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Is the rally for real?
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April 13, 2001: 1:27 p.m. ET
The Nasdaq flirts with a return to 2,000; but is it time to return to techs?
By Staff Writer Mark Gongloff
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NEW YORK (CNNfn) - Are we in a tech-stock rally or a dead-cat bounce?
When the Nasdaq closed Thursday for the long holiday weekend, it stood at 1,961.41, up 241 points, or 14 percent, for the four-day week.
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The Nasdaq is a long way from its year-ago levels. | | |
That's cold comfort to people who bought technology stocks around March 10, 2000, when the Nasdaq peaked at 5,132.5. But it's a 21-percent gain above the 52-week low of 1,619.58 set Apr. 4, and the sustained rally could be a signal that the worst is over for technology stocks.
In fact, the consensus on Wall Street seems to be that the market is finally in a process of bottoming out. Analysts continue to differ, however, about what investors should do with their money during this process.
Two camps have developed. The first advises caution, saying the economy is still slow and investors should return only cautiously to technology stocks. The other says the time to buy technology stocks is now, while things are at or near their worst, so you can benefit the most when the recovery comes.
"The choice is between getting in now and risking near-term volatility or getting in later and missing a good portion of the market recovery," said John Davidson, chief investment officer at Circle Trust Co.
'Bipolar' market
Among the conservative camp is Fahnestock & Co. market strategist Alan Ackerman, who is not convinced this week's rally was not a "bear trap."
"The best that can be said is that we're in a market that appears to be bouncing from an oversold condition," Ackerman said. "The market remains bipolar. The volatility and mood swings are very unsettling. It's not yet moving in a convincing enough manner."
Ackerman does see encouraging signs: "excesses" have been beaten out of many stocks during the extended Nasdaq slump, and margin debt -- the amount of money people borrow to buy stocks -- is falling, which may lead to less volatility.
Though he thinks we're in a "sideways" market, Ackerman said there are bargains to be found in small- and mid-cap stocks.
"Some stocks have been more resilient than expected," he said. "Reasonable evidence indicates we're seeing buying opportunities, regardless of whether the economy recovers or not."
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The House of Pain
But some analysts think the worst is over. | | |
Ackerman was also encouraged by economic data released Thursday that showed retail sales falling and consumer confidence weaker than expected and the four-week moving average of new unemployment claims rising to 380,000.
Economists watch the four-week moving average closely because it gives a good reading on the health of the labor market by smoothing out fluctuations in weekly data, and Ackerman thinks the Federal Reserve will pay more and more attention to the number as it approaches 400,000.
He hopes the Fed will be encouraged by such data to cut interest rates aggressively, which could be the push the market needs to begin a sustained climb.
"One more solid salvo from the Fed, combined with a tax cut, could be the combustible combination to get the market going," Ackerman said.
Circle Trust's Davidson, however, doesn't expect any action from the Fed before its next policy meeting, scheduled for May 15.
Some seek predictability
Also in the cautious camp is independent market strategist Gail Dudack, who told CNNfn's Before Hours program Wednesday she thinks the market still has hurdles to clear before it can start a sustainable rally.
Specifically, Dudack said, lingering sluggishness in the economy could continue to have a negative impact on earnings, which could hurt technology stocks in the short term. (291K WAV) or (291K AIF)
Until that time, Dudack suggested investors "try to find those stocks, companies, industries where the earnings are much more predictable."
Sectors fitting this description, Dudack said, include energy, utilities and consumer staples.
 "For technology, it's still probably going to be a long period before the turnaround," Dudack said.
Companies begin next week to report their quarterly results en masse, and recent market gains could be threatened if, as Dudack suggests, the U.S. economic slowdown continues to have a negative effect on earnings.
The test will come right away, as several tech firms -- including Texas Instruments Inc. (TXN: up $1.45 to $35.45, Research, Estimates), Advanced Micro Devices (AMD: up $1.34 to $24.85, Research, Estimates), Altera Corp. (ALTR: up $0.62 to $27.72, Research, Estimates) and Apple Computer Inc. (AAPL: up $0.62 to $22.42, Research, Estimates) -- are scheduled to report results next week.
'It takes guts'
But the market may already have taken disappointing company earnings into account, which is why it was able to advance this week despite reports Thursday of falling retail sales and Wednesday's warning about future results from communications equipment maker Motorola Inc. (MOT: Research, Estimates).
It's possible that, as Salomon Smith Barney analyst Jonathan Joseph said this week about the semiconductor sector -- triggering a big rally in that battered industry -- there's already been so much bad news that things can't get any worse.
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It takes a lot of guts to buy near the bottom.
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Peter Cardillo, director of research at Westfalia Investments |
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Peter Cardillo, director of research at Westfalia Investments, is more optimistic than that. He thinks, as many analysts in the "aggressive" camp do, that the market is beginning to reflect an economic recovery that's still six to 12 months away, and investors would do well to jump on board now to make the most of the upturn.
Bolstering the aggressive viewpoint are U.S. Treasury bond yields, which have risen in recent weeks as prices have fallen, reflecting a return to equity issues and pointing to a possible economic recovery.
"It takes a lot of guts to buy near the bottom," Cardillo said. "But smart money is made when nobody wants stocks. If investors take a long-term approach, I think they'll do very well."
Circle Trust's Davidson thinks that, even though a solid rally can't be sustained until corporate earnings have turned around, stock prices will continue to "work themselves up" anyway.
"The market typically leads earnings rebound by about six months," Davidson said. "Maybe market participants are expecting a fourth-quarter rebound in corporate earnings."
Robert Olstein, president of the Olstein Financial Alert Fund, is such an investor.
"You've got to buy the negativity," Olstein told CNNfn's Market Call program Wednesday. "That's when you get the right price for stocks -- in the eye of the storm."
"We believe the economy will start to (recover) some time in January," Olstein said. "And now is the time to take advantage." 
* Disclaimer
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