Market may be at risk of a relapse

By Adam Shell
USA Today

NEW YORK — After climbing more than 20 percent from July lows, the stock market is sinking again, raising fears that the late-summer surge was just a blip in a continuing bear rampage.

The Dow Jones Industrial Average's recent moves mirror failed rallies after Sept. 11 and in spring 2001. In those periods, the Dow mounted quick, powerful moves only to sink back to new, lower lows.

"Bear-market rallies are sharp, quick and make you feel good," says portfolio manager Gary Kaltbaum, who hosts "Investor's Edge," a nationally syndicated radio show. "The (rallies) suck you in temporarily, only to bury you weeks or months later."

Kaltbaum says he believes the stock market is again at risk of a relapse, one that could result in the Dow and other major share indexes retesting their July 23 lows.

Last Wednesday, the Dow fell 130 to 8,694, extending its losses to 5 percent since hitting an intraday high the previous Thursday. Before faltering, the Dow had run up 22 percent from its July 24 intraday low of 7,490.

Investors who jumped back in risk getting burned. The reason: 1,222 points, or three-quarters, of the Dow's 1,639-point run from July 24 to Aug. 22, came in the first four days.

Kaltbaum says: "If you miss the first few days, you miss about everything."

The pattern of soaring prices followed by renewed selling is worrisome. Two recent examples:

• After Sept. 11, the Dow hit an intraday low of 7,927 on Sept. 21 before turning and rallying 309 points to close at 8,236. The rally lasted almost six months before the blue-chip gauge peaked on March 8, at an intraday high of 10,729, or 35 percent higher.

Then came the relapse: The Dow plunged 30 percent before hitting bottom in late July.

• On March 22, 2001, the Dow hit an intraday trough of 9048. Two months later, the Dow was trading almost 2,400 points, or 26 percent higher. But hurt by a slowing economy and Sept. 11, the Dow fell 31 percent to a fresh low on Sept 21.

And while the recent slide has been blamed on profit-taking after a sizzling summer rally, the fact that stocks are again rolling over can't be ignored, says Bernie Schaeffer of Schaeffer's Investment Research.

The slide could intensify. For one, September has historically been the cruelest month for stocks. Other worries: potential war with Iraq and a spike in oil prices, the upcoming third-quarter profit warning season, pricey stock valuations and the threat of the economy falling back into recession.

The pitfalls are "far too serious and numerous for an 'all-clear signal' to be sounded," Schaeffer says.