Stocks Dive, Then Rally Amid Doubt

Technology stocks went on another wearying roller-coaster ride Monday, falling hard in the morning before largely rebounding in the afternoon, as investors kept searching for signs that the worst of the market sell-off is over.

The Nasdaq composite index slipped 26.19 points, or 0.8%, to 3,364.21 as bargain hunters swooped in on the heels of a 218-point drop early in the day. The morning sell-off briefly drove Nasdaq below its April 14 closing low.

The rally encouraged Wall Street bulls who say the rebound from the prior low demonstrates that stocks are in the process of bottoming.

Others say Monday’s trading highlighted the pervasive investor uncertainty that continues to hound the technology sector.

Throughout Nasdaq’s 10-week downturn, sharp tech-stock declines have been followed by partial rebounds as some investors have sought to “buy the dips.” But the rallies have lacked enthusiasm and been short-lived.

Amid the specter of further Federal Reserve interest-rate hikes and still-high stock valuations relative to underlying earnings, many institutional investors have viewed tech rallies as selling opportunities rather than the start of sustained recoveries.

To some analysts, Monday followed that pattern.

“It was a bottom-fishing bounce within [an ongoing] correction,” Robert Dickey, a technical analyst at Dain Rauscher Wessels in Minneapolis, said of Monday’s bounce-back.

The broad market also was lower. Dow Jones industrial average ended down 84.30 points, or 0.8%, to 10,542.55, after recovering from a drop of 257 points. A sharp drop in the shares of auto giant General Motors helped drag down the blue-chip index.

To many on Wall Street, the key to the market’s short-term direction may lie in trading volume.

Nasdaq trading activity on Monday increased to 1.6 billion shares, up from 1.3 billion on Friday. But Monday’s action was well below Nasdaq’s daily average earlier this year, when trading often topped 2 billion shares.

Volume is a concern for two reasons. First, trading activity has ticked up as Nasdaq has slipped in each of the last three days, a sign that big investors continue to sell out of tech stocks. Rising volume in a falling market shows that investors are increasingly eager to sell out of shares.

Perhaps more worrisome, however, is the belief that tech stocks are unlikely to stage a persuasive rally until volume picks up permanently, experts say.

Many short-term traders are loath to venture into techs amid lackluster volume because swift price swings in a market that lacks liquidity can saddle them with instant losses.

And without the presence of traders who can kick off a rally in a sector, big investors such as mutual funds are hesitant to establish positions for fear that the sector has further losses to go.

“It’s the worst possible market for traders to be involved with [because] it’s very hard to make money,” said Dodge Dorland, chief investment officer at Landor Investment Management in New York. “We need to see a convincing rally, and we’re just not seeing it.”

The drop in volume on Nasdaq could get worse during the summer as vacations take more players out of the market, said Todd Gold, technical analyst Gruntal & Co.

“We haven’t even seen the Hamptons kick in,” he said, referring to the New York beach community.

Still, there were some encouraging signs Monday.

Cisco Systems, a tech bellwether that has dropped steadily this month, slid early. But after sinking as low as $50 from a late-March peak of $82, bargain hunters jumped in and the stock closed up $1.81 on Monday to $55.25.

Traders are closely watching Cisco, worrying that a drop below $50 would foreshadow another steep sell-off across the sector.

Also, the fact that tech-stock leaders like Cisco have been dented in the last few weeks has some analysts convinced that the sector is close to bottoming out.

In a downturn, investors normally dump small and more speculative stocks first and hold on to the blue chips that they view as safe. But as the bigger stocks fade, thus threatening to wipe out their previous gains, investors reluctantly shed them too.

But that normally marks a turning point because investors probably have dumped all the stocks they’re willing to sell, and are sitting on piles of cash that can be redeployed in the market.

Richard McCabe, chief technical analyst at Merrill Lynch & Co., believes the selling of big-name techs could be a prelude to a “moderate” Nasdaq rally in June or July that could carry the index into the low 4,000s.

Among Monday’s market highlights:

* In the bond market, Treasury yields eased as money came out of stocks and hunted for safer havens.

* Crude oil slumped more than 4%, to $28.61 a barrel, after a report that the U.S. urged members of the Organization of Petroleum Exporting Countries to raise production in July to keep New York prices under $25 a barrel.

* Ciena fell $8.63 to $107.88. Last week, the maker of equipment to boost capacity on fiber-optic networks reduced sales forecasts for new products and said parts costs may rise.

* WestPoint Stevens sank $4.75 to $13.25. The maker of towels and bedding said a proposed buyout offer by a group led by Chairman and Chief Executive Holcombe Green Jr. was canceled because of higher-than-expected financing costs.

* Deere bucked the down trend, rising $2.75 to $49.56 after the agricultural equipment maker was reiterated “buy” at Bear Stearns.

* Taking a cue from the weak U.S. market on Friday, foreign stock markets slumped. French stocks were down 1.6% and Mexico’s market fell 3.5%. Japan’s Nikkei slumped 2.8%.

Market Roundup, C13-14

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

Is It a Bottom--or a Fake-Out?

Major technology shares plunged again early Monday, but many fought their way back to close higher, or with only modest losses. But many analysts are wary about declaring that the stocks’ steep declines are over. How key stocks have fared:

*--*

52-week Monday Mon. Mon. Drop from Stock high low close change 52-wk. high Micron Tech. $72.63 $56.69 $60.63 +$0.06 -17% Intel 145.38 111.38 118.38 +0.50 -19 IBM 139.19 103.44 109.25 +2.81 -22 Oracle 90.00 62.75 67.81 -2.25 -25 Sun Microsystems 106.75 70.25 79.88 +2.63 -25 Cisco Systems 82.00 50.00 55.25 +1.81 -33 JDS Uniphase 153.38 76.50 85.31 +3.31 -44 Yahoo 250.06 113.25 126.25 +5.94 -50 Qualcomm 200.00 77.75 88.44 -0.75 -56 Vitesse Semi. 115.69 42.75 46.13 -1.75 -60 Nasdaq composite 5,048 3,172 3,364.21 -26.19 -33

*--*

Source: Reuters