Investor Reaction Key to Outlook


Major stock indexes won back almost all of last week's losses Tuesday, but analysts aren't convinced that individual investors have recovered their psychological balance.

While Tuesday's rally could well be a sign that the stock market is about to stabilize, it could also be a test, market watchers say, of whether investor psychology is shifting away from the bull market mantra of "buying on the dips" to the bear market notion of "selling into the rallies."

If individuals--or institutional managers--decide to pull money out of the market once it rebounds--taking money off the table once they've recouped some of their paper losses--they could place a wet blanket on the rally sparked by Federal Reserve Board Chairman Alan Greenspan's hints this weekend that the Fed may be willing to lower short-term interest rates.

So Wall Street will be watching trading behavior closely once the markets open this morning.

"The next few days are going to be very interesting," said James Stack, editor of the InvesTech newsletter in Whitefish, Mont.

Marshall Acuff, equity strategist at Salomon Smith Barney in New York City, added: "I would guess that individual investors would be encouraged by [Tuesday's] action. But if this [rally] doesn't follow through on the upside, then they're going to wish they sold on strength."

That seemed to have been investors' attitude last week.

Last Tuesday, when the Dow Jones industrial average rallied 288 points (following last Monday's 512 point slide), investors poured $6.5 billion into stock mutual funds, according to, a Santa Rosa-based research firm.

But when the rally quickly petered out in the next two days, investors yanked $5.3 billion out of stock funds.

Hewitt Associates, an employee benefits consulting firm in Lincolnshire, Ill., reports that 401(k) investors also continued to shift assets away from stocks toward fixed-income investments following last Tuesday's rebound.

Another less-than-bullish sign: Despite this Tuesday's record 380-point rise in the Dow, many mutual fund companies did not report tremendous buying.

Vanguard Group, for instance, reported net positive in-flows of money into its stock mutual funds. But company spokesman John Woerth said there was "a mixed bag of exchange activity. Some people were buying and some were selling."

T. Rowe Price Associates also reports a slight increase of money flowing into its stock funds, but phone volumes were reported to be average.

If investors do sell, rather than buy, into a rally, a few groups are expected to lead the charge. They include retirees who are two years or less from tapping their investments and who may move to lock in any gains right now and individuals who borrowed money to invest in mutual funds and who may not want to put themselves at additional risk.

Also, while 401(k) investors may not be moving significant amounts of money out of stock funds in their company-sponsored retirement plans, many recently changed the percentage of future payroll contributions that will go to stocks.

So even if 401(k) investors have regained confidence in the bull market, many will invest less in stocks, not more.

"I think you're going to see higher flows into the fixed-income side because people altered their future flows," said David Castellani, senior vice president of Cigna Retirement & Investment Services, the nation's third-largest 401(k) plan administrator.

John Rekenthaler, research director at the Chicago fund tracker Morningstar Inc., notes: "There is a desire [among investors] to break even, or at least to make a profit from the [market] bottom. There's a belief that if I buy a stock at $15 a share, it drops to $5, and it comes back $10, I can sell because I made double my money from where I could have been."

But he does not think investors have reached this point yet.

Market watchers say what happens in the next week or so should go a long way toward determining this.

"As long as the market goes up consistently, investors are going to give it the benefit of the doubt," Stack said. "But the first sign it's fizzling is where you'll see if selling into the rally has set in."

Stack thinks the real test of market psychology will come if and when the Dow, currently at 8,000, retests its recent 7,500 lows.

RECORD GAIN: The Dow Jones industrials rallied to leap 380 points. A1

MARKET REACTS: Stocks soared on hints of a rate cut and strength overseas. D4


Tuesday's Index Scorecard

Tuesday's rally was strongest among technology and financial stocks, weaker among smaller stocks (reflected by the Russell 2000). The Nasdaq 100 index, reflecting the giant technology leaders, is one of the few major indexes still well ahead of its January levels.


Index Point Value Daily % change YTD % Change Internet* 315.58 +7.8% +35.1% Semiconductor** 213.6 +7.4 -19.0 Bank** 671.0 +7.0 -9.8 S&P; Financials 109.8 +6.7 -7.6 Nasdaq 100 1,286.5 +6.7 +29.8 S&P; 500 1,023.5 +5.1 +5.5 Dow Transports 2,749.3 +5.1 -15.6 Dow Jones Industrial 8,020.8 +5.0 +1.4 S&P; 400 MidCap 305.2 +4.7 -8.5 Russell 2,000 361.9 +4.3 -17.2 Amex Oil 420.4 +28 -7.5 Dow Utilities 276.9 +1.9 +1.4 Gold & Silver** 63.8 -1.4 -14.0


*Interactive Week's index

**Philadelphia Stock Exchange Index

Source: Bloomberg News

Recovery Zone

The Bloomberg Orange County Index, a weighted index designed to measure the performance of Orange County stocks, gained 6.30 points in Tuesday's market rally:

Friday's close: 146.86

Opening level: 147.47

10:30 a.m.: 151.91

11:30: 151.68

12:30: 151.35

1:30 p.m.: 151.72

2:30: 151.87

3:30: 152.05

Closing level: 153.16


Top 10 Gainers


Rank Stock Net gain % Increase 1. PairGain Technology $1.69 20.9% 2. Gensia Sicor Inc. $0.56 18.8% 3. Long Beach Financial $1.06 15.9% 4. FileNet Corp. $2.50 15.6% 5. Quiksilver Inc. $2.25 14.9% 6. Broadcom Corp. $8.50 14.2% 7. Pacific Sunwear $2.63 13.4% 8. First American Financial $3.44 12.5% 9. MTI Technology $0.47 11.2% 10. Onyx Acceptance $0.63 11.1%


Note: Includes stocks trading on major exchanges for more than $2 a share.

Source: Bloomberg News

researched by JANICE JONES DODDS / Los Angeles Times

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