Overdue Dive--Blip or Trend?
The stock market’s sharp decline on Tuesday may have been the most anticipated sell-off in years.
Many on Wall Street had predicted that some sort of downturn would strike this month as investors waited until the new tax year to lock in profits from 1999’s spectacular year-end rally.
The big question now is whether this is just a temporary blip on the road to new highs--or the start of a longer-lasting drop.
Here’s a look at some of the key issues facing the market, and answers to some of the questions many investors may be asking:
Question: How bad was Tuesday’s drop?
Answer: It was a broad sell-off, but that has to be placed in context.
The Nasdaq composite index sank 5.6%, its eighth-worst percentage decline of all time. But that came on the heels of an 85.6% surge last year--the best performance by a major market index--that left many investors sitting on fat paper gains.
What’s more, the Nasdaq index had continued to rise on Monday, adding 1.5% to a record high.
The Dow Jones industrial average gave up 3.2% on Tuesday after losing 1.2% on Monday.
The bulk of the selling pressure Tuesday may have stemmed more from investors taking profits in technology and other stocks that had rocketed in the last two months, rather than a reassessment of the prospects for the market overall. Many investors held off selling in December to avoid capital gains taxes in April.
On the other hand, rising interest rates--usually the No. 1 enemy of bull markets--are a pressing issue for stocks.
Despite easing on Tuesday, the 30-year Treasury bond yield, at 6.53%, is at its highest level since 1997.
Q: Are there signs the market could be headed into a deeper dive?
A: On a positive note, several experts said trading on Tuesday was orderly and didn’t have the feel of panic selling.
About 1.5 billion shares traded on Nasdaq, a heavy day but below the recent volume peak of 1.7 billion shares on Dec. 9.
“It was very orderly. If you had sat on our trading floor, you would not have noticed that [the market] was down,” said E.E. “Buzzy” Geduld, chief of Herzog Heine Geduld, a major trading firm.
Perhaps more a factor than any rush to sell was simply that there was a dearth of buyers, experts said. When sellers looked to unload shares, buyers stepped away, which caused prices to fall more than they otherwise would.
That continues the recent trend: Even as stocks rose in the past two weeks, so-called up volume--the number of shares being bought as prices moved higher--had begun to dissipate, said Mike Hurley, a technical analyst at E-Offering, an online investment bank. That’s a sign of short-term buying demand petering out.
Even if an extended decline is in the offing, experts say, stocks are unlikely to head straight down the way they recently shot straight up, because bottom-fishers will cushion the fall. Overall, that could mean an extremely choppy market ahead.
Q: If I own fast-moving tech stocks that scored impressive gains in late 1999, what should I do now?
A: That depends on your investment strategy and how long you plan to hold the stocks.
Many experts advise long-term investors to simply hang on. Though their valuations are stretched, the outlook for revenue and earnings growth at many leading tech companies remains bright.
Shorter-term traders face a bigger problem. At the very least, traders should have preset limits as to how much of a decline they’re willing to sustain before exiting. In other words, if you have a 50% paper profit, decide now how much of that profit you’re willing to see evaporate before you pull the plug on a stock--and be prepared to monitor prices closely in coming days.
Even if tech stocks avoid a continuing slide, some pros say the upward trend in many issues has been disrupted and won’t assert itself soon. “We’re probably done going up for awhile” in many leading stocks, Hurley said.
Q: Are there certain indicators that can give clues about the trend in specific stocks?
A: One tool that investors may want to use is so-called relative strength, which compares the performance of a stock with its industry group or to an index such as the Standard & Poor’s 500.
If the stock begins to fall faster than similar stocks, that may be a sign of diminishing investor enthusiasm for the shares, a precursor to a possibly worse sell-off.
But if the stock holds up well in comparison, it could be a signal that that issue will re-accelerate as soon as the market picks up.
Q: Should I consider buying some tech stocks now that they have fallen, or if they continue to slide?
A: Several Wall Streeters said Tuesday that their phones were flooded with calls from clients asking when to buy.
“I don’t think I’ve had one question from anyone worried about the downside,” said Robert Dickey, managing director of technical research at Dain Rauscher Wessels in Minneapolis. “People are more worried about what price they can buy these stocks at. All day, over and over again, that’s the question I’ve heard.”
The problem with buying now, Dickey and others said, is that the market has yet to show that it has stabilized. Investor sentiment is still extremely bullish, a historically contrarian indicator. Also, Nasdaq closed at its low of the day on Tuesday, an indication that institutional investors were unloading shares at day’s end.
As for individuals, “While there was no panic selling, there was no panic buying either,” said John Lauer, head of Charles Schwab’s active traders’ unit.
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Walter Hamilton can be reached by e-mail at walter.hamilton@latimes.com.
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* MARKET SELL-OFF: World stock markets fell sharply on fears of rising interest rates. A1
