Falling stocks bring out Ministers of Paranoia
By Pierre Belec
NEW YORK (Reuters) - The stock market's headline-grabbing
slide has once again brought out the Wall Street Ministers of
Paranoia.
After nearly five years of spectacular gains, Wall
Streeters are starting to wonder about the durability of the
bull market. Things have apparently changed a lot since the
Federal Reserve hinted that it may raise interest rates later
this month in a bid to keep inflation from resurfacing in the
economy.
What's unsettling for the market is that history has shown
that whenever investors are in that frame of mind, it's usually
a good sign that caution is warranted.
The Dow Jones industrial average, the Nasdaq Composite
index and the Standard & Poor's 500 index have been locked in a
slow moving but steady erosion since setting record highs in
July.
Some analysts see trouble in the way the market is
behaving.
The daily trading volumes have shrunk, which suggests that
investors' appetite for risk is low. They are not running back
to snatch bargains in the wreckage of battered stocks. The
light volumes have also caused stocks to fluctuate wildly.
The ratio of stocks that fall vs. those that rise has
increased sharply, which is a no-no for the market. Also, a
bigger number of stocks are making new 52-week lows.
There's more bad news.
Internet stocks -- the former shooting stars -- have had
their own private crash. Some 90 percent of the Internet shares
that were launched in initial public offerings in July are now
trading below the level at which they made their debut on the
Street.
What a difference a couple of months makes. Just last
April, during the Internet mania, the stocks would double and
triple after an IPO. Now, people view many of the Internets as
Lemmings.Com.
Even the blue-chip Internet stocks, such as America Online
<AOL.N> and Amazon.com <AMZN.O> have fallen precipitously from
their peaks.
The slaughter of Internet stocks has brought the
technology-laced Nasdaq Composite index down 10 percent from
its July high of 2,864.48, which fits the definition of a
correction. Another 10 percent plunge could signal the start of
a bear market.
The Dow is down 3 percent from its peak of 11,209.84 and
the Standard & Poor's 500 index has fallen 7 percent from its
high of 1,418.78 .
TheStreet Com's <.DOT > index of the leading Internet
companies has plummeted 40 percent from its April high.
"I'm more pessimistic than ever about this market and, in
fact, I'm sort of scared about what could happen," said Raymond
DeVoe Jr., market strategist for Legg Mason, Wood Walker. "Back
in the 1929 crash, just 2 million people were in the market but
now, half of American households own stocks."
He said a bear market is a mental process rather than a
statistic and the risk is that investors can quickly push the
panic button if their losses are too large.
"I'll bet that if the market drops 20 percent and stays
there for more than a week, I'll guarantee we will see a lot of
dumping by people and it could mean a drop of 40 percent or
more," he said.
"Investors can lose 10 to 20 percent but they'll still stay
in the market. But if they lose 40 or 50 percent of their
holdings, they'll be out of the market completely," DeVoe said.
Right now, few investors are running for the exits.
The reason: Investors have made so much money in the market
over the years, they now believe they could easily ride out a
big market slump.
"To those people, I would say: 'That's what you're saying
now, but let's wait and see what you will do when it does
happen,'" DeVoe said. "It's easy to talk bravely with the
market having acted beautifully for the last 17 years."
What are the tricks to staying alive in a bear market?.
"The 'buy on dips' mantra that has worked in the past
becomes 'sell on the rallies,' because that may be the only
time there is liquidity to get out of the market," he said.
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