Markets try to negotiate past storm

Monday, October 16th 2000, 12:00 am
By: News On 6

By Bill Deener / The Dallas Morning News

Stock investors may feel as though they were smacked by the perfect storm last week.

Soaring oil prices, sagging earnings, a slowing economy plus a nasty flare-up in the Middle East all conspired to produce a vicious wave of selling for much of the week. A bit of calm returned to the markets Friday, and many stocks were able to recoup some of the week's slide.

But the question now is whether the storm has passed, or whether investors remain in the eye of a hurricane – about to be slammed again.

The volatility in the market, which is at historic levels, is a pretty clear signal that the storm may linger.

"A one-day rally doesn't necessarily mean anything," said Jim Weiss, chief investment officer at State Street Research & Management Co. in Boston. "We still have a lot of uncertainty to deal with, so I would say it's a little early to take a victory lap and say the decline is over."

However, Mr. Weiss and other analysts say there are some signs that the stock market in general and the Nasdaq composite index in particular may be at least nearing a bottom.

First, the Nasdaq before Friday's rally was down about 40 percent from its all-time high of 5,048.62 hit on March 10. Home to most of the big-name technology companies, the Nasdaq had dropped 8.5 percent before Friday's rally.

"We have taken enough valuation off the Nasdaq that we have only a precious few stocks that are overvalued," Mr. Weiss said. "I just flat disagree with those who say technology is still overvalued."

Even the less volatile Dow Jones industrial average was battered last week. And after the 379-point drop on Thursday, it was down 5.3 percent for the week and 14.4 percent year-to-date.

Some strong growth

Second, in the midst of Thursday's dramatic sell-off, several technology companies actually reported strong third-quarter earnings growth. For example, chip maker Advanced Micro Devices beat Wall Street expectations, and its shares actually rose.

"It's positive to see these earnings come in like that because it reminds investors that the long-term fundamentals for technology are quite good," Mr. Weiss said.

Third-quarter earnings growth for companies in the Standard & Poor's 500 index is expected to come in at about 16 percent, and the current estimate for the fourth quarter is 15.4 percent – about double the historical average.

And third, the severity of last week's downdraft almost reached the point of panic selling, or in the parlance of Wall Street: "capitulation."

Mr. Weiss said the number of bets made by Wall Street traders that the market would fall – the so-called put ratio – was at a level not seen in two or three years. Historically, capitulation has often signaled a new upward turn in the market.

"It was almost the classic signs of panic and blow-off selling, " said Mr. Weiss. "I would have preferred to see a washout, but that is not necessary to mark the bottom, and it was awfully close anyway."

Waiting for more

But Bill Meehan, chief market analyst at Cantor Fitzgerald & Co., said he's not ready to announce a sustained turn in the market until he sees "some real fear take hold" where investors just throw in the towel and exit the market at any price. This would indicate the market has hit bottom and is ready to begin a new march upward.

Each rally from the recent downturns just signals that investors are still "living in another world, " he said.

"Some people are still in the denial stage and think these stocks are going to come right back and get a 20 percent return before the end of the year," said Mr. Meehan.

"I thought we might get enough bloodletting Wednesday [a 137-point drop], but the Nasdaq rallied back and that took care of that."

Steven Leuthold, chairman of Leuthold, Weeden Research, a Minneapolis market research firm, is even more bearish. In fact, after last week's market debacle, he let fly with words of unvarnished candor.

"We are in a bear market," Mr. Leuthold said. "And the disappointments in earnings are going to create a lot more havoc."

Indications of a bear

Technically, Wall Street defines a bear market as a 20 percent decline in the Dow – and it's down only 11.4 percent for the year. But Mr. Leuthold said he's not afraid to announce a bear market when 40 percent of the value of the Nasdaq has been lopped off.

Further, the unprecedented volatility in the Nasdaq doesn't bode well for the future.

In August, 39 percent of the month's trading days were up or down 1 percent or more.

In September, 75 percent of the trading days were that volatile, and so far this month nine of the 10 trading days have seen 1 percent moves.

"This kind of volatility goes far beyond anything we have seen since the 1930s," Mr. Leuthold said.

The amount of volatility has changed, he said, because the nature of trading has changed.

A huge number of investors are now involved in so-called momentum trading, meaning if the stock is going up, they buy at any price – and if it's going down, they sell at any price.

"In the old days, six years ago, you had value players that would come in when a stock dropped so far and say, 'I believe it's a bargain at that level and buy it,'" he said. "Today, everyone is a momentum player."

How to bounce back

If the current market is to regain its footing, technology companies, which now account for about 30 percent of the Standard & Poor's 500 index, have to re-establish themselves as market leaders.

But some analysts, including Mr. Leuthold, doubt that will happen any time soon.

They argue that the technology sector, just like many other sectors of the market is cyclical.

This means that it moves in tandem with the overall economy, and as the U.S. economy slows so will the earnings of tech companies.

And while that's true for some technology companies, Mr. Weiss said many analysts mistakenly paint the entire industry with too broad a brush.

He counters that technology in the last five years has become a strategic, competitive weapon for a host of companies both in the United States and overseas.

In other words, even so-called old economy companies have to keep buying technology in order to stay competitive.

"Technology is a strategic weapon for bankers, retailers and all kinds of companies. That is a profound shift," Mr. Weiss said. "That takes a large part of cyclicality out of it."