More Selling, but Snapback Seen on Street
By Brendan Intindola
Saturday July 20, 9:38 am Eastern Time
NEW YORK (Reuters) - Expect no reprieve, as the stock market is likely to get shellacked next week by more languid earnings and deep-seated investor mistrust.
"The mood is just horrible. There is one crisis after another. Anything people can point to as a negative they are jumping all over it," said Mike Driscoll, a Bear Stearns managing director of listed trading. "Markets tend to go to extremes, and I am seeing a lot of good companies that are being completely annihilated without reason."
But the pros won't rule out a reversal, as each rout to lows dating back to 1997 makes prices more alluring. The result, they say, could be a market that finishes the last full week of July unchanged, or with a minor loss.
Still, a small decline could offer some comfort for investors stunned by the Dow's nearly 1,400-point drop since July 5, a span in which it fell nine days out of 10.
On Friday, the Dow Jones industrial average logged its seventh-largest points decline, falling nearly 400 points. The rout was led by health products giant Johnson & Johnson, which said U.S. regulators are probing allegations of fraudulent record-keeping at a Puerto Rico plant. The stock fell 16 percent.
The rush of corporate earnings reports continues in one of the busiest weeks of the reporting period. So far, the mountain of numbers and forecasts digested by investors every 90 days has stoked the July meltdown. It is not so much the results that have weighed, but the dim outlook for the future.
"Valuations matter, and they have been improving," said Thomas McManus, strategist at Banc of America Securities. "Now we are starting to see bargains popping up, good companies available at prices you would not have considered possible in some time."
One example, he said, is Automatic Data Processing Inc. . On Thursday, ADP shares surrendered almost a quarter of their value, dropping to a 1998 low, after the No. 1 U.S. payroll-services company warned of slower profit growth ahead.
"Here is a steady business, steady cash flow, rising dividend," McManus said, "ADP has been in business for 41 years, and it is an outstanding company."
MAGAZINE COVER GRRRRRL
Need another reason for emergent optimism? The latest issue of BusinessWeek magazine has a toothy, roaring bear on the cover. This in the past been a contrarian indicator, a harbinger of a turn in market sentiment.
If the bear's prowl widens to more general news publications, such as Time magazine or Newsweek, investors should take that as even more encouragement to get back into stocks, McManus said.
"I think that the market is trying to form some form of tradable bottom," said Jeffrey Saut, Raymond James Financial chief investment strategist. For next week, he said he expects the market to "make a low and trade higher."
"Everything was OK until clients got their monthly statements a week ago. They saw the stealth decline in June, which was relentless ... and they dialed up 1-800-GET-ME-OUT," Saut said.
The Dow fell 9.4 percent in June, the worst month since a 10.5 percent drop in February. In July, the Dow has declined 13.2 percent, as investors fled from equities and there was little sign of a let-up.
Jack Francis, a senior Nasdaq trader at UBS Warburg, noted: "There were $11.4 billion in mutual fund outflows last week. That is monstrous, and selling begets selling.
Most of the earnings being reported by technology companies in general met analyst expectations, but Francis said their lowering of earning forecasts fueled pessimism on Wall Street.
EXPLODING BOTTOM
For evidence of a lasting market turn, Kevin Lane, chief market strategist at Technimentals Research Group in New York, will be looking at market breadth, which is the ratio of rising stocks to decliners.
The recent drop in stocks, he said, differs from the panic sell-off last September. In trading immediately after the attacks on the United States, stocks tumbled to three-year lows, but after a week of heavy selling, the breadth improved.
"Institutions on the buy side (like mutual funds) are not showing any confidence or conviction," Lane said. "Last September, we saw big surges in gainers versus decliners, we saw institutions step back into the market. Now, you are not seeing anyone step up with confidence or conviction."
While he waits for such an "explosion off the bottom" -- a day where rising volume beats down volume by at least a 10 to 1 ratio -- he said he sees a telling parallel between the surging market of early 2000 and today's near-constant declines.
"There seems to be that last leg of the bear market. We are getting the mirror image of the bull market, when stocks were going up every day, seeming like they would never stop," he said.
The blue-chip Dow index closed at its lowest level since October 1998, finishing the week with a drop of 7.8 percent, pushing it back into bear territory. The Standard & Poor's 500 ended the week down 8 percent and at a new 1997 low, and the Nasdaq composite finished the week off 4 percent.
So far this year, the Dow is off 20 percent, the S&P has surrendered 26.2 percent and the Nasdaq has tumbled 32.4 percent.
NUMBERS ON DECK
Earning will again dominate equity news, with a slew of results this week representing the quarter's peak.
On Monday, American Express Co., 3M Co. and Texas Instruments are due to announce results.
Tuesday brings AT&T Corp., Amazon.com and Gillette Co., followed by Anheuser-Busch and AOL Time Warner on Wednesday.
Thursday, look for earnings from Viacom, American International Group and Eastman Kodak . |
