Nasdaq groggy from pounding; blue chips gain favor
By Eric Wahlgren
<<NEW YORK, April 13 (Reuters) - There's no quick comeback seen for Wall Street's Nasdaq composite index, where stocks had delivered knock-out returns before being pounded into the mat over the last month.
But the drubbing that sent the Nasdaq reeling 1,279 points, or more than 25 percent off its March 10 high of 5,048.6, will soon peter out, leaving investors to decide where to put idle money, Wall Street analysts predict.
And the stock market's former and long-reigning champ -- the Dow Jones industrial average (^DJI - news) -- is expected to again be a contender now that money is gushing back into stocks that make up the blue chip gauge after the Nasdaq's fall.
``I think it is going to be a much more even-handed market,' said Trude Latimer, an independent market strategist in Charlottesville, Va. ``We first need to have a couple of bounces and tests in the Nasdaq to see if confidence can return. As far as the 'old economy' stocks are concerned, they will not go back into the woodwork. They justified their existence.'
Since the Nasdaq's banishment into bear territory, the Dow has climbed back to a level less than 1 percent off its Jan. 14 high of 11,722.98 as investors have abandoned highflying technology shares for safer old-line stocks.
The renewed interest this month in blue chips marks a big turnaround when compared with a month like February, when the Nasdaq gained 756 points, or 19 percent, while the Dow lost 812 points, or 7 percent.
But with first quarter earnings season kicking off this week, Wall Streeters acknowledged that profits, especially from technology companies, are expected to be strong, suggesting that the Nasdaq may not be in trouble for too long.
NASDAQ'S HEALTHY MISERY
Many on Wall Street said that although the Nasdaq's drop has cost many a bundle, it ultimately may be looked at as a necessary rebalancing of valuations.
``I think it has been healthy,' said Rick Meckler, senior managing director at Liberty View in Jersey City, N.J. ``It took a very undervalued part of the market and restored it and took a very overvalued sector of the market and rectified that. I think people will be less willing to pay massive premiums for stocks that have no earnings.'
Meckler added that any upward Nasdaq moves, for a while, will be met with selling, as investors seek to soften the blow from losses suffered on the index's big downswing.
But trading on Thursday showed that some investors were already tip-toeing back into the Nasdaq looking for good deals, pulling the index up 105 points to 3,874 at midday.
``My guess is that you are going to see some long-term investors coming back,' said Richard Babson, the chairman and president of Babson-United Investment Advisors Inc. in Watertown, Mass. ``There are certain techs that are cheap.'
Babson singled out Internet investment firm CMGI Inc. (NasdaqNM:CMGI - news), which dropped about 36 percent, to 70-1/4 from 109-1/4, since the latest bruising began on April 3.
``I think we are all waiting for a sign that a real bottom is in place,' said Bill Meehan, chief market analyst at Cantor Fitzgerald in Darien, Conn. ``It might be happening as we speak.'
The big tech pullback began on April 3, when the failure to settle the U.S. Government's antitrust case against Microsoft Corp. (NasdaqNM:MSFT - news) set off a massive dumping of the software giant's shares along with other technology issues.
Extending the sell-off was news earlier this week of a profit warning from No. 2 wireless equipment maker Motorola Inc. (NYSE:MOT - news), a cellular industry bellwether.
``We think the slowdown in the momentum of technology earnings has been the catalyst for the current correction,' said Morgan Stanley Dean Witter's Peter Canelo in a strategy note.
Canelo added that he sees the technology shares market remaining depressed until the momentum in technology earnings picks up.
CORPORATE BOTTOM LINES TO DEFINE MARKET BOTTOM
But other Wall Street watchers said strong corporate earnings expected in the first quarter should help the stock market begin to recover from its losses with technology companies seen as leading the way on the profit front.
``There are some people who have taken their chips and gone home,' said Babson. ``But money can't just sit on the sidelines.'
Companies making up the Standard and Poor's 500 index (^SPX - news) are seen as posting on average a 19.2 percent increase in first quarter profits over the same period last year, according to First Call/Thomson Financial.
The 73 companies that have reported so far have exceeded Wall Street's expectations by a substantial 6.8 percent margin, First Call said.
In a sign that there is still a big appetite for technology companies that come through with strong earnings, chipmaker Advanced Micro Devices Inc. (NYSE:AMD - news) was up 12-1/4 to 75-1/2 after posting profits that blew past Wall Street's recently upgraded estimates.
``The earnings picture and the ability to handle higher interest rates still rests with technology,' Meckler said.
Furthermore, Wall Streeters said they doubt the Federal Reserve Bank will deviate from plans to continue raising borrowing costs only gradually, giving investors little reason to fret about a more aggressive interest rate policy.
The Federal Reserve's Federal Open Market Committee next meets on May 16, when it is expected to raise interest rates by another modest quarter of percentage point.
``I think we will get further confirmation that the Fed's course of action will be gradual,' Meehan said.
VOLATILITY EXPECTED TO SIMMER DOWN
The ulcer-causing volatility in the market that was punctuated by the Nasdaq composite's swing of a record 634 points on April 4 is expected to settle some as stocks begin to rebound.
The reason? Any big rise in the market followed by selling pressure usually triggers more and more selling as investors seek to stay one step ahead of the falling market, analysts said. Now that the market is clearly on the defensive, Wall Street will be more wary of making fast-and-furious moves -- up or down.
``It is almost like a big storm,' said Meckler. ``You get a really big tidal wave, but the waves of buying and selling pressure that follow will be confined to smaller and smaller waves.' >>
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