As Nasdaq Wails, Some See Silver Lining

SAN FRANCISCO -- "Could this day be any more demoralizing? Maybe the whole Nasdaq technology behemoth is over."

Such was the lament of one market participant Tuesday in the wake of the Nasdaq Composite's afternoon swoon. Once as high as 3639.29, the index closed down 3.2% to 3455.83, its first close below 3500 since May 31.

The source -- a market strategist whose name most readers would recognize -- requested anonymity, fearing he'd wind up calling the bottom. That's instructive because it shows more concern about making the wrong call than of additional market losses. It won't really be a bottom until the gurus are out en masse saying publicly that it's time to "sell." They won't be shy about it, either.

Seems we're a long way from that, judging from the published pronouncements this morning from the chief guru herself, Abby Cohen of Goldman Sachs. The market strategist wrote -- among other things -- "the backdrop for technology investments is favorable."

The "other things" Cohen wrote included a concession that this is a difficult time of year because of profit warnings coinciding with the fiscal year-end for many mutual funds. Managers whose funds are down for the year "may wish to book offsetting gains by selling securities in which there are gains," she wrote.

Maybe that's why Oracle (ORCL) -- a big winner in 2000 -- dumped over 11% Tuesday?

But Cohen's larger point was that it's going to get better come November and December and beyond. She predicted stocks will move upward to her "projected fair value levels" for the S&P 500 of 1575 at year-end 2000, and 1650 at midyear 2001.

Once upon a time, such comments from the revered strategist would have inspired a substantive rally, on the expectation of better days ahead. Now is not that time. Instead, what had been a solidly positive session on Wall Street turned to mush.

Which brings us to the question: What happened?

These truths we hold to be self-evident (if only because they're facts): Just before the Federal Reserve's 2:15 p.m. EDT announcement, the Dow Jones Industrial Average was up nearly 160 points and the Comp was higher by about 45 (already down from its morning apex). Thereafter, the Comp tanked while the Dow relinquished most of its early gains, finishing up a paltry 0.2%. The S&P 500 closed down 0.7% to 1426.46 after having traded as high as 1454.55.

The action seemed to provide a definitive "yes" to the question of whether there was a serious expectation among market participants the Fed would adopt a symmetric (i.e., neutral) bias. Even though market players said everybody knew the Fed wouldn't/couldn't/shouldn't change its bias because of oil prices, it seems some investors just couldn't help themselves from keeping hope alive.

Thomas Galvin, chief investment officer at Donaldson Lufkin & Jenrette, agreed that disappointment over the Fed's statement was a big contributor to the market's struggles. "There was maybe a hope on the part of investors that the fall in stock prices and slowdown in profits would have biased the Fed to have removed the inflation label," he said, noting that he was not so disposed.

Galvin's bullish outlook is predicated in part on a belief that investor sentiment regarding the Fed's next move will change. Tuesday's action certainly was a step in the wrong direction on the attitude-adjustment front, but the strategist maintains the change will occur by year-end or soon thereafter.

Still, that provides little solace at present.

"People aren't going to buy stocks until we get into the meat of earnings and conference calls," he said. "I don't get the sense people are in an alarmed, panic state [but] at this juncture, I don't think there's any level of motivation" to buy stocks.

The strategist further acknowledged the action Tuesday is going to revive talk of the need for/inevitability of the Comp retesting the April-May lows around 3200. Galvin shied away from making such a prediction himself. But the fact such a well-known bull would even discuss such a possibility suggests we're getting closer to a solid bottom.

We're just not there yet.

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