Speculative Signs Troubling Wall Street
Classic signs of rampant speculation in stocks are invigorating the bear camp and causing some bulls to lose sleep.
Historically, excessive speculation in the market--traditionally defined as heavy trading in lower-priced stocks, and surging interest on the part of inexperienced investors--has heralded market tops.
The question is one of timing, however: What appears to be heavy speculation might just be a prelude to much wilder action before the market finally peaks. What’s more, nothing guarantees that a market top, if one has arrived, will be followed by a deep decline. The market could just move sideways for a sustained period.
Still, even many Wall Street bulls admit that warning flags are flying after 16 months of tremendous gains in stock prices:
* Trading volume on the Nasdaq market, home to many lower-priced, more speculative stocks, has soared in recent weeks, far surpassing volume on the New York Stock Exchange.
Nasdaq volume was 3.17-billion shares last week, 1.3 times NYSE volume. Even allowing for the “double counting” of many Nasdaq trades as shares move from dealer to dealer and then to customers, the action in Nasdaq has been red-hot, as many institutional and individual investors seek out small-company stocks.
Indeed, small-stock indexes are hovering near record highs, even though the blue-chip Dow Jones industrial average hit a three-month low on Tuesday.
* Crazed trading in some unquestionably speculative issues--such as Newport Beach-based Comparator Systems, a penny stock that has been setting Nasdaq volume records in recent days--is raising plenty of eyebrows on Wall Street. The only reason Comparator is making headlines is because the tiny firm has had the chutzpah to issue 610 million shares over the past decade, more than IBM Corp. has outstanding.
* Individual investors are forming new investment clubs at a record pace, according to the official organization for such clubs, the National Assn. of Investors Corp. in Royal Oak, Mich. Ken Janke, NAIC’s chief, estimates that roughly 1,000 clubs were formed in April alone. If that pace continues, the number of clubs will soar 60% over the next year, from the 21,157 in existence as of March 31.
Because investment clubs form specifically to pool members’ money to buy individual stocks--not mutual funds--bearish analysts see the club boom as a sure sign that “green-horn” investors are bored with mutual funds and are seeking more action, and risk, in individual stocks.
That is also suggested by a surge in new-account openings at discount brokerages, which cater to do-it-yourself investors. Charles Schwab Corp., the nation’s biggest discounter, says it has opened 350,000 new accounts so far this year, far above the 1995 pace, when 698,000 new accounts were opened during the full year.
* Finally, speculative fever isn’t limited to the small-investor crowd, bearish analysts say. A New York Stock Exchange membership sold for a record $1.45 million on Tuesday, $200,000 above the previous record price set in March.
Ricky Harrington, a veteran market analyst at brokerage Interstate/Johnson Lane in Charlotte, N.C., argues that “chances are increasing that we’re seeing a major top in the market,” given the traditional speculative signs.
But then, investors heard the same warnings late last summer, when the craze for Internet-related stocks reached its first crescendo. “Six months ago we were talking about [the stock offering by] Netscape Communications” marking a peak, says a dubious Laszlo Birinyi at research firm Birinyi Associates in Greenwich, Conn.
He says there is little doubt that more individual investors are becoming interested in picking their own stocks rather than leaving that decision to mutual fund managers. But Birinyi thinks Wall Street is a bit too self-serving to declare that the vast majority of small investors don’t know what they’re getting into.
For much of the 1980s, Birinyi notes, small investors were more interested in high-yielding, low-risk Treasury bonds than in stocks, which in retrospect was a wise choice.
“I’m not sure the proverbial little guy is as stupid or naive as Wall Street thinks,” he says.
The NAIC’s Janke concedes that the recent explosion of interest in investor clubs “is really scary. We love to see it, obviously, but . . .”
Janke believes that for many investors, researching and buying individual stocks is simply the natural progression after years of owning mutual funds. “An awful lot of people want to have control of their own future by selecting their own securities,” he says.
Of course, that also means that individuals are taking on vastly more risk. And history shows that as bull markets peak, people become much more comfortable with risk--until the bottom falls out.
Yet despite the speculative signs in the market, even some of Wall Street’s warier veterans say the market may be far from out of steam. Richard McCabe, technical analyst at Merrill Lynch & Co. in New York, notes that the NYSE advance/decline ratio--the number of stocks rising versus the number falling--hit a new high last week. Generally, he says, that doesn’t happen coincident with market peaks, but rather three to six months in advance.
Joseph Barthel, strategist at Fahnestock & Co. in New York, argues that without a recession or a severe credit-tightening move by the Federal Reserve Board on the horizon, the market’s natural direction is up.
“A market top is [accompanied by] a sequence of events, and I’m not sure we’ve had enough of those events,” Barthel says.
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Nasdaq’s Surge
Trading volume on the Nasdaq stock market has soared in recent weeks while New York Stock Exchange volume has remained flat--a sign that investors are chasing more speculative issues, some analysts argue. Weekly share volume, in billions:
5/3
Nasdaq: 3.17
NYSE: 2.44
Note: NYSE volume is composite (all exchanges).
Sources: NYSE, NASD
High-Priced Chairs
A “seat” on the New York Stock Exchange--actually, a membership on the exchange--sold for a record $1.45 million on Tuesday, up $200,000 from the last sale, in March. High prices for NYSE seats each year and latest, in millions:
Tuesday: $1.45
Source: New York Stock Exchange
