at market sectors, Johnson sees telecom as the only area of technology that he advises investors to get into if they want tech in portfolios. And he predicts oil and oil services will continue to outperform. These were a few of the points Johnson made in an investing chat presented Feb. 10 by BusinessWeek Online on America Online, in response to questions from the audience and from BW Online's Jack Dierdorff and June Kim. Edited excerpts follow. AOL subscribers can find a full transcript at keyword: BW Talk. Q: Chris, from where you sit how does the stock market look right now? A: The stock market looks a little too precarious to me. As it stands right now, many of the indexes are trying to stick to levels above some of their key short-term moving averages, and therefore, like many traders in the market, I've adopted a wait-and-see attitude going through the next few weeks. One example of a trend line I'm watching closely is that of the S&P 500 and its 50-day moving average. This trend line is well known to be one that intermediate traders and institutions keep their eye on -- and it normally induces some selling when the S&P 500 closes below it. And the last two days, [we have] seen daily lows that have bounced off this trend line. Add to the weakening technicals of the market some of the optimistic sentiment that we continue to see, and it makes me lean to the short-term bearish side, if you were to press me for an answer. Q: What does your analysis forecast for the telecom sector? Interesting merger activity there. A: As a matter of fact, one of my picks for 2005 (made in December) was AT&T (T ). This is one of the sectors [where] I've been telling individuals: If they have to have technology in their portfolio, they have to look in telecom. As it stands, there's merger and acquisition activity going on right now, companies continue to expand as technology allows them, and consumer demand is high for their products, leaving the telecom industry as one of the few out there that's seeing true increases in demand. Q: Your opinion, please, for the short and long term on ExxonMobil (XOM ) and ChevronTexaco (CVX ). A: First of all, oil companies and oil-service companies are among the sectors that we see continuing to outperform the majority of the sectors on the Street, simply because of fundamental positives, technical positives (as these sectors continue to see positive price activity), and, of course, negative sentiment. The composite scores, according to our scoring system, have the oil sector at a 7 and the oil service sector at a 6.5, which is among the highest of the sector rankings for our scoring system. Looking at the two companies -- first ChevronTexaco, with a score of 6. Chevron's put-call ratio is right in the middle of its one-year range, telling us that options traders are neither overly optimistic nor overly pessimistic toward the stock. Digging deeper, though, I see that the short-term and intermediate-term trends of this put-call ratio are to the downside, telling me that options traders are adding calls to their positions at a fairly good pace. While this isn't a warning sign, it's certainly something that I'll remain aware of as the stock continues to make new highs. As it stands, 12 of the analysts covered by Zacks have the stock at a hold or lower, while only five are at a buy or higher, telling me that the analyst community continues to sit on the sidelines. But with new highs being made on the stock, the sentiment will likely switch, and we'll see analyst upgrades. Of course, this means more buyers down the road. Given this, I expect that we'll see CVX continue to do what it has done today, in making new 52-week highs until we begin to see too much optimism, at which time the stock will likely top out. Next stock: ExxonMobil, with a scorecard rank of 9. This stock is, of course, extremely attractive to us. The put-call ratio for ExxonMobil is among the highest readings over the last year, telling me that options investors continue to add puts to their portfolios, which means they're obviously growing in skepticism. While some may think that's bad, those who follow sentiment know that this is actually a good sign, as it tells us that there continues to be sideline cash available to move the stock higher.
BW MALL
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