Interesting read.....but read it all.....
The Jury Is Out
Market Gains Followers as Momentum Wanes
Business - Reuters
Sat Jul 24, 8:14 AM ET
By Dick Satran
NEW YORK (Reuters) - Wall Street's fast lanes have been so busy this year, it's been hard to get onto the slow ones.
The long-term investor has all but vanished from the market as hedge funds and program traders have turned it into a churning speedway that's going nowhere fast.
"They just take a swipe at the market by catching a stock on a bounce and riding it a point higher before they get out," said Jon Brorson, managing director of growth equities at Neuberger Berman.
But some analysts now see the stock market finally going through a decisive turn -- one that could break it out of its trading range one way or the other.
Following a June swoon in the economy, the Dow industrials have dropped to their lowest level of the year. More important, the risky, high beta stocks that have been favored by short-term traders have fallen hard, possibly underscoring a shift toward more conservative investing.
Reflecting the rapid downturn in "momentum" stocks this month, the Morgan Stanley Technology Index (^MLO - news) has dropped 12.7 percent and the American Stock Exchange Biotech index (^BTK - news) has shed 9.9 percent. During that period the Dow industrials (^DJI - news) have lost just over 2 percent.
For much of this year, the tech and biotech stocks were favorites, as momentum traders looked for so-called 'high-beta,' high risk stocks that tend to move up and down quickly.
The fast money -- including computer program traders and hedge funds -- could exceed 90 percent of all activity during the recent summer doldrums, said Frederick Dickson, chief market strategist of D.A. Davidson & Co.
"They've been trading heavily in 'expectational' stocks -- stocks that are long on expectations and short on fundamental evidence of solid earnings," said Davidson. "Some of them are coming plunging back to earth now, though."
The dramatic declines in those one-time favorites could be signaling a shift in the market, a piercing of the "mini bubble" that's formed over the past year, analysts and fund managers said. Uncertainty has hit the high-risk sector as many of the companies have given more cautious outlooks for the rest of the year, forecasting somewhat slower growth rates.
"Momentum is a difficult game. It's hard to be out ahead of competitors paying such hefty prices for the stocks," said Richard Earnest, fund manager for HighMark Capital Management, Los Angeles
In this environment, it's not enough just to meet expectations, he said. To avoid a share debacle, the companies need to exceed them. Yahoo (Nasdaq:YHOO - news), Ebay (Nasdaq:EBAY - news), Motorola (NYSE:MOT - news) and Microsoft (Nasdaq:MSFT - news) are among those that have matched but not exceeded estimates, and all had sharp declines.
All of those companies earn significant profits. But on another level are the "mini-bubble" stocks, some of which are trading at hundreds of times earnings following a rally over the past year.
Among them, Salesforce.com, a hot initial public offering stock earlier this year that trades at nearly 400 times earnings saw its stock drop 27 percent on Wednesday when it forecast earnings about three cents a share below analysts' estimates. Red Hat Inc., up 600 percent in the past year, dropped 22 percent in one day on an earnings restatement.
Money leaving risk stocks doesn't mean a "good stock" rally will automatically begin. But some analysts see healthy signs that the market is regrouping and looking for stronger footing.
"The market will drop to a level where long term investors get interested, which we are close to, " said Stephen Massocca, head of trading and president of Pacific Growth Equities. "To have a real rally, you need the people who will buy a stock and put it away."
"The jury's out," said Davidson strategist Dickson. "But we could be getting to a point where valuations are getting compressed enough. We're going through a process. Some extraordinarily high stock prices have come back to earth and now investors want tangible results and cash and are paying attention to valuations."
HighMark's Earnest, a value-oriented fund manager, said the market already reached a level where it is attractive based on simple valuations. With stocks now at 15 times next year's earnings, they are below the long-term 18-times-earnings average. And earnings are still rising, even though the rate of growth is expected to slow.
"Now tech stocks are looking more reasonable, and we're thinking of raising our tech exposure." said Earnest. "In this kind of market, the stocks are starting to come to us. They're starting to hit the numbers we need."
But Earnest concedes that this thinking has not swept through the market, and value investors in general are waiting for still-cheaper stocks.
"We're at the intersection of a lot of political and economic uncertainty, and concerns over higher interest rates," said Brorson. "Nobody's betting the ranch right now."
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