risk/reward
Stocks Expected to Drop as Risks Pile Up
Sat Jun 15, 7:33 AM ET
By Chelsea Emery
NEW YORK (Reuters) - Plunging stock prices have sent benchmark indexes tumbling to lows unseen since late September, but don't expect the bargain cavalry to ride in and lasso up beaten-down stocks this time.
Prices may have dropped, but there's still too much risk to make new long-term bets on stocks in the week ahead, strategists and fund managers say.
"There are geopolitical risks, possibilities of more terrorist attacks and the ongoing concern about corporate skullduggery," said Tim Woolston, who helps manage $3.5 billion for Boston Advisors Inc. "The market has more to work through at the lower end -- Nasdaq, in particular."
Woolston said he's selling stocks of large companies with prices he considers high, considering their expected growth rate, like drugmaker Pfizer Inc. , to buy stocks of smaller, less expensive companies with better dividends, such as Merck & Co..
But don't expect stocks just to drift lower next week. Prices will likely swing widely as Wall Street scrutinizes the profits of investment banks and the earnings pre-announcements of other companies, reshuffles portfolios at quarter end, and factors in the so-called triple witching day, when options, index options and futures contracts expire simultaneously.
Still, there won't be much good news to let stocks hold any gains, investors say.
Profits for the top investment banks, such as Lehman Brothers , are expected to drop as much as 23 percent from the same quarter a year ago as trading volume, new share offerings and merger ( news - web sites) activity have sunk. And pre-announcements, when companies warn they may miss earnings expectations, will also weigh on Wall Street's mood.
"If we could see something positive on the horizon, the market would embrace it wholly. But there isn't enough. We'll test the (stock index) lows from September, and with the next bad news, we'll probably go through them," said Michael Palazzi, head of Nasdaq trading for SG Cowen.
Wall Street will likely greet next week's report on the U.S. Consumer Price Index ( news - web sites), the broadest gauge of consumer-level inflation, with a yawn. The overall May CPI is forecast to rise 0.1 percent, according to economists surveyed by Reuters. In April, overall CPI gained 0.5 percent. Only nine of 22 bond dealers expect the Federal Reserve ( news - web sites) to raise interest rates in September to quell inflation, a Reuters poll showed, while the majority see the Fed waiting until November or later to hike rates. Virtually no one expects the Fed to raise rates next week when its policy-making committee meets.
For the week, the Standard & Poor's 500 index <.SPX> and the Nasdaq composite index <.IXIC> declined 2 percent, while the Dow Jones industrial average <.DJI> fell 1.2 percent.
The S&P 500 has now fallen 11 of the past 13 weeks, an occurrence seen only five times before in the index's history, according to market research firm MarketHistory.com. The Nasdaq has dropped 12 of the past 14 weeks. This has happened only twice before.
The steady drumbeat of falling stocks has traders, normally among the most resilient people on Wall Street, bowed.
"We come in at 6:30 a.m. optimistic and we leave at 4 p.m. depressed," Palazzi said.
END OF THE BEAR?
If history is any guide, though, beleaguered investors finally could be seeing the bottom of a long bear market.
The S&P 500 climbed more than 11 percent six months after it racked up an 11-week slide, in five out of six occasions, according to Gibbons Burke at MarketHistory.com.
Two years after the end of an 11-week drop, the S&P 500 was up between 41 percent and 53 percent, according to MarketHistory.com. The only exception to both these milestones was the period ended Sept. 25, 1931, when stocks had dropped six months later and fell again two years later.
The Nasdaq's behavior corresponds with the S&P 500. The index fell 12 out of 14 weeks over a period ending in September 1974 and March 1982. Both times, investors saw the bulls gain the upper hand again.
"By all means, we're in the throes of a bear market, but the data suggests we're very close to major market low points and, in the past, we've rallied significantly," Burke said.
A WALL OF WORRIES
But Wall Street is still a slave to the present. There are more than enough worries to keep investors from adding big positions.
Investment banks have struggled to save money and cut costs, but these measures won't be enough to boost profits much at Morgan Stanley , Goldman Sachs Group Inc. , Lehman and Bear Stearns Cos. Inc. , analysts say. Even more important, it is doubtful the companies will predict better days ahead, analysts said.
"If anything, we'll probably see a recovery pushed out an additional quarter or two from earlier expectations," said Frank Barkocy, director of research for money management firm Keefe Managers, LLC. This bad news "is probably in the stocks already, though."
Next week will bring the first trickle in a flood of quarterly pre-announcements. The ratio of warnings to positive outlooks has shrunk recently, according to market research firm Thomson First Call. But Wall Street is more willing to sell on bad news than buy on good news these days.
Stocks that have performed well over the past quarter may see gains next week, and stocks that have fallen will likely fall more as fund managers rush to reorganize their portfolios so they show winners instead of losers.
Pepsi Bottling Group Inc. was the S&P 500's best-performing stock as of Friday, with a gain of 37.4 percent, while energy trader Dynegy Inc had the biggest percentage loss at 72.5 percent. |
