Analysts Predict Blue Chip Drop
By John Hanley
NEW YORK (Reuters) - Prices of shares in America's biggest corporations are poised to drop between 3 percent and 5 percent in coming weeks -- historically a very weak period for the stock market -- as a sell-off from the last two weeks gathers steam.
That, at least, is the prediction of technical analysts who forecast price activity based on past performance, and who have the luxury of ignoring fundamental factors like interest rates, corporate profits and the fickle mind-set of day traders.
"We're not out there screaming bear market," said Louise Yamada, a director of research and senior technical analyst at Salomon Smith Barney, However, she said, "You have to consider it was up 42 percent since October. It is due for a good consolidation ... I think at some point we are going to move higher but I think you have to get through this unsettled period."
The bluest blue-chip index, the Dow Jones Industrial Average, could fall to previous lows near 10,400 touched in June, chartists said. That translates into a 7.8 percent correction from a record high of 11,252.27 hit July 19.
Ten percent is a so-called "normal" correction that may mark a bear market. However, analysts said that even if a 10 percent sell-off from its record highs did occur, bringing the Dow to roughly 10,000, that would be a bottom for the index.
In midday trading Monday, the Dow industrials rallied 123.16 points, or 1.2 percent, to trade at 10,778.31.
The 30-stock index includes some of the nation's most well-respected companies, including General Electric Co., Coca-Cola Co., International Business Machines Corp., and Wal-Mart Stores Inc.
The index is still up 16 percent so far this year -- and 32 percent higher than where it traded a year ago -- but it has fallen like a stone the past two weeks, losing 5.2 percent.
"We're in a pullback phase," said Jonathan Dodd, technical strategist at Morgan Stanley Dean Witter. "It has gotten a little less bullish because this last move up to new highs was not as strong and we've got some divergences. The breadth of the market has not made new highs and is below the May lows."
He said the New York Stock Exchange advance/decline line, or the number of advancing stocks versus declining ones, was showing signs of weakness.
Chartists also pointed to other factors for their cautious outlook.
The Dow industrials' last push to record highs in July was not accompanied by equivalent strength in the broader markets, meaning the rally was very narrow. The index has a seasonal tendency to hit a peak in July-August and then sell off into the fall. It is currently trading below its 30- and 50-day moving averages, a bearish momentum sign.
If Monday's rally continued, the Dow would find resistance near last week's highs at 11,031, analysts said. But by early afternoon it had not even hit Friday's high of 10,825.80.
"April to October is a particularly weak period for the market and within that you ride the seasonal waves," said Elaine Yager, senior technical analyst at Herzog, Heine, Geduld.
Indeed, the tendency for stocks to fall in late summer is convincing.
For the broader S&P 500 index, September is the worst month of the year and the index's performance from May to October pales in comparison to its gains from November through April, according to a leading historian on the stock market.
Yale Hirsch, editor and publisher of The Stock Trader's Almanac, a bible of facts and figures that is now in its 33rd edition, said that $10,000 invested in the S&P 500 in 1950 in the better-performing period would have generated a profit of $340,250.
For the other six months, the same $10,000 investment would have yielded meager earnings of $11,138 since 1950, he said.
Likewise, the Dow industrials gained a total of nearly 9,500 points in the November-April period since 1950, but it racked up a gain of only 1,120 in the other six-month period, Hirsch said.
"Everything seems to be geared toward the end and beginning of the calendar year," Hirsch said. He cited year-end bonuses, dividends, the holiday selling season and year-end investment strategies as reason for the seasonal strengths. |
