Fun And Games

For example, the biotechs bounced well after the initial market selloff in
early 2000. The reason for their recovery had a lot more to do with liquidity
than fundamentals. As money came pouring out of tech stocks, it needed to find a
new home. Traders could have placed that cash in many of the listed stocks and
turned a nice profit. But their popular addiction to Nasdaq kept most of their
search to four-letter stocks.

The bulls continue to rule biotech to this day. But can you name another hot
sector that has outperformed biotech since the bubble burst? Here’s your hint:
sneak into your kid’s room and see why he can’t seem to get his chores done on
time. That’s right. Fun and games is the surprise winner of this bear market.

Perhaps an analogy to the dark days after the 1929 crash is in order. One of
the most interesting consequences of the Big Depression was the rise of the big
Hollywood musical. It seems that the wounded citizenry needed to escape reality
from time to time, and a few dimes at their local movie show was just what the
doctor ordered.

While modern investors aren’t on the streets selling apples just yet, adverse
market performance does seem to raise the need for entertainment. Enter
Microsoft, Sony, Nvidia and Electronic Arts. This marriage of international
corporations and original suppliers has created a revolution in your kid’s
bedroom…and on your hard drive.

OK, it’s time for my personal confession. Here is what my current inventory
looks like. The Hand has just reached the second island in “Black and White”.
I’m stuck in the masoleum fighting Howlers in “Clive Barker’s Undying”.
I expect “Myst III: Exile” to be even more frustrating than “Riven”
(if that’s possible!). And I head over to FlightSim.Com at least once a week to
check the latest about this winter’s release of “Flight Simulator 2002”.

Hmm, I guess I need to upgrade to the new anti-aliasing GeForce. But then
I’ll need a faster PC to run the whole thing. And a bigger monitor. But I
digress. This column is about technical analysis, not game hints, cheat codes or
walkthroughs. So let look at a few winners that forgot this is a bear market.

Electronic Arts has come a long way since Deluxe Video, their mid-80s pipedream
of today’s video editing software. The weekly chart reveals a company on a very
long growth track. Although there have been bumps and obstacles along the way,
ERTS now sits at an all-time high. This reflects its powerful position within
the entertainment software genre. ERTS got its foot in the door several years
back with its popular sports-related titles, and has since expanded into
everything else, including more racy titles that require PG retooling before
your 11-year old can frag the bad guys.

Although ERTS has made a nice recovery after getting caught in last year’s
selloff, it may still have some work to do before making a run toward 100. The
lower pane indicator is my proprietary Accumulation-Distribution Accelerator
(ADA). This handy reading gauges the intensity of buying and selling pressure,
especially near new highs and lows. In the chart above, price has expanded to a
new high but ADA still sits under a resistance trendline.

This suggests that the stock will pull back and wait for accumulation to
catch up with price development. The theory behind the prediction is simple:
price tends to lead or lag accumulation. When price leads and tension on this
spring draws tight, it should pause until accumulation builds, or turn back
until it matches the volume reading. Alternatively, in those setups where
accumulation leads price change, price should eventually jump forward to catch
up with the more enthusiastic buying crowd.

To the victor go the spoils. Nvidia Corporation outlasted their incompetent
competition to emerge as the leader in 3-D video hardware. Good technology
didn’t hurt either. Each generation of the NVDA chipset alters the playing field
(so to speak) of computer graphics. And their association with the upcoming
Microsoft XBox makes them a great speculative vehicle on the video gaming
industry.

NVDA has pushed into a new all-time high as well. It also appears that the
stock is under more intense accumulation than ERTS. Notice how the ADA marked a
new high at the same time as price. Then it formed a bullish cup on top of the
old high while price shifted into a sideways move. Now that ADA is turning up
again, it may signal that the stock is about to cut through 100 in a big hurry.

Let’s not leave a humble NYSE retailer out of our analysis. Consider the math:
if you had put $10,000 into TOY at the beginning of 2000, would you be better
off or worse off now than if you put an equal amount into CMGI or perhaps GLW?

Hurts, doesn’t it?