Stocks: What’s Next?
With the Dow industrials losing almost 300 points Tuesday, many investors naturally are fixated on the market’s current plunge.
But what they really should care about is the next rally--whenever it arrives.
Certainly, investors should pay attention to how hard the market gets hit in coming days if this sell-off continues, analysts say.
But with the market looking “oversold” and the buy-on-dips mentality almost certain to reassert itself at some point, the next upturn could offer more clues about the health of the 1990s bull market than will the current decline.
“If we do get a rally, it’s going to tell a lot about the future direction of the market,” said Gary Anderson, a technical analyst at Anderson & Loe in Eugene, Ore.
A rally is likely to ensue sooner than later because many big and small investors alike are no doubt rubbing their hands in glee at the thought of buying on weakness--with key stock indexes already down 9% to 18% from their peaks.
That strategy has worked like a charm in recent years as solid rallies have invariably followed scary market corrections.
Look back no further than last October, when Asia-fueled fear sent the Dow down 554 points on Oct. 27. The next day the Dow soared 337 points. And after a few steps backward in ensuing months, stocks went on to make new highs this year.
The market’s message in its many rebounds since 1990 has been that the bulls have remained in control on Wall Street, despite plenty of challenges. That may still be the case.
Indeed, a number of Wall Streeters think this latest downdraft is nothing more than a garden-variety correction that is close to running its course.
“We might have a little more downside, but we don’t think this is the end [of the bull market],” said Jeffrey Applegate, chief investment strategist at brokerage Lehman Bros. in New York.
The latest sell-off has been triggered in part by fears about slowing corporate profit growth. But bulls dismiss those worries, arguing that once the fourth quarter rolls around, comparisons to last year’s Asia-weakened profits will look good enough to keep stocks in an updraft.
But to other market-watchers, it’s not that simple anymore.
With the exception of about four dozen blue-chip stocks, the broad market has been in horrendous shape for several months.
On Tuesday, the Russell 2,000 small-stock index--which has been pounded down 18.3% from its April record high--sank below its low of last October. That is a big negative to so-called technical analysts who watch stock charts.
Other technical patterns also point to trouble.
In each of the last two days the market has been hit hard in the final 30 minutes of trading. That’s ominous because it underscores the negative sentiment gripping the market: Late selling shows that big institutions, unhappy with what they see over the course of the day, are unleashing big blocks of stock just before the close.
In other words, the market’s action in the first six hours of trading only heightens their anxiety.
Some experts also are troubled that the so-called summer rally was so fleeting. After weakening through most of May, blue-chip stocks rallied to new highs from only mid-June to mid-July, before resuming their fall.
So the market’s rallies seem to be getting shorter, while declines become more frequent and more drawn out.
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Another technical warning sign: After Tuesday’s fall, the Dow index now is touching its 200-day moving average.
A moving average shows the general trend in an index over a certain period. It’s bullish when an index trades above its 200-day moving average, and bearish when it falls below that line. So it could spell deeper trouble if the Dow were to drop much further.
How can investors tell when the current pullback has run its course? And more important, what should you look for in the following rally to tell whether the bull market still is intact, or whether a deeper decline--perhaps the first genuine bear market since 1990--is likely to follow?
When selling is as heavy as it has been the last three days, one key sign may come in the form of what’s known as a “climactic” sell-off. That’s a day with extremely heavy volume--indicating sellers are capitulating--and yet the market ends higher.
When such sell-offs occur they suggest that fear has becomes so potent that investors rush to sell at any price. But buyers also become emboldened, swooping in to pick up bargains at fire-sale prices, thus reversing the slide.
Typically, the about-face comes in the course of the day. In other words, the market sells off early but recovers later.
That’s what happened last Oct. 28. Volume was a record 1.2 billion shares on the New York Stock Exchange. The market started off with a loss but turned around to close up 337 points on the Dow.
The 853 million shares changing hands Tuesday was second only to Oct. 28. But share prices did not turn around in midday Tuesday.
When the next rally begins, analysts say, it must be broad-based (meaning smaller stocks as well as blue chips must rise), and on significant volume.
If not, it may be a clear signal that the market will face even tougher times ahead.
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MAIN STORY: A1
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Blue Chips Give Some Back
The Dow Jones industrial average slumped 299.43 points, or 3.4%, to 8,487.31 on Tuesday, its biggest one-day decline since the 554.26-point, or 7.2%, loss last Oct. 27. Worries about corporate earnings, President Clinton’s legal woes and Japan’s fragile financial system have helped triggered the latest plunge in stocks, which has pulled the Dow back to March levels. Weekly closes of the Dow industrials and latest:
Tuesday: 8,487.31
Deepening Slide
Blue-chip stock indexes in recent days have begun to catch up to small-stock indexes--on the downside. How key indexes have fared Tuesday and their declines from their 1998 highs:
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Tues. Tues. Decline from Index close change 1998 high Dow utilities 273.74 --2.4% --7.3% Dow industrials 8,487.31 --3.4% --9.1% S&P; 500 1,072.12 --3.6% --9.7% NYSE composite 541.36 --3.5% --9.9% Nasdaq composite 1,785.64 --3.5% --11.3% Dow transports 3,087.28 --3.5% --16.2% S&P; small-cap 168.63 --3.1% --18.2% Russell 2,000 401.63 --2.8% --18.3%
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Stock Funds: Low on Cash
U.S. stock mutual funds have sharply depleted their “cash” holdings over the last two years in an effort to stay invested in the market. That means many funds have little cash with which to snap up stock bargains today. Cash as a percentage of assets by fund category:
Aggressive growth
June 1998: 4.9%
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Growth
June 1998: 4.5%
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Growth and income
June 1998: 3.7%
Source: Bloomberg News, Investment Company Institute
