The stock market continues to look as if it wants to go lower. The bears can show you any number of market barometers that strongly support their case.
Even so, the ammo for the big blowout that everyone fears doesn't seem to be there. Stocks may well decline further, but the bottom may be reached a lot sooner than the bears think, some experts now say.
Friday, the market had good reason to go into a free fall as interest rates soared again. Yields on 30-year Treasury bonds hit 8.94%, up from 8.59% a week earlier. But the Dow Jones industrial index recovered from a 38-point midday loss to finish down just 15.99 points to 2,695.95. For the week, the Dow lost 55.85 points.
The bears correctly note that the market's internal trends have been weak for months. Financial stocks have plunged, relatively few stocks are rising on any given day versus the number falling, and margin debt (stock purchases financed on credit) is falling.
Yet as worried as some investors may be, trading volume has been shrinking since January. New York Stock Exchange daily volume between 160 million and 180 million shares was routine in January and February. So far this month, a good day has been 150 million shares. What that suggests is that few investors are terribly interested in exiting the market, despite the negative sentiment.
"There's no visible supply of stock out there, because money managers don't want to sell," said David Holt, director of technical market research at Wedbush Morgan Securities in Los Angeles.
Instead of wholesale liquidation, the market is going through a classic rotation period: Traders are dumping stock groups that they believe have become overpriced for the short term, and they're pumping the proceeds into groups that haven't moved in a while. In other words, many people who are in the market want to stay in--they just want to move their cash around.
One target of rotation sellers: Industrial stocks, which were strong last fall and in the first quarter. John Connolly, chief strategist at Dean Witter Reynolds in New York, recently advised clients who have made money in heavy-equipment makers such as Ingersoll-Rand and Caterpillar to take some profits.
To the top of Connolly's "buy" list went health-care companies such as Warner-Lambert and Humana, which lagged the industrial stocks in the first quarter. And indeed, the health-care stocks surged early this month as investors looked for new ideas.
Elaine Garzarelli, Shearson Lehman Hutton's technical market chief, looks around on Wall Street and concludes that this is no environment for a major plunge. Corporate profits are bottoming, she insists. Meanwhile, big investors hold so much cash that there's no way they'll sit out for long if stocks fall further, she said.
"The correction has only a little more to go--maybe to 2,600 on the Dow," Garzarelli said. Then she sees the market zooming again, led by such stock groups as computers, entertainment and apparel makers, which look best according to her technical indicators. "Everybody's looking for a major top (in the market)," said a confident Garzarelli. "But it's not here."
Focusing Long Term: Let's say you bought a few industrial stocks in the first quarter, and now you hear people such as Dean Witter's John Connolly say it's time to take profits in those stocks. The temptation may be to assume you made a mistake, and exit.
Better stop and think for a moment: Why did you buy a particular stock to begin with? If you're betting on a business capital spending boom in the 1990s--driven by a rejuvenated economy here, in Eastern Europe and elsewhere--then your payoff from an industrial stock will be over a period of years, not months. If you bought a stock to trade, that's one thing. But if your original focus was long-term, why change your mind now?
David Holt, Wedbush Morgan's technical market chief, notes that investors have to remind themselves continually that short-term market strategies and long-term market strategies often are in conflict. You solve the problem simply by remembering, for each stock you own, why you bought it.
The death blow for a lot of investors is being panicked into trading because of a short-term event that has nothing to do with long-term fundamentals. The most constructive thing about technical analysts' short-term "correction" calls is that they can give long-term investors an opportunity to buy a stock at, say, $40 in a few weeks instead of at $45 now.