Prime Stock Advisory Letter for December 9th, 1998

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Today's Comments:  The overall market finished yesterday moderately lower.  There was strength in the healthcare and high tech indices with weakness in the rest of the sector indices I track.  In yesterday's newsletter I wrote that I thought there was a possibility that the market may be forming a "Handle" on its "Cup" pattern,  which is a very Bullish pattern.  Well there is also a possibility that the market may be forming a "Triple Top",  which is a very negative pattern.  And to be totally honest from a technical perspective the major market indices are not providing a clear picture as to which of these patterns is being formed.  In cases such as this it helpful to look at other market data to help get a better view of what may occur in the market.  According to this week's Barons the S&P 500 'SPX' closed @ 1,176.74 and is trading showing trailing 12 month's earnings of $38.10 and trading at 30.89 times earnings.  A year ago the S&P 500 'SPX' closed @ 983.79 and showed trailing 12 month's earnings of $40.59 and traded at 24.24 times earnings.  A look at the numbers shows that the S&P 500 has risen 192.92 points or approximately 19.6%  During that period of time the earnings on the S&P 500 have declined $2.49 or 6.1%.  Also the Price to Earnings ratio on the S&P 500 has increased from 24.24 to 30.89.  This an increase of 6.65 or in  percentage terms it works out to 27.4% expansion of the Price to Earnings ratio on the S&P 500.  What these numbers are very clearly showing is that the entire growth in the level of the S&P 500 'SPX' is due to a massive inflow of money into the market and not due to growing corporate profits.  Now a solid case could be made that the market is looking to the future and is clearly expecting corporate profits to increase due to the apparent turn around in the overseas economic problems.  But while the overseas picture seems to be improving there is a scarcity of hard facts to build a solid case for the turn around on.  In terms of what this means for the prospects of the market moving higher is that it is asking for a lot of "faith" to be placed into something that is yet to be proven.  In addition to this apparent over valuation of the market on a fundamental basis the Dow Jones Industrial Average does not appear to be forming the same "Handle" formation on its chart.  Such a divergence between the Dow Jones Industrial Average 'INDU' and the S&P 500 generally results in the S&P 500 following the Dow Jones Industrial Average lower.  A close look at the chart of the S&P 500 indicates that the market could go either way.  A look at a few key broader pieces of information points to a move lower.  My thoughts are the market will move lower,  but I would like to see another day's trading before I am willing to recommending index put options.  The Bottom Line:  The market should move lower.

In yesterday's newsletter I incorrectly stated this week is options expiration week and also "Triple Witching" expiration.  I was wrong.  I misread the options table.  Next week is options expirations week,  and it is a "Triple Witching" expiration.  I would like to thank those readers who called in to inform me of my mistake.

In reference to the divergence between the Dow Jones Industrial Average 'INDU' and the S&P 500 'SPX',  there is a very good reason why this occurs.  The S&P 500 is a capitalization weighted index designed to track the movement of the overall market and due to the fact that it is capitalization weighted larger companies have a greater impact than smaller ones.  The Dow Jones Industrial Average 'INDU' is an equally weighted index that is designed to track the economy of the United States,  not the market.  The market should track the economy not the other way around.  Due to this major difference in these two indices the Dow Jones Industrial Average will continue to carry more significance than the S&P 500 in my opinion.

Company:   Capstar Broadcasting      Symbol: 'CRB'    Closing Price: $20.25/share.
YH: $26.625      YL: $10.125     EPS: ($1.25)     P/E: N/A    Forecasted EPS: ($0.49)
Dividend: N/A      Yield:  N/A      Ex Dividend: N/A
Price Targets:  $25.25 & then $38.50      Downside Stop:  $18.875
Options Recommendation: January 17 1/2 Calls,  Symbol 'CRBAW' @ $3.625/contract.

Company Description: This company operates radio and television stations.

Recent News:  11/10  Capstar 3rd qtr after tax cash flow up 129%

Our Analysis: The shares of 'CRB' gapped higher on the open of trading yesterday.  They finished the day by closing above a key upside resistance level on heavier than nornmal trading volume.  They should continue to move higher and test their previous closing high of $25.25/share.  If they close above that level then they will have completed a cup pattern with a measured move to $38.50/share.

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