Stocks’ Setbacks Muddle Outlook
Wall Street’s fall rally suffered another setback with Wednesday’s stock sell-off, raising concerns that the market has reached at least a temporary peak.
A significant concern of some analysts is that, despite the breadth of the advance since late September, it has lacked some of the features that often accompany sustained upward moves.
The Dow Jones industrials dropped 160.74 points Wednesday, or 1.6%, to 9,711.86, extending Tuesday’s 110-point slide.
The Nasdaq composite index tumbled 48 points, or 2.5%, after easing 5 points Tuesday.
Given how far the market has come in two months--the Dow climbed 21.2% from Sept. 21 through Monday, while Nasdaq soared 36.4%--a pullback has been expected. The question now is whether any continued profit-taking will be relatively modest, or whether the market will surrender a large portion of its gains.
The rally from September’s post-attack lows has been strong enough to stir hope that a new bull market is underway, finally ending the bear market that began in March 2000.
Some Wall Street experts believe in the unofficial dictum that a 20% rise in an index from its low qualifies as a new bull market.
“We might be witnessing the start of the first major bull market of the 21st century,” said Joseph Battipaglia, equity strategist at Gruntal & Co. in New York.
Though the economy is in recession, optimists point out that bull markets historically have begun several months prior to an economic upturn as investors, sensing a coming recovery, rush to lock in stock positions.
Optimists argue that tax cuts, higher federal spending and low interest rates will spark a recovery by mid-2002.
Though the market’s losses of the last two days may have given some nervous investors pause, analysts note that this week’s pullback, so far, is only half the size of the decline the market suffered over a three-day stretch in late October, which gave way to November’s strong performance.
The latest pullback has shaved 2.7% from both the Dow and Nasdaq. That’s much less than the 5% pullback in the Dow, and 5.7% slide in Nasdaq, in late October.
Some analysts argue that it’s premature to declare a new bull market, and Exhibit A in their argument is the recent rally itself. They say it hasn’t been strong enough to wash away lingering doubts about the market’s longer-range potential.
The rally “has been somewhat underwhelming,” said Gary Anderson, a technical analyst at Anderson & Loe in Eugene, Ore.
On the positive side, the major indexes have advanced more strongly than many people thought possible. And the rally has been broad: Among Standard & Poor’s stock industry sectors within the blue-chip S&P; 500, the mid-cap S&P; 400 and the small-cap S&P; 600, about 80% of all sectors have risen in the last month.
Large stocks led the way when the rally kicked off in late September, but smaller names joined the party in early October, said John Bollinger, head of Bollinger Capital Management in Manhattan Beach. Strong “breadth” is critical because narrow advances led by only a few dozen stocks are more likely to peter out, analysts note.
The New York Stock Exchange’s daily advance-decline line, a popular breadth measure, is at its highest level since September 1999, said Richard McCabe, chief technical analyst at Merrill Lynch & Co. in New York. That line tracks the number of rising stocks each day versus falling stocks.
Nevertheless, some experts question whether the market can sustain its advance. The biggest problem, they say, is that the rally of the last two months never displayed the type of overwhelming power that has characterized the start of past bull markets.
Rising stocks have outnumbered losers most days, but since September the best single-day advance-decline ratio was 3 to 1, McCabe said. At the start of past bull markets, many days have seen ratios of 6 to 1 or 7 to 1, he said.
Bollinger also is troubled by the absence of powerful surges in which there is a dramatic jump in both trading volume and the number of stocks reaching new highs.
“These are like the exclamation points in a rally, and we haven’t had those, and their absence is troubling,” Bollinger said.
NYSE trading volume has mostly remained below 2 billion shares a day in the last two months, after surging with the deep sell-off that occurred in the week the market reopened after the terrorist attacks.
December may bring a critical test of the rally’s staying power, analysts say.
Many investors may be tempted to sell stocks to record losses for tax purposes this year. If buyers fail to step up, that selling could drag the market lower.
Also, investors are looking for more signs that the economy is poised to recover, and with it corporate earnings in 2002. With stocks’ gains since September, many stocks arguably are high-priced relative to even best-case earnings projections for 2002, experts note.
