Question: What do you get when you cross a bear and a donkey?
Answer: Ralph Acamporass
Fake out or break out? Read this advice
Stocks live, die by many measures
By Thom Calandra, CBS MarketWatch
Last Update: 8:52 AM ET Aug 5, 1998
SAN FRANCISCO (CBS.MW) -- It's big-picture time, folks.
U.S. stocks live and die by many measures. Before you consider buying or selling securities, now that major indexes have declined 10 percent and more from their July highs in Europe and in the United States, check out these facts:
The terms long-term, medium term and short-term mean nothing. Next time you hear Mr. Dow 10,000 (now Mr. Dow 7,500) Ralph Acampora or any other stocks strategist talking about their something-term outlook, call their office and ask what the heck they mean. Long term for a 55-year-old who just started investing in stocks or bonds might be just five years. For us 40-something-year-olds, it's 20 years or more before retirement.
Don't get sucked into a fakeout-breakout rally or dip. This time around, new circuit breakers on the NYSE won't save individual investors or fund managers from making hasty buy and sell decisions. The circuit breakers halt trading only at thresholds of 10 percent, 20 percent and 30 percent in the Dow Jones Industrial Average ($DJ).
The 299-point fall in the Dow Jones Industrial Average was the third-largest point drop in the index's 102-year history. Still, the one-day fall wasn't even among the 25 greatest percentage declines for the 30-stock average. In percentage terms, the decline was 3.41 percent.
That Dow Jones average represents just 15 percent of the value of all U.S. stocks. Other indexes, like the Standard & Poor's 500 Index ($SPX), are far more representative (65 percent).
In the seven-year U.S. bull market that has added trillions of dollars of wealth to American households, the Dow Jones average and other major indexes masked nasty declines in thousands of stocks. (On the Nasdaq Stock Market, 80 percent of stocks have fallen 20 percent or more from their 52-week highs.) When Dow stocks like Procter & Gamble (PG), Walt Disney (DIS), JP Morgan (JPM) and others finally started cracking in July, it finally registered: the world's best known stock index is vulnerable.
The word "correction" means nothing. (With thanks to the fine editors at Bloomberg News, who have known this for almost a decade now.) No measure of value is "correct." Instead, let's just say that the Dow Jones average of 30 stocks, after a 299-point fall, had lost 9.1 percent of its value since hitting a July 17 high.
The Nasdaq Composite ($COMPQ) has given up more than 11 percent since a July high. And many small and medium-sized Nasdaq stocks have lost a third of their value in six short weeks. Still, don't lose the forest for the trees. The index, which includes many technology stocks, small and big companies, is still up 14 percent for the year. And hey, the index has doubled, folks, since early 1996. Now that the handful of stocks responsible for those heady gains, like Worldcom (WCOM) and Microsoft (MSFT), are finally slipping off their pedestals, the financial media is paying attention.
Oh, there's that earnings thing. Most of the S&P 500 companies have reported their quarterly results this summer. The average year-to-year profit growth is about 1.7 percent. That's paltry for stocks that sell for 25 or so times yearly earnings. Once again, folks, those are averages. Stocks that continue to produce steady profit growth, like fund manager Frank Cappiello's favorite Tootsie Roll Industries (TR), seem relatively immune from the morning-after syndrome for stock indexes.
"Yesterday's drop of 300 points in the Dow was a needed reality check for investors. It shows that the market does not go up in a straight line every day," says Irwin Kellner, CBS MarketWatch chief economist."It was profit taking on profit concerns, Ralph Acampora, Monica Lewinsky -- you name it. However, the bull is intact; the Dow is still about 9 percent higher than it was at the start of the year--within the range for the entire year that market pundits were forecasting."
That's the big picture, for now.
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