The Coming Week: The Market Might Holiday Till Friday
By David A. Gaffen
Staff Reporter
5/27/01 12:30 AM ET
There's got to be something better to do this week than sit around and watch Michael Bay count all his money, no matter how bad a film he made.
After a three-day weekend that began with a Friday retreat, the market may be on cruise control this week, stopping only when the employment report rears with what is likely to be another month of job losses when it's released Friday.
Between now and then, the economy remains weak and Fed Chairman Alan Greenspan remains concerned. Manufacturing demand, judging by the past week's reports on the semiconductor book-to-bill ratio (that's orders-to-shipments) and the durable goods release, remains sluggish.
Investors really don't seem to be worried. The prevailing notion that the economy will find a way to recover persists, thanks to a multitude of interest-rate cuts from the Federal Reserve and a coming $1.35 billion tax-cut package.
The optimism figures to bull its way through the second-quarter preannouncement season, which is likely to get going not long after the Memorial Day holiday. Earnings for the coming quarter are not expected to be strong, and, of course, the market is already looking past that.
Some analysts sense that managers are beginning to plan longer-term strategies based on the notion of a solid economic recovery. If their plans are long range, however, they won't worry about interim losses or meandering, sideways action.
"I think we're going to go higher still, but I think we're going to have an adjustment period, so [in coming weeks] we'll probably go sideways," said Eugene Profit, chief investment officer of Profit Investment Management in Silver Spring, Md.
Until Friday, the market seemed to have been able to push through nagging areas on the major indices where demand wasn't strong enough to carry the rally further. The 11,000 level on the Dow Jones Industrial Average was a convenient figure to use; for quite a while it represented resistance. After the Dow closed just above that mark Friday, the market will have to prove there's enough demand to push it higher.
Whether the market can make a sustainable move higher is unknown, but the sense among investors is that it may not have to -- after months of rallies that were quickly sold off (or simply scoffed at, characterized as they were as "rallies off the lows"), the most recent gains seemed to herald something more substantial. They meant that the market, as a discounting mechanism, was ready to continue moving diverse sectors higher. It's notable that Friday's significant decline didn't happen with a lot of volume (although traders bugging out early for Memorial Day was the primary cause of this, and nothing more).
With the anticipation that the economy will ultimately improve come the end of the year, investors are still stuck having to capture the best performance possible, and that potentially means chasing stocks that have already started to take a ride. Phil Dow, director of equity strategy at Dain Rauscher, said he believes that while large institutions are beginning to make longer-term bets on sectors again after the extended time it takes for behemoths to sell stock, the "herd mentality" most assuredly hasn't been eradicated from the market.
"The majority of people think there will be a recovery but they don't know when, but most managers feel they have to be in the next leg up in technology," said Dow. "We don't have strong fundamentals under us, and might not have that for some time to come, but, you get these turnarounds in the marketplace and to me, it would indicate some people are willing to put some cash to work."
The equity market's foundation no longer feels like Play-Doh to strategists, but the market remains wary of economic data, and the end of the week brings a doozy: The May employment release, followed by the purchasing managers' index, a measure of manufacturing sentiment around the country. The latter is expected to improve to 43.5 in May from 43.2 in April, which still represents a contraction in the manufacturing economy.
More importantly, nonfarm payrolls are expected to decline by 17,000 for May, with the unemployment rate rising to 4.6%. Already, some economists believe payrolls could end up much worse. Salomon Smith Barney economists, in a comment, said payrolls could drop 125,000, which, following the loss of 276,000 jobs in March and April, would represent the worst three-month loss in a decade.
thestreet.com |
