So Are Stocks’ Bad Times Over for the Year? Maybe
With Thursday’s powerful rally, has the stock market seen its lows for the year?
The Dow Jones industrial average now has rebounded 6% from the five-month low of 10,019.71 reached on Oct. 15, though it remains down 6.2% from its record high set in August.
Some analysts say one of the most bullish aspects of the rebound is that it has been led by financial services stocks--a group that often foreshadows major market moves, both up and down.
What’s more, the Dow transportation index has risen 7.3% since Oct. 20, advancing with the Dow industrials.
For much of this year the transportation stocks have been plummeting even as the industrials have held up--a negative sign to followers of the “Dow theory,” which holds that a sustainable rally requires the two indexes to move together.
Adolfo Rueda, technical analyst at Shields & Co. in New York, thinks the Dow and Standard & Poor’s 500 will push to their summer peaks of 11,326.04 and 1,418.78, respectively.
He was impressed with the heavy trading volume accompanying Thursday’s rally, and says bank and drug stocks--two key sectors--look as if they have bottomed.
Although some analysts were disappointed that rising stocks outnumbered losers by a fairly modest margin of 22 to 9 on Thursday on the New York Stock Exchange (modest, at least, for such a strong Dow gain), Rueda said that “breadth” measure is a lagging indicator: Investors always stampede into blue-chip stocks before they move back toward smaller names, he said.
“It’s strong enough to say we’ll go back to the old highs,” Rueda said of Thursday’s gain.
Other analysts suggested caution, though many said the issue may be settled in the next few days.
Another broad-based rally obviously would be positive, whereas fresh sluggishness could mean Thursday’s surge was an anomaly.
John R. McGinley Jr., who publishes the Technical Trends newsletter in Wilton, Conn., doubts the recovery will last. Besides moderate breadth, he said, only 76 NYSE stocks hit new 52-week highs on Thursday, while 141 hit new lows.
“The bear spends a lot of time trying to convince people that he’s not a bear” by rallying sporadically, McGinley said. “I would like to see some breadth numbers start to accumulate. I’d like to see new highs expand and stay there. I would like to see it happen on substantially increased volume.”
Tim Hayes, senior equity strategist at Ned Davis Research in Venice, Fla., agreed. “It’s too early to say” the market has bottomed, he said. He noted that “a lot of the gains [Thursday] came in the first hour or two,” and then the Dow went flat.
One of the market’s biggest problems this year has been rising interest rates, Hayes noted. Because he doesn’t think bond yields have yet peaked, he doesn’t think the groundwork has been laid for a resurgent stock market.
“We’ve got to see more evidence before we know if this is for real.”
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Financials Rule the Rally Financial services stocks, including bank, brokerage and insurance issues, have been the best-performing market sectors over the last week from among all of the industry groups in the Standard & Poor’s 500. The S&P;’s top 10 sectors for the five days through Thursday: *--*
Stock sector Avg. 5-day gain Investment banks/brokerage +22.2% Personal loan cos. +20.7% Savings and loans +20.2% Multi-line insurance +16.3% Money center banks +15.3% Life insurance +14.7% Housewares +14.7% Misc. financial +14.0% Insurance brokerage +13.0% Major regional banks +12.4% S&P; 500 +4.6%
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Source: Bloomberg News
