Pessimism may do stock market some good

Monday, September 10, 2001

NEW YORK -- Some describe the selling frenzy on Wall Street these past two weeks as capitulation by investors.

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 analysts 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.

Don't try to time it

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."

There were plenty of reasons for investors to feel glum this past week. The Labor Department on Friday reported that the jobless rate climbed to 4.9 percent in August -- its highest level in nearly four years -- and that businesses slashed 113,000 jobs.

On Thursday, Motorola Inc. warned about lower third-quarter profits and announced it's slashing 2,000 more jobs, bringing this year's total job cuts to 32,000. That same day, retail sales reports were mixed, giving investors little reason to hope that weak consumer spending is improving.

But the market also shrugged off a fair amount of positive news, such as Intel Corp. reaffirming its third-quarter revenue projections late Thursday and a report Tuesday by the National Association of Purchasing Management, which said business activity rose more strongly than expected in July.

While the market initially traded higher after the NAPM report, the market later headed back down, a trading pattern that analysts called proof of investors' growing grumpiness.

"Even good news is bad news these days," Hogan said.

Tricked before

Other analysts cautioned against declaring this decline as being the stock market's long-awaited bottom. Investors have been tricked before, most recently by the April lows that the major indexes fell to this week.

Investors still might not be sick enough of stocks, particularly the high-techs that ran the bull market. The tech issues investors about which used to boast, such as chipmaker Intel and network equipment maker Cisco Systems, have suffered the most as the economy weakened.

Intel is trading about 63 percent below its 52-week high, while Cisco has dropped 79 percent.

Others agree that the market still isn't feeling miserable enough to bottom out. So far it's been clear that the economy isn't ready to deliver stronger growth and that earnings aren't likely to improve soon, analysts said. So, Wall Street needs its huge sell-offs to come amid extremely heavy trading volume, said Robert Harrington, co-head of listed block trading at UBS Warburg.

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