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Prime Stock Advisory Letter for January 19th,
1999
Today's Comments: The overall market moved sharply lower on
Thursday of last week, and appeared to stage a recovery on Friday.
US financial markets were closed on Monday in observance of the Martin
Luther King holiday, but overseas markers weren't. It appears
that most overseas markets rallied on Monday based upon the strength of
our rally on Friday. On the surface it would appear that things look
great. But in a world of "Leader" and "Followers" not every stock,
index, or market is created equal. And it is very important to recognize
who or what is setting the leadership pace, and who follows.
In my opinion the US financial markets set the leadership pace for the
rest of the world. And the Dow Jones Industrial Average 'INDU',
not the S&P 500 sets the leadership pace for the US Financial markets.
The capitalization weighting of the S&P 500 'SPX' distorts it ability
to indicate the directional movement of the overall market, not to
mention causes index funds to push its Price to Earnings ratio to a level
higher than it would be if it were not capitalization weighted. Now
that I have had my weekly "slam" of capitalization weighting indices,
the fact that the Dow Jones Industrial Average 'INDU' failed to close above
Wednesday's closing level on Friday causes me some concern over today's
market direction. This combined with Friday's lighter than normal
trading volume leads me to believe the market will move lower today.
The heavy volume continued to be in stocks moving lower on Friday.
In addition to this several of the different sector indices I track moved
lower on Friday, signaling a lack of completeness to Friday's rally.
With Friday's market activity I received a "Sell Signal" on the Amex Computer
Technology Index 'XCI', and the Morgan Stanley Cyclical Index 'CYC'.
The Bottom Line: The market should move lower.
Recommendation
Company: Verity, Inc. Symbol:
'VRTY' Closing Price: $35.00/share.
YH: $35.46 YL: $4.25
EPS: $0.33 P/E: 106.22
Forecasted EPS: $0.82
Dividend: N/A Yield:
N/A Ex Dividend: N/A
Price Targets: $40.50 & then $52.00
Downside Stop: $31.625
Options Recommendation: February 30 Calls, Symbol 'YQVBF'
@ $7.375/contract.
Company Description: This company produces software that allows
for knowledge retrieval for corporate Internet users and e-commerce sites.
Recent News: 1/18 Verity provides Keyview technology
for Lotus Notes R5
1/11 Xerox to use Verity search, retrieval software on intranet
Our Analysis: The shares of 'VRTY' set a new closing high on
Friday. They are currently in a very strong upward trend that should
easily carry them higher. They should continue to move higher and
test $40.50/share, a point of upside resistance established in late
May of 1996. If they close above that level then they should continue
to move higher and test $52.00/share, a point of upside resistance established
in late February of 1996. Monday morning 'VRTY' announced it was
providing software coding for embedding in the newest version of Lotus
Notes.
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