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Today may give hint for this year's sector winner

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Last week I wrote a piece on "tax-loss selling" and a beginning of year phenomena that sometimes provides a bullish trader an opportunity to take advantage of a "lack of supply" on a short- term basis. Well, this morning any short-term hope of this event taking place today was quickly erase. The three stocks I spoke about last week, may give some hint as to how things go this year and perhaps this years "best performing" sector.

Here are some observations

One of the candidates I mentioned for a "tax-loss bounce" was shares of WorldCom (WCOM) and that stock is up strong today at $15.75. Another thing that has me optimistic on the telecom stocks is what we uncovered in Thursday's 03:30 EST Update and the "Dogs of the Dow" theory, specifically the Second Lowest- priced section. Readers may start thinking that some of the recent activity in these stocks may be more than just a coincidence. While I started my investment career as a "fundamental" investor, I soon became more impressed with the results of trading the technicals. While I still base the bulk of my "beliefs" on the technicals, we might still take something from current and future fundamentals that may give telecom bulls reasons to be bullish.

Supply/demand

No, I'm not going to put up a supply/demand chart, but let's think for a moment what took place the last couple of years in the telecom sector. Did anyone other than myself think that eventually all the latest "telecom equipment" that was demanding high prices would hold? When we think about how a market embraces technology, the "early adopters" are willing to pay a high price for bigger/faster equipment. Once competitors of equipment makers saw the huge margins that were being made, more were sure to arrive. Now, look at some charts of telecom equipment stocks like LU, NT and others. Ouch! I think (and it's being reported) that inventories are building at alarming rates. This is excess SUPPLY and to move it, prices will probably drop to make room for new technologies and production. Who could benefit from this activity?

The Telecom Companies, that's who!

Who buys all this telecom equipment? What were they paying before and what are they paying now? Now I haven't looked at a lot of financial reports for companies like WCOM, T, SBC or FON, as I get enough sleep after a hard day of charting stocks. But, if I believe there might be something "fundamental" to why the above scenario (lower equipment costs boosting the bottom line for telecom stocks like SBC, T, WCOM) then I can test these fundamental over time with the technicals.

A reason to avoid the equipment stocks.

I might also use the above "fundamentals" as a reason to monitor some of the equipment stocks like LU, NT and even CSCO. We've mentioned before that certain groups of stocks act inverse of each other during certain market cycles (Airlines Vs Oil Prices would be an example) and how the price of a component could effect the performance of a group of stocks (positively or negatively).

What can I do?

The above example of a "better bottom-line for telecom stocks at the expense of the telecom equipment stocks" is the SCENARIO, that I can now begin testing with the technicals of the indexes or groups of stocks that I classify as telecom verses telecom equipment.

Quick test

I mentioned three stocks last week that might get a "bounce" from a lack of tax-loss selling today. Those three stocks were WCOM, RBAK and FDRY. Is it coincidence that WCOM (telecom service) is bouncing but FDRY and RBAK (telecom equipment) aren't? I'm not sure, but we've developed a new scenario that we'll want to test on a daily/weekly/monthly basis.

Jeff Bailey
Staff Analyst

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