Hitting bottom may help stocks
Advertiser News Services
NEW YORK — Some describe the selling frenzy on Wall Street in the last two weeks as capitulation.
Investors aren't just noncommittal when it comes to the stock market, they're disgusted, fed up, analysts say, which is why they sent the Dow industrials down nearly 8 percent and the Nasdaq composite off nearly 12 percent over the past two weeks.
But in the convoluted way Wall Street thinks, that's actually a good thing.
"On the bright side, we are getting to some levels of fairly significant pessimism," said Charles White, portfolio manager for Avatar Associates.
Analysts say the mood of the market must plummet to truly miserable levels to hit bottom and then head higher again.
"Historically, that has been the turning point. Whenever we have had a really bad run as we have been having this year, you don't have the bottom until everyone throws in the towel," said Arthur Hogan, chief market analyst at Jefferies & Co. "You need to have everyone be bearish."
The notion that investors' foul mood bodes well for the market might be difficult for anyone off Wall Street to understand. But analysts likened it essentially to sellers needing to get the selling out of their systems, to drive stocks low enough to make them want to buy again.
As for how investors will know when total capitulation has happened — well, that's even tougher to figure out, said Hogan, who called the mood of the market the worst he's seen since the late 1980s. It's a fine line between the time to sell and the time to buy.
"You don't gauge it until you see the market head higher," Hogan said. "Individual investors shouldn't try to time it."
More evidence of anemic economic growth and low inflation expected to come out this week will likely clear the way for this year's eighth Federal Reserve interest rate reduction at its next meeting Oct. 2.
Economists expect industrial production numbers due out Friday will show a decline of 0.1 percent for August, the 11th consecutive monthly drop.
"This is a recession," said Chris Low, an economist at First Tennessee Capital Markets in New York. "Wage pressures are falling, slack is building into the labor force at a rapid pace and corporate profits — and corporate investment — remain elusive. None of this is lost on the Fed."
But so far the Fed's actions have failed to stir the stock market.
"You have to look to the Great Depression in the U.S. or Japan in the 1990s to see an example where we've had this much easing and the stock market is still setting new lows," said James Paulsen, chief investment officer at Wells Capital Management.
Starting with a surprise half-point rate cut in January, the Fed has eased rates seven times, cutting three percentage points from its interest rate benchmark.
The S&P 500 fell 4.2 percent last week and is now as low as it was in October 1998. The Nasdaq Composite Index fell 6.5 percent and is down 32 percent this year. The Dow Jones Industrial Average fell 3.5 percent last week.
