Heated Rally in ‘Cyclical’ Stocks Has Some Skeptical
Can it last?
Thursday’s record-shattering surge in the Dow Jones industrial average has Wall Street abuzz over whether long-neglected “old-economy” stocks can mount sustained rallies.
The early assessment: The Dow’s 499-point, 4.9% romp offers hope that the brutal decline in nontechnology issues is over. But many experts remain skeptical that drug, financial and basic-materials stocks are launching into a prolonged advance.
“Does it look stunning? It does. No doubt about it,” said Elaine Yager, technical analyst at Herzog, Heine, Geduld Inc. in New York. But with “momentum” players driving the market, the risk is that this is just a “bear-market rally” in these stocks, she warned.
On the heels of a 320-point surge on Wednesday, the Dow is up a startling 8.4% in two days as blue-chip stocks that were moribund only three days ago are suddenly trading like red-hot “dot-coms.”
To analysts who watch the market’s chart patterns, Thursday’s rally was impressive, with record New York Stock Exchange volume and three stocks rising for every one that fell.
Among Dow components, American Express, Home Depot and Honeywell each jumped about 8%. Merck leaped almost 9%. And International Paper bounded an improbable 9.7%.
“We’ve certainly seen the lows” in those stocks, said Todd Gold, a technical strategist at Gruntal & Co. in New York. “We can say that with conviction.”
Nevertheless, other experts remain dubious about the rally. They point out that “cyclical” stocks staged a similar rally almost a year ago, as then highflying Internet shares suddenly cooled off.
Like the current move, that rally also started with forgotten stocks climbing on enormous volume. But buying pressure quickly waned and the rally fizzled.
Naysayers also worry that this week’s rally is being driven in part by a temporary technical factor: Today, various options and futures contracts expire simultaneously. Big-name stocks are frequently volatile in the days leading up to such “triple-witching” sessions.
Some of the buying demand over the last two days stemmed from so-called short covering by investors who assumed that old-economy stocks would keep heading south, and who had to close out their bets when the stocks resurged, said Alan Shaw, a technical analyst at Salomon Smith Barney.
But much of the fuel appears to be money that had come out of technology and other “new economy” stocks early this week, as those shares sold off. The value of tech stocks overall has become so great in recent years that even a small amount of money diverted from techs provides a lot of fuel for other sectors, analysts note.
Based on the weighting of industry groups in the Standard & Poor’s 500 index, Shaw said, an investor who sold one share in the semiconductor group would free up enough cash to buy one share each in the aluminum, chemical, soft drink, food, footwear, steel, machinery and paper sectors.
“And you’d still have a couple of dollars left over,” he said.
The bearish argument is that new-economy profit-taking is exaggerating the significance of the old-economy rally--and the profit-taking is unlikely to last.
In a sign of how beleaguered the index was, the Dow, at 10,630.60 now, remains below its so-called 50-day moving average of about 10,690. The index would have to rise above that level, and then break through its 200-day average of about 10,817 as well, to convince some analysts that the rally is durable.
“Something good may come out of this because some stocks may be initiating legitimate turns,” Shaw said. But most old-economy stocks going up over the last couple of days “are going to disappoint.”
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FAST-MONEY PLAYERS
The market has seemingly been seized by “momentum” investors. A1
* MARKET SURGE
The rally was broad enough to lift all key indexes sharply. C3
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Beaten-Down Stocks Soar . . .
The market rally this week has fueled “dot-com”-like gains in depressed stocks of the “old economy.” The fastest-rising stock sectors in the Standard & Poor’s 500 index over the last week, based on average gain over the last five days:
. . . Lifting ‘Value’-Oriented Funds . . .
Stock mutual funds that seek out “value” stocks in such sectors as finance and manufacturing have rocketed this week with the market turnaround, but many still remain down year-to-date. A sampling of major value funds:
. . . But Will History Repeat?
About this time last year, shares of many large manufacturing companies began to rocket on optimism about the economy. But the bulk of the move was over in a matter of days. The Morgan Stanley index of 30 “cyclical” stocks, daily closes from April 5 to May 28, and weekly closes since August:
Source: Bloomberg News
