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Are You a Trader or an Investor? It's Time to Answer

May 21, 2000|TOM PETRUNO

This stock market is making many people poorer by the day. Others are facing perhaps a worse fate: The action in stocks, if that's what we can call it lately, is boring them to death.

Trading volume has dwindled to pathetically low levels. Nasdaq, which earlier this year was routinely trading around 2 billion shares a day, has traded less than 1.5 billion on every day but one in the last three weeks. Some days have barely topped the 1-billion mark in share turnover.

Meanwhile, as measured by the New York Stock Exchange composite index, the average Big Board stock has moved no more than 2.3% up or down from its average level over the last four weeks.

Consider financial services giant Citigroup. Since April 27 its stock has mostly churned between $58 and $62 a share. It closed Friday at $60.94.

Not exactly a day trader's dream.

Citigroup's price trend, however, is the good news. In the technology sector, the price charts of many former stock leaders, such as Motorola, Cisco Systems and Agilent Technologies, continue to sketch out an eroding mountain range: ever-lower peaks and ever-lower valleys.

In other words, it isn't all downhill. You get rallies--but they're brief and they don't hold. That's classic bear market activity.

Granted, we're only talking about a month here. The market can't be wild and crazy every day, and who would want that, anyway?

Still, after the hurricane-force action in the Nasdaq market in the first 2 1/2 months of this year--the dramatic uptrend from January through mid-March, and the even more dramatic collapse from mid-March to mid-April--the water-torture-like market of the last few weeks already seems like it has lasted an eternity.

Many investors just wish something would happen. As long as it's a rally, of course.

*

But on Wall Street, some analysts figure the market's trend of the last few weeks could easily stay in place through June 27-28, when the Federal Reserve next meets.

The Fed, as expected, raised its benchmark short-term interest rate to 6.5% last Tuesday from 6%, the sixth rate hike since June. More important, Chairman Alan Greenspan and cohorts, in their terse announcement accompanying the increase, left little doubt that they aren't finished tightening credit.

Economist Gary Shilling, no fan of the Fed or of the stock market, argues that the central bank has a bear market as a specific policy objective of its rate campaign.

Not true, the Fed repeatedly says. But Shilling isn't alone in suspecting that much of the Fed's fear about economic overheating is rooted in the stock market's tremendous performance of the last five years--which, of course, culminated with the tech mania of the first quarter, when half the country seemed to believe it was just a few tech-stock trades away from buying a Malibu mansion.

Plenty of stocks already are deep into their own bear markets, "but that doesn't mean the Fed won't persist in its campaign, just to be sure," Shilling says. "It usually has overdone it in the past."

But Wall Street's optimists now are talking up this scenario: The market gives us more of the same between now and late June, with many stocks drifting while the tech sector falls further. (The Nasdaq composite, down 3.9% last week to 3,390.40 as of Friday, and down 32.8% from its March 10 peak, is again threatening to test the closing low of 3,321 reached in the April 14 tech collapse.)

Between now and June 28, however, there are definitive signs that the economy finally is slowing, the optimistic scenario goes.

Then the Fed, on June 28, raises its key rate to 7%--and announces that it hopes that will be enough, given the economy's easing trend.

Bingo! There's your excuse for a summer stock market rally.

Considering the plunge in trading volume over the last month, it's reasonable to ask where we're going to find buyers to spark a summer rally. But most investors and traders aren't dead--they're just sidelined, for Fed-related reasons or because they've suffered some hefty losses. Or just because they're bored.

The army of millions of online investors still is out there. And there is nearly $1 trillion sitting in money market funds owned by individual investors, about $200 billion more than two years ago. Even a small portion of that, directed the stock market's way, could get something going.

Just as much as individuals, many institutional investors would love to get a stock rally going. They know that owning bonds, or keeping assets in money market funds, isn't the ticket to above-average returns in the long run. But they want to be sure they're no longer fighting the Fed--the first money management don't they learned in business school.

Still, there's no glossing over the risk that the stock market is much more "broken" than a lot of people would like to believe.

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