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Panic to Sell Becomes a Panic to Buy; Either Way It's a Bad Strategy

April 22, 2001|TOM PETRUNO

Panic is once again demonstrating that it's an equal-opportunity emotion on Wall Street.

The panic to get out of the stock market, and particularly technology shares, in February and March gave way to a panic to get back into the market the last two weeks.

On Nasdaq, the stampede of buyers pushed the tech-dominated market's composite index up 10.3% last week, which followed the 14% surge of the previous week. Those were the third- and second-biggest one-week percentage gains in the index's 30-year history.

By Friday, profit-taking finally set in, but the sellers barely got the upper hand: The Nasdaq index ended down 0.9% at 2,163.41. That still left it up 32% from its two-year low set April 4--a nice chunk of change by any measure.

The blue-chip Standard & Poor's 500 index, also off 0.9% Friday, is up 13% from its two-year low, also set April 4.

Just another rally in a bear market? That's the risk, of course. Before this one there were four significant Nasdaq rallies in the last year. The biggest of those occurred from May 23 to July 17, lifting the composite index 35.1% before investors began to pull away again.

The smart move in all of those rallies was to sell into them, though even those who did sell probably had no inkling how low technology stocks would sink by this year.

What's different this time? Obviously, prices are lower. Despite a 51% gain since April 9, shares of network computer maker Sun Microsystems, at $19.71 on Friday, still are down 36% from their level at the end of January and 69% since the end of August.

So what? some would say: Sun's earnings have collapsed, as they have for many tech firms as companies and consumers have slashed spending on computers and related equipment. Sun reported Thursday that its latest quarterly results fell 73% from a year earlier, to a mere 4 cents a share.

Brokerage Goldman Sachs, like many of its peers, believes Sun will recover later this year. Goldman now expects Sun to earn 53 cents a share in the next fiscal year, ending June 2002. Based on the current stock price, that means Sun is valued at 37 times the 2002 earnings estimate--about double the price-to-earnings ratio of the average blue-chip stock.

With valuations at similar or higher levels for many tech leaders, the shares simply aren't bargains, Wall Street's bears say. So this rally is bound to stall out sooner than later, they argue.

But bear markets generally don't last forever, Japan's experience since 1989 notwithstanding. Nasdaq's 13-month decline was long and brutal by bear-market standards. Years from now, investors will look back on the prices that some (albeit not all) tech shares reached in recent weeks and they'll wonder what sellers were thinking.

Indeed, some investors have already had that thought--hence the panic rush back into many of the stocks since April 4.

A key catalyst for the rally was that more than a few tech companies said in recent weeks that the sales and earnings picture is at least stabilizing. In a market so dominated by bad news for months, just a hint that the outlook isn't worsening has been a bullish tonic.

Yet there is no way to measure how much of the buying since April 4 represents bargain-hunting by investors who plan to hold these stocks for years, and how much is from speculators merely looking to play what they figure could be a strong short-term bounce.

Other buyers have been in the market recently because they have to, not because they want to. Those are "short sellers," traders who borrow stock and sell it, betting that the price will fall.

Their bearish bets had reached record levels by early April. But as the market rebounds, short sellers risk financial ruin if they maintain their bets. To close them out, they have to buy stock in the open market to repay the shares they borrowed--buying that adds more steam to a market that is already going up.

Into this mix jumped the Federal Reserve on Wednesday, with its surprise half-point interest-rate cut. Just when many investors had given up hope that the Fed was serious about staving off recession and/or rescuing the stock market, the central bank reasserted itself with dramatic flair.

Were they bailing out investors--something Fed Chairman Alan Greenspan has insisted he does not do? Greenspan could point to the stock rally that began a week earlier and say the market had already rescued itself. In any case, with the tech-stock bubble drastically deflated over the last year, many investors' portfolios are long beyond rescuing. Greenspan is no hero to millions of stock owners, no matter what he does with interest rates now.


Whether the bear market is over will be obvious only in retrospect. Everyone has an opinion about that now. Given the dismal track record of so many highly paid Wall Street analysts over the last year, your opinion is just as good as any of theirs.

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