Bulls Trample Fearful Futures
Robert Holmes
03/05/07 - 11:59 AM EST
Monday's surprise bull run has some people questioning the value of those early morning stock futures quotes.
The Dow Jones Industrial Average was up 18 points at 12,131 around midday Monday. The blue-chip index reversed an early loss of 75 points and recouped a bit of last week's sharp declines.
The market's resilience points to the huge amount of cash on hand at mutual funds and institutional investors. It shows that even after last week's turmoil, there are lots of investors looking for stock market bargains.
And with many huge companies employing stock buybacks and paying out hefty dividends -- last week alone, Dow components
AIG (AIG Quote) and
Verizon (VZ Quote) announced plans for multibillion-dollar stock repurchases -- observers say there are plenty of factors pushing prices higher.
But the swing also questions the value of the early morning futures quotes that are widely used to predict daily market action. Monday's rally marked the second time in a week that stocks shrugged off negative action in the futures market to post gains.
"Big moves premarket give very little indication of where we'll be at the end of the day," says Barry Hyman, equity market strategist with EKN Financial. "That's something we cannot discount."
In the hours leading up to Monday's opening in New York, stock futures were predicting a selloff that would take the Dow below the 12,000 mark for the first time in five months.
Part of the gloom stemmed from selloffs that swept overseas markets. The big indexes in Asia slumped, with Japan's Nikkei dropping 3.3% and Hong Kong's Hang Seng sliding 4%. Big indexes in Europe dropped between 0.5% and 1%.
Another negative factor was the specter of recent selling. Last week, the Dow tumbled 4.2% and the S&P 500 dropped 4.4%. The Nasdaq plummeted 5.9% to notch its biggest weekly percentage loss since August 2004.
The scene was set for a repeat of last Tuesday's selloff, which took the Dow down 416 points.
After a brief Monday morning tumble, though, each of the U.S. indices bounced back, despite a disappointing report from the Institute for Supply Management.
"The increase in premarket volatility and the reaction from overseas losses on a day-to-day basis could be considered non-indicative of how the U.S. markets will trade," says Hyman, equity market strategist with EKN Financial. "Once this rally started, futures became irrelevant."
A similar scenario unfolded last Thursday, when the futures predicted a sharply down open and stocks rallied early into the trading day on solid economic data.
Paul Mendelsohn, chief investment strategist with Windham Financial, says that the futures market reflects the selling that has been coming in from overseas, but fails to take into account U.S. buyers that are hunting for bargains.
"At these levels, you're attracting buyers that are buying into the dips," says Mendelsohn. "That's the psychology that's out there. Now U.S. buyers are stepping in front of the market.
"People are buying what they think are bargains," he adds. "We did a lot of damage very fast that people were able to take advantage."
