On-Target Market Prognosticator Says Stocks Haven’t Bottomed Out

U.S. stocks have further to fall, if you believe some of the analysts and investors who correctly predicted earlier this year that stocks would plunge.

“Everybody is looking for higher levels in the market, and it’s not going to happen,” said Tom DeMark, a technical analyst who predicted that the market would top out Feb. 18, the day the Standard & Poor’s 500 index reached its record high.

“There’s a natural rhythm in every market, and this one has reached an exhaustion point.”

Stocks soared 10% in the first six weeks of the year, then erased most of their gains as interest rates rose and investors became concerned that share prices overshot earnings prospects.

The S&P; 500, which represents 75% of the market value of all U.S. stocks, fell 9.6% from its peak. Since April 11, it has recovered 5%. Now many investors wonder whether the worst is over or yet to come.

The worst is yet to come, insists DeMark, president of Market Studies Inc., a consulting firm. DeMark--who takes his cues solely from patterns in stock price and volume, said stocks are headed down--beginning today--and are poised to set new lows for the year.

DeMark also expects Microsoft and UAL, parent of United Air Lines, to decline as much as 10% from current prices. Tuesday, Microsoft gained $3 to $110.625 and UAL jumped $4.125 to $78.875.

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Investors ignore DeMark at their peril. Earlier this year, he called the top of the market--to the day. DeMark predicted that the S&P; would begin an 11% slide on Feb. 18. The S&P; began a 9.6% slide on Feb. 18.

“It’s hard to progress much in stocks when you’re looking at bond yields as high as they are,” said Gene Grandone, senior investment counselor at Northern Trust Co., which oversees $130 billion. Grandone also predicted a market rout before stocks fell this year.

Since March 27, the benchmark 30-year Treasury bond has yielded more than 7%, near seven-month highs. Rates began rising in February, a month before the Federal Reserve Board, attempting to slow the strong U.S. economy, tightened credit for the first time in more than two years by raising the overnight lending rate between banks.

“For the first time in years, you have the Fed in your face,” said Garrett Nagle, president of Garrett Nagle & Co. in Boston, which oversees $200 million.

Nagle became concerned about U.S. stocks early in the year. He saw the plunge in International Business Machines as a bad omen. IBM has declined from a peak of $170.125 to $140 currently.

Now Nagle and others fear additional Fed rate increases are in the offing. Higher rates make alternatives to stocks more attractive, as bonds and bank certificates offer increasingly competitive returns. Higher rates also raise consumer and corporate borrowing costs, potentially slowing economic growth.

“We expect more rate increases, and the Fed to be successful in slowing the economy,” said Douglas Cliggott, chief equity strategist at J.P. Morgan Securities. “In the second half of the year, as higher rates start to bite, corporate profits should grow more slowly.”

In early February, weeks before market indexes began to slide, Cliggott recommended that clients lower their stock holdings to no more than half of their portfolios.

At the time, he was among the least optimistic stock strategists.

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What’s ahead? “I think stocks will be in a trading range for the foreseeable future, maybe well into 1998,” he said.

Cliggott recommends high-yielding integrated oil companies and regional telephone firms--stocks that offer dividend income even if the market declines.

Like other short-term bears, Richard Eakle, a Fair Haven, N.J., investment advisor, also is anxious about rising rates and slowing profit. And he has another concern: The recent rout, he said, wasn’t convincing.

“There was never any day when the selling was real extreme,” said Eakle, a former Morgan Stanley & Co. equity strategist. “You didn’t get the fear and disgust--the catharsis--that accompanies a market bottom.”

Eakle said volume on the New York Stock Exchange was relatively stable when the Dow Jones industrial average and S&P; hit their lows this year.

That wasn’t true last summer, when the Dow declined about 7%. On July 16, a week before it hit bottom, the 30-stock average seesawed from a 166-point decline to a 9-point gain, and the frenzy spurred what was then the busiest day in market history. More than 680 million shares traded on the Big Board, and investor pessimism about the market was widespread--a good contrarian indicator.

Eakle recommends oil service stocks, such as Schlumberger Ltd. and Enron Corp. “But if I’m right, and the market’s headed lower, why throw money into it?” he said. “Why not wait?”

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Yet timing the market is difficult. One may call the top and then miss the bottom, and miss out on gains.

“Trying to time the market is like asking for a card at blackjack when you have 17,” said Grandone at Northern Trust.

“You might win the hand, but the odds are you don’t.”