Stocks Stage Broad Advance as Investors Wax Optimistic

Stocks extended the new year’s rally Thursday with another broad advance, raising hopes that the market’s worst days are behind it.

The Nasdaq composite index surged 3.2%, bringing its year-to-date gain to 12.1%--a sharp rebound after falling a record 39.3% last year.

The technology-dominated Nasdaq gained 85.71 points to 2,768.49 for the day, while the Dow Jones industrials rose 93.94 points, or 0.9%, to 10,678.28.

More important, the market’s breadth--the number of stocks rising each day versus the number falling--has improved markedly in recent weeks, suggesting that investors are shopping for an array of stocks despite the threat posed to corporate earnings by the weakened U.S. economy.

The Value Line index of 1,700 stocks, considered one of the best measures of the broad market because all stocks in the index are equally weighted, hit a record high Thursday and is up 6.3% year-to-date.

The Russell 2,000 index of smaller stocks quietly notched its seventh straight advance.

For analysts who believe the market has bottomed, the metaphor of the moment is that investors are already looking across the “valley” of a weak economy and lackluster earnings growth in the first half to a recovery later in the year.

“I think we’ve seen our lows for the year,” said Phil Orlando, chief investment officer at Value Line Asset Management in New York. “Stocks have been moving up on bad news, and that’s a critical indicator of a change in psychology. People know the earnings numbers will be rough for the next couple of quarters, but they also know that valuations are more attractive now, and they’re looking ahead.”

In addition, “The Fed is on the side of the investor,” noted Alan Skrainka, chief market strategist at brokerage Edward Jones. The Federal Reserve surprised Wall Street by cutting interest rates Jan. 3, and expectations are high that the central bank will continue to cut rates in the months ahead.

Historically, the Dow has risen an average of 20% in the 12 months following the first interest rate cut in a Fed credit-easing cycle.

Thursday’s rally was partly a reaction to stronger-than-expected earnings from IBM, which late Wednesday said fourth-quarter profit grew 28%. The company also gave an upbeat forecast for 2001.

IBM shares surged $11.63, or 12%, to $108.31.

Stocks also were helped by another decline in Treasury bond yields Thursday. The yield on the two-year T-note fell to 4.73% from 4.84% on Wednesday amid more economic data pointing to widespread weakness.

Besides the tech and telecom sectors, stock groups rallying Thursday included drugs, consumer products, utilities and entertainment. Winners topped losers by 16 to 13 on the New York Stock Exchange and by 22 to 17 on Nasdaq. Trading was very heavy on both markets.

Some analysts caution that stocks could merely be in a short-term bounce fueled by traders, not long-term investors. But others note that the market’s technical signs have improved significantly in recent weeks.

Bill Ryder, strategist at First Union Securities, noted that new 52-week lows have “nearly dried up” on Nasdaq. On Dec. 20, for example, 788 Nasdaq stocks made new lows, but in recent days, only 10 to 20 per day have reached new lows, he said.

Breadth on the NYSE, which bottomed Oct. 18, has been improving for several weeks, noted Al Goldman, chief market strategist at A.G. Edwards.

Nasdaq, which last week scored its first three-day winning streak since August, has risen above the 2,616 level it reached after the Fed’s rate cut Jan. 3, before it sank again for several sessions.

How strong and sustainable this rally is remains debatable, however. The Dow has met with profit-taking several times in recent weeks as it has reached the 11,000 range, analysts note.

Ryder said he could see Nasdaq reaching 3,000 or 3,200 in coming weeks or months. That would be about a one-third retracing of its 10-month peak-to-trough plunge. The index topped out at 5,048 last March.

But in the 3,000-to-3,200 range, selling pressure would probably intensify from investors looking to get out of technology stocks after recouping some of their current paper losses, analysts say.

Of course, the severity of the economic slowdown and the effectiveness of the Fed’s medicine remain question marks.

Some trend followers are happy to stay on the sidelines, awaiting clearer signs of the bull market’s return, especially in the ravaged tech sector.

Ed Foster, strategist at the Huntington Beach-based Maverick Advisor newsletter, said his firm “is still a ways away from flashing the all-clear signal, at least for Nasdaq.” The firm’s investment model looks, in part, for key indexes to cross above their 200-day “moving averages” before again jumping aboard.

That would mean about 3,400, or an additional 23% rise, for Nasdaq, but only about 1,400, or another 4% rise, for the Standard & Poor’s 500, which rose 1.4% to 1,347.97 on Thursday.

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Techs Lead the Market

Major technology stocks continued to bounce back Thursday, leading the broad market’s advance. But most of the stocks have so far recouped only a modest part of the declines from their 2000 peaks. A sampling:

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Ticker 52-week Thurs. close 2001 Stock symbol high and change gain JDS Uniphase JDSU $153.44 $60.31, +$6.56 +45% EBay EBAY 127.50 46.88, +3.63 +42 KLA-Tencor KLAC 97.75 46.06, +5.69 +37 IBM IBM 134.94 108.31, +11.63 +27 Sun Microsystems SUNW 64.69 34.88, +2.50 +25 Micron Technology MU 97.50 44.44, +5.19 +25 Yahoo YHOO 205.63 34.44, +4.19 +15 EMC EMC 104.94 76.00, +3.69 +14 Nortel Networks NT 89.00 36.69, +1.94 +14 Verizon Commun. VZ 66.00 55.75, +1.81 +11 Cisco Systems CSCO 82.00 41.88, +2.88 +9 Check Point Soft. CHKP 177.88 138.19, +11.63 +3 S&P; 500 1,527.46 1,347.97, +18.50 +2 Nasdaq composite 5,048.62 2,768.49, +85.71 +12

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Source: Times research, Bloomberg News (BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

Wider Rally

The stock market’s rebound this year has been led by some of last year’s worst-performing sectors, but most key indexes are up. A sampling:

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Pctg. change: Pctg. change: Index 2000 YTD Nasdaq telecom --54.4% +22.4% Internet* --51.2 +14.3 Nasdaq composite --39.3 +12.1 Value Line +9.6 +6.3 Russell 2,000 --4.2 +2.3 S&P; 500 --10.1 +2.1 S&P; small-cap +11.0 +2.0 Dow industrials --6.2 --1.0 S&P; mid-cap +16.2 --1.4

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* Interactive Week index

Source: Bloomberg News

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Market Roundup, C7-8