Still no panic ... Wall Street uses 'upgrades' to defend withering stocks
By Thom Calandra, CBS.MarketWatch.com
Last Update: 11:10 AM ET July 11, 2002
SAN FRANCISCO (CBS.MW) -- Hard as it is to believe, there is still no panic in Detroit, or Kansas City, Memphis, Albuquerque, Buffalo or Tampa Bay.
American investors have yet to reject stocks. Negative volume and points lost on the NYSE are failing to reach the 90 percent "panic" levels that would indicate the start of a major market sell-off. See the latest 90-90 update.
Indeed, as Paul Desmond of Lowry's Reports points out, the stock market has not seen all-out, got-to-dump-these-losers selling since the trading session of April 3, 2001. In 1999 and 2000, there was not a single day in which negative volume on the New York Stock Exchange amounted to 90 percent of the total, with 90 percent of all points gained and lost in the red as well.
Without the intense selling and drastic markdowns in price that marked the October 1987 tumble, investors have little incentive to chase so-called bargains. "If (a) decline does not attract strong buying, then even lower prices will be required," says Lowry. "This is a classic example of the law of supply and demand at work"
Part of the reason for the tranquil selling, no doubt, comes from the stubborn belief of many Americans that their beloved stocks can go no lower. After all, the wealth lost in the American stock market this year alone exceeds $2 trillion. Since March 2000, the red ink is far north of $5 trillion.
Wall Street investment banks also bear part of the blame. Even today, amid the lowest level for the S&P 500 Index since November 1997, dozens of brokerage reports are branding their favorites with the "bargain" label, hoping to drive up prices.
"When Merrill Lynch (MER: news, chart, profile), the same bunch that has been recently fined $500 million, comes out with a strong buy on a stock that is selling at 90 times earnings, Cisco Systems (CSCO: news, chart, profile), and the whole world piles into it, there is no 90/90 mentality building yet," says Ed Kaminski, an individual investor. "We have a long way down still to go."
Merrill Lynch's "intermediate strong-buy" is Wall Street's version of market timing, something the big banks say investors should never try for themselves. Wall Street would prefer the folks in Memphis and Albuquerque "time" their market ins-and-outs only after reading analyst research.
The stream of upgrades on Wall Street this week, it seems, is a defensive mechanism. Morgan Stanley would have us "overweight" shares of Colgate-Palmolive (CL: news, chart, profile). Salomon Smith Barney, luring us with a "Buy/High Risk Rating," wants us to chase shares of Jack in the Box (JBX: news, chart, profile). UBS Warburg tells us IndyMac Bancorp. (NDE: news, chart, profile) is a "strong buy," presumably because its price has fallen so low, it has to be a "strong buy."
There may be sweet justice in the world. Even with the computerized buy programs that fund managers and banks almost surely will put in place as their next defense mechanism against the sliding stock market, the S&P 500 Index is flirting with five-year lows, destined to sink even further, if the history of bear markets is any guide.
"One possible reason that we haven't reached the final lows is because investors apparently still see stocks as being overvalued," Desmond, president of Lowry's Reports, told me Thursday. "The price/earnings ratio for the S&P 500 components is currently at approximately 24. Since 1942, the average P/E ratio at major market bottoms has been approximately 11. The highest P/E ratio seen at a major market bottom over the past 60 years is approximately 12.5 (in June 1962)."
Lowry, whose work on bear market bottoms won the Charles Dow Award this year, said the bottoms of October '74 and August '82 saw P/E ratios of about 7. "During the bubble years, investors got used to everything happening in a hurry. Now they will have to adjust to things happening more slowly. A lot of cash and a lot of patience is what is needed now," Desmond says.
So, there is no panic in Detroit, Providence, Eureka, Tucson or Tom's River. Not yet, anyway. The true buying in this overpriced stock market won't come until most Americans have ejected every last remnant of their withering retirement and taxable portfolios. By then, the market indexes Wall Street uses to benchmark their days and nights all will be far, far lower.
"In the years to come," said Desmond, "books written about this bear market will emphasize the importance of the virtue of patience." See Paul Desmond's paper on bear market bottoms. |
