IBD Big Picture..sounds like the Bear is back..
The Big Picture
Friday, June 15, 2001
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Techs Get Clobbered As Volume Intensifies
Investor's Business Daily
Stocks took another hit Thursday. But this one packed higher volume, a bad sign for the market.
With the General Electric (GE)-Honeywell (HON) merger on the rocks and a load of profit warnings, stocks sold off hard. The Nasdaq skidded 3.7%. The Dow industrials fared better, losing 1.7%. The S&P 500 dropped 1.8%.
Unlike many recent declines, trading volume increased. It was the fourth to fifth day of distribution, or professional selling, since the market’s rally stalled about three weeks ago. Arrows on the Nasdaq, S&P and Dow charts in the print edition point to the higher-volume churns and sell-offs that peppered the market.
Three to five distribution days over a few weeks are usually all it takes to derail a market. Things were already looking shaky with so many breakouts running into trouble.
As long as you let the market guide you gradually and cut any initial losses quickly, the current weakness shouldn’t be too painful. Recall this Big Picture excerpt from May 23, when the market looked decidedly more bullish: “Don’t relax your trading rules just because the market has changed direction. You can still suffer serious damage if you let a small loss snowball into something large.”
If your selling rules are sound, you’ve been raising cash the past few weeks. It’s definitely no time to be heavily margined.
With the economy recovering slower than expected, technology profits won’t rebound soon. Thursday’s benign wholesale inflation report gives the Fed room to cut interest rates further. But it takes months before they’ll kick in.
How far will the market move from here? As this column stated when the market followed through and confirmed its rally on April 10, “You never know.”
Wall Street loves price targets, even though they rarely pan out. Successful stock investing is all about managing uncertainty and putting the odds in your favor. Nothing’s guaranteed. The daily price and volume changes in the major market averages and leading stocks are your best guides.
But past experience can give you a feel. Consider the serious market breaks in 1987, 1973-74 and 1929-32.
In 1987, the Dow plunged 23% on Black Monday. By the next day the selling was over. Even though the Dow suffered sporadic distribution from the end of October to early December, it never undercut the Oct. 20 low. It trended slightly higher in choppy trading for more than a year before picking up real momentum.
The wicked bear market that started in 1929 didn’t hit bottom until 1932. Four days after the Dow closed at 41.2 on July 8, 1932, it followed through with a big 5% gain in heavier volume. The Dow vaulted 97% during the next two months. Distribution started knocking the market lower. The Dow fell 38% by Feb. 23, 1933. But it never came close to retesting its ultimate low.
That wasn’t the case in 1974. At a time when the country’s economic problems were much more serious than they are now, the Dow staged a rally in early October. The blue chip average advanced 21% over the next month before running into heavy selling. The Dow undercut its prior low by a few points on Dec. 9, which turned out to be the beginning of a strong rally. |
