S&P 500: What's this talk of crashes?
By Thom Calandra, CBS MarketWatch
Last Update: 2:27 PM ET May 28, 1999 Also: Options Watch
SAN FRANCISCO (CBS.MW) -- What's all this talk of a market crash?
"If history is to be trusted, it is very possible," notes William B. Noble, a Texas economist at LIMresearch.com. The research firm scanned Standard & Poor's 500 Index [s $spx] behavior this week in light of the stock index's 1.5 percent drops on Monday and Tuesday, and its 1.5 percent gain Wednesday.
LIMresearch found that 65 percent of the time in that weekly scenario, the S&P 500 rallied more than 1 percent. Alas, not this Thursday. The index fell 1.8 percent amid talk of an emergency rate increase by the U.S. Federal Reserve.
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Now it's Friday. The S&P 500, which represents about two-thirds of the value of all U.S. stocks, was up another magic 1.5 percent Friday yet is trailing badly the past two months against the Dow Jones Utility Average ($UTIL: news, msgs), which is close to all-time highs. (See the chart above.)
Cedd Moses, the Los Angeles hedge fund manager who writes for MarketWatch.com, says he saw a top in S&P 500 on May 13. It "will not be surpassed for several months," he says. "We will at best be trading sideways and at worst expect a 20 percent correction unless interest rates rise dramatically." (See the Moses column.)
Utility stocks, which are very sensitive to interest rates, are your stock market leaders this month, says Moses. (Federal funds futures contracts indicate about a 65 percent chance that the Federal Reserve will guide rates higher at its next policy meeting at June's close.) Strong utility stocks usually suggest some kind of tectonic shift in the balance of U.S. stocks.
Sir John Templeton, the legendary value investor, is said to looking for a (pick one): 20 percent, 30 percent, 40 percent drop in U.S. stock indexes.
"You can't blame market participants for being edgy," says economist Irwin Kellner, who writes for MarketWatch.com. "Even with these recent declines the Dow ($INDU: news, msgs) is still up 14 percent since the end of 1998." (See Irwin Kellner's column.)
James Grant, the editor of Interest Rate Observer in New York, is as much a skeptic of rising market valuations as anyone walking the face of the planet. He wrote recently that "the greatest risk to the market is the market itself." Stock options and the runaway popularity of equities are skewing the multiples that investors are willing to pay for the shares of companies, he says.
And perhaps in a capitulation, U.S. banks such as First Union, their shares roughed up amid continued talk of higher interest rates later this year, have taken the buyback plunge. (For more on stock buybacks each day, see our buyback screen.)
Where will it all lead? One positive sign: First Union (FTU: news, msgs), the North Carolina bank whose repeated profit warnings rocked the company's stock and endangered a $1.1 billion brokerage purchase, is finally showing some life. The stock Friday got some life after First Union adjusted the terms of its pact to purchase brokerage Everen Capital Corp (EVR: news, msgs). In effect, First Union, whose sliding quarterly profits are still formidable, guaranteed investors a $31 share price for Everen.
One of the San Francisco TV anchors I work with, Ken Bastida, just told me U.S. stocks are going far higher. On Tuesday. After the three-day Memorial Day weekend in the United States. (Markets are also closed in Britain on Monday.) "After all the barbecues and the beer, the fat cats are going to be sitting back, saying -- 'there are some real bargains out there,' and on Tuesday, right after that nice long weekend, they're going to buy buy buy," Bastida says.
Bastida broadcasts from KPIX-TV Channel 5 in San Francisco.
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