Stocks Tumble; Nasdaq Drops to 12-Month Low

Wall Street’s foul mood worsened Monday, as investors sent stocks sharply lower--and the Nasdaq composite index down 5% to a new 12-month low.

But amid continuing losses in key stock sectors, some analysts point to an ironic problem: They say there is still too much bullishness out there to signal a market bottom.

That wasn’t obvious Monday, as ongoing worries about the slowing economy and the election stalemate, combined with a string of analyst downgrades of individual tech stocks, helped drive Nasdaq down 151.55 points to 2,875.64, its lowest close since Oct. 28, 1999.

After falling early in the day, Nasdaq rallied in the afternoon only to plunge again by the close.

Blue-chip indexes also tumbled. The Dow industrials fell 167.22 points, or 1.6%, to 10,462.65.

Trading volume was relatively moderate, but losers swamped winners 3 to 1 on Nasdaq and nearly 2 to 1 on the New York Stock Exchange.

The decline in tech stocks also hurt local stocks as the Bloomberg Orange County Index of 124 companies fell 12.82 points to 328.17. Emulex Corp. led the 80 losers with a 19% drop in value.

Yet a closely watched indicator of Wall Street sentiment last week showed the percentage of bullish analysts rising: Investors Intelligence’s weekly survey of 130 investment newsletter editors had 50.9% giving a bullish market outlook, whereas just 30.6% were outright bearish. The rest expected merely a modest near-term market pullback.

The bullish percentage has been creeping up in recent weeks. It was 43.4% four weeks ago. Michael Burke, editor of New Rochelle, N.Y.-based Investors Intelligence, says this week’s survey may show a rise to about 52% bulls.

But sentiment indexes like this one tend to be “contrary” indicators: High bullish readings tend to mark near-term market tops, and low bullish readings tend to mark near-term market bottoms. In other words, the market usually fools the majority.

There’s a fundamental basis for that as well. When people generally are bullish, it means they may have used up all their cash to buy stocks. When they’re bearish, they are more likely to have cash on the sidelines--which can fuel a new rally.

In any case, the Investors Intelligence survey has been one of the most accurate contrary indicators over the years. And right now, it is a far cry from signaling a bottom.

Judging by the performance of some stocks, though, it may be hard to see. Broadcom Corp. in Irvine, one of the biggest communications chip makers, saw its stock double in value this year through late August. But steep declines, mainly this month, have left its stock 4.5% lower since the start of the year. It lost $2.88 Monday to close at $130.13 a share.

Last week’s sentiment survey by the American Assn. of Individual Investors showed bulls outnumbering bears nearly 3 to 1.

Other indicators also are too rosy to please contrarians:

* Wall Street strategists are recommending investors devote 65% of their portfolios to stocks, on average, a multiyear high for the asset allocation survey, Salamone noted.

* The CBOE put-call options ratio is “relatively high, but it should be higher considering how cheap portfolio insurance has become,” Salamone said. Heavy use of put options means investors are trying to protect themselves from a sinking market by locking in the right to sell stocks at a set price in the future.

* More money has been flowing into the bullish Rydex OTC stock fund, which tracks the Nasdaq 100 index, than its bearish counterpart index fund, he said.

* “We aren’t seeing nervous magazine cover headlines like we saw in ‘98: ‘The World Is Over’ and all that,” Salamone said. “The major [media] theme still seems to be, ‘This is a buying opportunity.’ ”

Another major market decline, perhaps sending the Nasdaq composite index to the 2,500 to 2,600 range, “might be the medicine we need if it scares enough people,” Salamone said. “But, then again, if fear still does not emerge, then look out.”

Some analysts do see signs of a potential rally--at least in the very short term. Rich Ishida, president of Pasadena-based Market Vane, which surveys commodity-market advisors, said there is considerable bearish sentiment toward Standard & Poor’s 500 index futures. That “could point to a decent short-covering rally in the next week, a trade-able rally,” Ishida said.

But for the market to stage a meaningful recovery, the S&P; would have to burst through the 1,430 level, he said. At that range or moderately above, previous rally attempts this year have sputtered as sellers have stepped up. The S&P; fell 1.8% Monday to 1,342.62.

Locally, other major tech companies followed Broadcom and Emulex, which lost $28 to close at $121 a share. Conexant Systems Inc. fell nearly 5%, losing $1.44 to close at $27.88 a share. So far this year, Conexant stock has lost 58% of its value. QLogic Corp. was down $11.63, or nearly 11%, to end the day at $98.25 a share.

Newport Corp. and Ingram Micro Inc. were among the 28 gainers on the Bloomberg Orange County Index. Newport was up less than 1%, gaining 44 cents to close at $70 a share. Ingram gained 13 cents, or 2%, to end at $5.69 a share.

Among Monday’s highlights elsewhere:

* In the tech sector, Oracle tumbled $4.06 to $24.75 on Friday’s news of the software maker’s second key executive departure in recent months.

Networking stocks led Nasdaq lower after Morgan Stanley Dean Witter downgraded the shares.

Among other tech issues, Sun Microsystems fell $7.69 to $81.63, Emulex sank $28 to $121, Check Point Software slid $23.50 to $112.50 and Hewlett-Packard was off $1.06 to $34.56.

* Bank and brokerage stocks fell on concerns about loan volume and defaults in a slowing economy. Goldman Sachs slumped $5.06 to $83 and Bank of America lost $1 to $39.31, lowest since 1996.

Auto stocks also were hammered. GM tumbled $4.31 to $51.56; Ford lost $1.44 to $23.50.

* Quaker Oats jumped $4.69 to $95 on reports that its board is considering an acquisition by Coca-Cola. Other food stocks also rallied.

* HOT STOCK PICKERS

A look at 10 mutual fund managers who are beating the odds this year. C8

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Too Many Bulls?

The Investors Intelligence weekly sentiment survey of investment newsletter editors finds more than 50% now are bullish on the stock market. But this index tends to be a good “contrarian” indicator: The majority usually are wrong about the market’s near-term trend.

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Month-end bullishness readings of the Investors Intelligence sentiment survey

Monday: 50.9%

Note: Newsletter editors who aren’t bullish are either bearish or expect a short-term market correction.

Source: Bloomberg News