Market Heeds Caution Signs
Liz Rappaport
03/27/07 - 05:28 PM EDT
The stock market has been remarkably resilient despite heaping portions of bad news, particularly about housing. But whether the market will hold up to the blows or buckle, the mindset of the market is undecided.
Tuesday's stock market activity reflected the indecision. Much like Monday, there was some bad news about the housing market as oil prices remained at their year-to-date highs. But unlike Monday, the market couldn't find its way upward, even though much of the day's news was not all that new.
"I think the mindset of the market is pretty good given the circumstances," says John Bollinger, president of Bollinger Capital. "The market passes the acid test for the moment."
But "everyone is frustrated right now," Bollinger added, as the market made a "nice little W-bottom, turned higher and had a big expansion day" last Wednesday. "But we stalled as yet another wave of bad news engulfed the market."
The veteran technician believes that the market will eventually turn back up toward new highs, but when and how he's unwilling to speculate.
The major indices finished the day near their lows Tuesday. The
Dow Jones Industrial Average fell 0.6% to close at 12397.29, while the
S&P 500 finished down 0.6% to close at 1428.61. The
Nasdaq Composite fell 0.7% to close at 2437.43.
Homebuilder
Lennar(LEN Quote) reported a 73% drop in its earnings and withdrew its outlook for the year. The news came atop
KB Home's(KBH Quote) posting an 84% profit decline last week. So, Lennar's report was not such new news. Lennar slid 0.9%, but was down 3.4% in after-hours trading.
After the market closed,
Business Week reported that the FBI is investigating the lending practices of homebuilder
Beazer Homes(BZH Quote). Beazer fell 2.9% Tuesday, but was off 10.9% in recent after-hours trading.
Elsewhere, cyclically sensitive parts of the market also were weak. The Dow Jones Transportation Average fell 1.2%, while the Morgan Stanley Cyclical Index declined 0.9%, led by
Ingersoll-Rand (IR Quote) which lost 3.3%. The S&P Retail Index also slid 1%, paced by weakness in
Target (TGT Quote) and
Home Depot (HD Quote) on concerns stemming from consumer confidence.
A decline in the Conference Board's consumer confidence index for March also weighed on the market as traders worry that consumers will restrain their spending. But that's not a new fear. Typically, the index reflects recent movements in the stock market. So, after the Feb. 27 plunge, the weakness is not unexpected. The index fell to 107.2 from 111.2 in February.
The decline was due mostly to a drop in expectations for the future, but consumers' assessment of the present increased moderately, and puts the spending concerns somewhat at bay. The respondents were more optimistic about the job market. As long as investors have incomes, spending usually remains robust.
As for oil, prices closed Monday at their year-to-date highs and edged up only slightly Tuesday to close at $62.93 per barrel, largely due to geopolitical concerns about Iran.
"Nothing has changed since yesterday," says Randy Diamond, trader at Miller Tabak. "Customers are sitting on the sidelines, not convinced they should be putting their money to work here, but they're not necessarily selling either."
Sounds like limbo. How confused is the mind of the market? Here's a snapshot.
Liz Ann Sonders, chief investment strategist at Charles Schwab, told me Monday afternoon that her weekly phone call, in which brokers and financial advisers can call in and ask her anything that's on their minds, was swamped.
Their chief concern this week was the subprime mortgage industry, says Sonders. She has suggested investors be defensive in the stock market this year, as she outlined in
this interview for TheStreet.com TV.
As for what investors should do right now, Sonders has words of caution. Individual investors should sit tight, she says. Not every move in the stock market should elicit an action plan, nor should individuals try to time the market, she says. With 32% of trading driven by computers, she says, how can an investor attempt to beat that?
Another trader reminded me that sitting tight is sometimes the best policy. Even in 1987, a year that saw the largest one-day market drop since 1929's famed crash, investors who didn't budge finished up 2% (based on the S&P 500). Such stoicism is easier to preach than to practice, and 2% is not gangbusters, but it's not a loss either.
Institutional fund managers also are feeling cautious. Portfolio managers ratcheted up their cash balances in March to 4.4% from 3.8%, according to Merrill Lynch's Global Fund Manager Survey, released last week. Their risk appetite, measured by Merrill's Composite Indicator for Risk Appetite, also fell five points in the month, to its lowest reading in five years.
That said, fund managers do not believe a recession is at hand, nor have they abandoned their positions in equities, according to the survey. Indeed, the managers say they plan to put their new cash balances to work in the stock market.
Citigroup's Smith Barney unit polled affluent clients, revealing investors are only moderately less optimistic about the investment environment after the recent bout of volatility. Those who believe this year is a better investment climate than last year fell to 45% after the market's decline, vs. 52% prior to Feb. 27.
Meanwhile, hedge funds are "significantly net short stock," writes Mary Ann Bartels, technical research analyst at Merrill Lynch. She notes that the Russell 2000 reached record net short levels last week. Excessive short positions like this "mitigate downside risk," writes Bartels. Short-selling represents unrealizedbut guaranteed demand in the market, as these investors are forced to cover their positions by buying the security they've shorted under certain conditions.
As more data stream in, more minds will be made up. As for right now, the mind of the market might just need a vacation.
