As Sellers Swarm, Wall St. Braces for More Trouble
It could get worse before it gets better.
That was the sentiment among shaken Wall Street professionals Wednesday after another technology-sector blood bath sent the Nasdaq composite index squarely into bear-market territory.
“This is the first great Internet [and] technology stock shakeout,” declared Scott Bleier, chief investment strategist at Prime Charter Ltd. in New York. “Hour-by-hour, the fear is increasing that this is the big one, that this is 1987 for technology stocks.”
At Wednesday’s close of 3,769.63, Nasdaq is nearing the intraday bottom reached April 4, the day the index plunged almost 14% to as low as 3,649.11 in the morning before staging a furious afternoon recovery that erased most of the day’s losses.
Though that afternoon rally was impressive, many experts predicted at the time that another drop would follow soon. Simply put, the slide was too short-lived to mark a permanent bottom in the market, many analysts argued.
What was needed, they said, was a longer and more painful sell-off that would truly rattle investors’ nerves. In other words, short-term traders and other “weak” holders had to be shaken out of the stocks, thus leaving shares in the hands of only the longest-term and most committed investors.
That process is still going on, experts say. Indeed, surveys of investor optimism last week suggested that many people remained stubbornly bullish--a classic “contrarian” sign that the market was primed for a steeper fall.
A regular survey of investment newsletter writers nationwide showed bullishness hit a 10-month high last week, according to Investors Intelligence in Larchmont, N.Y.
On the bright side, most market watchers believe this sell-off is largely a reaction to what had been extraordinarily high stock valuations, not a warning about a fundamental problem in the tech sector or the economy. And as on April 4, many traders say tech stocks now are “oversold” and due for some sort of short-term bounce.
Some bulls say the selling is likely to exhaust itself this week. They look for Nasdaq to bottom around last week’s intraday low and then stabilize. That would mean at least another 3% decline.
But a much deeper drop wouldn’t surprise many. On Wednesday, Nasdaq closed at its low for the day, a sign that the only thing standing in the way of further selling was the market’s closing bell. The force of Wednesday’s sell-off clearly caught some pros by surprise.
With each day of damage, the chance of a new sustained up-trend beginning any time soon recedes further.
“Everybody’s going to remember” this sell-off and be hesitant to jump back into aggressive tech stocks, said A.C. Moore, chief investment strategist for Dunvegan Associates in Santa Barbara.
The biggest danger, experts say, is that the “momentum” fury that carried so many tech stocks up from October through early March is reversing--meaning investors now are more inclined to look for reasons to sell than to buy.
“The momentum has been broken,” said Richard Cripps, chief market strategist at Legg Mason Wood Walker in Baltimore.
And just as tech shares went higher than many people expected, it’s difficult to predict where the bottom might be.
Expectations that first-quarter corporate earnings reports this week would settle the market have been dashed. For months, bulls had argued that sky-high tech stock prices were warranted because profits would continue to sparkle.
But if anything, the profit reports of the last two days have further spooked investors. On Tuesday, shares of Motorola plunged 18% after the firm indicated it would fall short of estimates in the second quarter. On Wednesday, a high-profile analyst cut his revenue projections for Microsoft, arguing that weaker demand for personal computers last quarter would hurt the company.
Other factors are stacking up against Nasdaq in the next few months, Cripps said.
Once investors finish funding retirement accounts by tax day Monday, inflows into mutual funds should slow down, he said. Also, tech stocks are historically weak during the spring and summer months.
What’s more, the so-called lockups on many newly public stocks will expire soon. Lockups are agreements by top executives and other insiders to refrain from selling shares just after a company’s initial public offering. The expiration of lockups, especially in a weak market, means that many insiders will potentially be adding to selling pressure, Cripps said.
In the short run, Nasdaq’s biggest problem may be ongoing “margin calls”--demands for repayment by lenders that have funded speculators’ massive stock purchases on credit in recent months.
Margin borrowers who don’t respond to such demands by adding money to their accounts can have their stocks automatically sold by the brokerages, typically three days after a margin call but even faster in an extremely sharp downturn.
Such forced dumping of stocks has added to the violence of Nasdaq’s recent sell-offs, and may continue to do so. Margin credit has been at record highs.
“When the market takes a big move down, margin calls get heavy,” said Michael Dunn, spokesman for Datek Online Holdings, a large online brokerage based in Iselin, N.J.
Like other brokerages, Datek has already tightened its lending policies by restricting the amount of credit that can be extended on certain volatile stocks. Some stocks are considered too volatile for any margin lending at all.
Some experts are concerned that if the extreme volatility that has shaken the less well-established tech stocks continues to spread to the biggest market leaders--stocks like Intel, Cisco Systems and Applied Materials--it will only worsen the margin selling.
That’s because margin calls are based on the status of an entire account rather than an individual stock. Big, blue-chip technology issues had held up relatively well last week, protecting some investors from margin calls after a plunge in their smaller, more speculative holdings. But now the tech blue chips also are tumbling, which means forced selling could snowball.
