Buying of Dow Stocks May Indicate Rally: U.S. Stocks Outlook
New York, Aug. 28 (Bloomberg) -- U.S. stocks may rally in coming weeks, buoyed by a flood of cash from small investors into the big-name stocks of the Dow Jones Industrial Average.
Confident on U.S. stocks amid a worldwide market slump, small investors kept buying as the Dow average shed 481 points in its worst week since the mini-crash of October 1989, money flow statistics show. ''If you look at the best indicator of the market, it's money flowing to Dow stocks, and you see money flowing in,'' said Laszlo Birinyi, head of Greenwich, Connecticut-based research firm Birinyi Associates Inc.
Small institutions, corporate officers, market makers and the
specialists have ''continually shown up buying, and that's the kind of
thing that we have seen at other critical correction period points the
last 10, 15 years,'' Birinyi said. The 30-stock Dow average includes
such well-known names as General Electric Co., Coca-Cola Co. and Exxon
Corp.
Birinyi's past predictions have turned out to be accurate. In April
1997, when the market was in the midst of a 9.8 percent slump, he
forecast three months before the fact that the DJIA average would pass
8,000.
This week, which brought the Dow's second 10 percent ''correction'' of
the decade, prompted him to say that his 10,000 forecast for year-end
''is looking increasingly like a mirage.'' Yet he stayed bullish.
One reason: the Dow industrials are now 9 percent below their 50-day
moving average. The last 10 percent drop below the moving average took
place after last October's plunge. The Dow subsequently rallied more
than 2,000 points.
Benefit From Bonds
As investors sold stocks around the world, they bought U.S. government
bonds. Yields on the benchmark 30-year Treasury fell to 5.28 percent
early today, the lowest since the U.S. start regular sales of the
securities 21 years ago.
The low yields will be good for stocks, investors said. ''With interest
rates as low as they are, stocks continue to be attractive,'' said Evan
Harrel, who helps manage the $16 billion AIM Value Fund in Houston. ''We
have made no wholesale changes to our portfolio.''
Harrel, whose funds returned 8.4 percent year to date, compared with a
4.4 percent gain for the S&P 500, particularly likes banks such as
Citicorp and Chase Manhattan Corp.
Bank stocks are likely to be among the biggest beneficiaries in coming
weeks, based on money flow analysis, which measures purchases when
prices rise against sales when prices fall.
The stream of non-block money into the Standard & Poor's Money Center
Index rose steadily all year, continuing its climb even as the index
slumped 29 percent since July 14.
Bank Slump
Banks were particularly hard hit this week as some disclosed hundreds of millions of dollars in losses stemming from Russia's default on its
debt. BankAmerica Corp., the fifth-largest U.S. bank, said it incurred
$220 million of trading losses this quarter, mostly in Russia. Republic New York Corp. said it would take a $110 million charge.
There was plenty of bad news from other emerging markets. Hong Kong, the trigger for last October's plunge in markets worldwide, entered its first recession in 13 years, joining Malaysia and South Korea. Brazil's benchmark stock index plunged 10 percent Thursday.
While U.S. banks' exposure to Russia is relatively small, ''if this is a protracted slowdown in the emerging markets, where's their other
exposure?'' said David Winton, a bank analyst at Keefe, Bruyette & Woods Inc.
Even banks that don't expect to lose money in Russia were punished.
Citicorp spokesman Jack Morris said yesterday the bank had no plans to
announce any possible losses from its business in Russia. Still,
Citicorp stock has fallen 35 percent from its record closing high in
July on concern that the bank's exposure to Russia, Asia and Latin
America would drag down its earnings. Citicorp said its total Russian
exposure, including loans and short term debt, was $420 million by the
end of June.
Warnings Season
During the next few weeks, companies that don't expect to meet Wall
Street earnings forecasts will be breaking the bad news to investors. If
warnings pile up, that could temper any gains in the market.
The effects of the strong dollar, which makes U.S. goods more expensive
overseas, and lower demand in Asia's recession- stricken economies
already showed up in first-half earnings.
The Commerce Department reported U.S. corporate after-tax profits rose
0.3 percent in the second quarter, after declining a 1.6 percent in the
first quarter. That slight quarter-over- quarter gain failed to allay
investors' concerns that growth is slowing. ''We were nervous about
second-quarter earnings and echo that for the third quarter,'' said
Franklin Morton, the director of research at Chicago-based Ariel Capital
Management Inc., which manages $2.4 billion. ''Particularly for
companies with exposure to Asia. There are also signs the U.S. economy
is slowing, and we believe we will see some pre-release warnings soon.''
144 Points From Ground Zero
For the week, the Dow industrials dropped 5.7 percent. The Standard &
Poor's 500 Index fell 5.0 percent. The Nasdaq Composite Index, dominated
by computer-industry shares, lost 8.8 percent.
The Dow average, up 18 percent for the year just six weeks ago, is now
just 144 points away from losing its entire 1998 gain.
The Russell 2000 Index of small stocks entered a bear market on
Wednesday, falling more than 20 percent below its April high. At the
close on Friday, the loss widened to 27 percent.
The index consists of little-known companies with an average market
value of about $450 million. It took at least 11 months for the Russell
to dig out of its last three bear markets. Fans like Ariel Capital's
Morton aren't deterred. ''We continue to buy small-cap, out-of-favor
stocks,'' said Morton. ''We're trying to take advantage of value in the
small end of the market.''
Morton bought Libbey Inc., Shorewood Packaging Corp., First Brands Corp.
and Interface Inc. in recent days at the expense of holdings in ECC
International Corp., Omnicom Group and Century Telephone Enterprise Inc.
Monday Drop
Even a big market drop on Monday wouldn't faze Ricky Harrington, a
technical analyst at Interstate/Johnson Lane Inc. in Charlotte, North
Carolina.
His evidence: the ratio of put options to calls on the Chicago Board
Options Exchange, along with the volume on the New York Stock Exchange
yesterday, the second-busiest ever. To technical analysts, those are
signs that investors are so pessimistic that they're hoarding cash --
which means they'll eventually buy. ''The market is oversold,''
Harrington said. ''While I am looking for extreme volatility, if the
market is down big today and Monday, I predict a big rally later in the
week.'' |
