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Rage, Rage Against a Lower Bottom

SAN FRANCISCO -- Do not go quietly into the dying of the light. Rage, rage against the dying of the light.

While perhaps falling short of the poetic drama of Dylan Thomas , stocks managed to close on a decidedly upbeat note today, even if major proxies ended mixed. The session probably said more about the calendar than anything else, but the market's ability to overcome its midday torpor raised expectations about the possibility that stocks had (finally) bottomed late last week.

The Dow Jones Industrial Average rose 0.5%, restrained largely by weakness in IBM (IBM). The S&P 500 gained 0.7% as strength in financial, energy and pharmaceutical shares overcame weakness in retailing and big-cap tech stocks.

After trading as high as 2548.75 early on, the Nasdaq Composite closed down 0.9% to 2493.52, failing (again) to build on Friday's big gains. Still, the index closed up from its midday low of 2436.19. The Comp's session was embodied by specialty chipmaker Broadcom (BRCM), which recovered from a decline to as low as $83.81 to close off 1.2% at $92.50.

The volatility in both individual stocks and averages reflected the holiday atmosphere and accompanying empty desk syndrome at many trading shops.

"It doesn't take much to bring stocks down or take 'em back up. There's zero liquidity on either side" of the trade, said Tony Cecin, manager of Nasdaq trading at U.S. Bancorp Piper Jaffray in Minneapolis. "I didn't see anything fundamental" to account for the last hour's gains.

Indeed, trading volume was modest. In Big Board activity, 802.2 million shares traded while advancing stocks led decliners 17 to 11 and new 52-week highs topped new lows 263 to 94. Meanwhile, 1.5 billion shares were exchanged over the counter, with losers besting winners 23 to 17 and new lows ahead by 383 to 103.

Still, buyers may have been enticed that the downturn midday was "pretty lackluster," Cecin noted. Bargain hunters began to nibble away at select stocks when it became apparent the losses weren't going to accelerate.

That observation dovetails nicely with the outlook expressed by Bob Basel, director of listed trading at Salomon Smith Barney.

After predicting a fairly slow week accompanied by volatility (in the true sense of the word), Basel took on the $64 million question of whether we've finally witnessed the end of the market's misery.

"I don't think the Nasdaq totally has bottomed , it could fall back further," he said. "With that said, if I had money and was managing it, I wouldn't want to wait too long to get in."

Tech-stock valuations could decline further, but in the medium to intermediate term, "they are stocks you'd want to own," the trader continued. "If I were a betting man -- which I am -- and had multiple billions of dollars at my disposal to invest -- which I don't -- I'd go after them sooner rather than later."

Basel's point being that it may be difficult for large institutions to build significant positions because if and when the momentum turns, those willing to sell their stocks will become reluctant, if not scarce.

Because they trade in smaller lots, individuals can better-justify awaiting confirmation of a direction shift before plunging back into stocks. But patience is not a virtue of most investors these days, as evinced by Blue Martini Software's (BLUE) near 52% rise today following some positive comments in Barron's.

Back to Work, Back to Reality

That the Federal Reserve will soon ease interest rates is the accepted gospel on Wall Street, a development with the potential to dramatically alter the investing landscape for everyone. The big question seems to be by how many basis points the Fed eases at its next meeting on Jan. 30-31. Lost a bit in the shuffle of today's languid activity, however, was an apparent rethinking of the between-meeting rate-cut theory.

Stocks rallied late last week partially on the heightened anticipation the Fed would lower interest rates prior to its next scheduled gathering. A few days later, few are still making such arguments.

Basel and Cecin each agreed the possibility of a rate cut prior to Jan. 30-31 is pretty small, despite the obvious slowing in the U.S. economy. Last Thursday, the Commerce Department again revised downward its third-quarter estimate of gross domestic product growth to 2.2% vs. 2.4% previously. GDP rose 5.6% in the second quarter and 5.7% in the third quarter of 1999.

But Cecin, for one, believes the Fed will not take emergency measures "unless there's overwhelming evidence of an excruciatingly fast slowdown" in the international economy. The trader recalled a Dec. 21 article in The Wall Street Journal about that very subject, which reported the World Bank expects global growth of 3.4% in 2001 vs. an estimated 4.1% this year. Europe grew 2.8% in the third quarter vs. 3.2% in the second. Most troubling, Japan's Economic Planning Agency recently reported that the nation's economy grew at just 1% in the third quarter and revised lower second-quarter growth to 1% from 4.2% previously. The piece also cited evidence of slowing in emerging markets.

Today, Japan's government reported unemployment reached 4.8% in November, the highest since a record 4.9% in March. Other reports showed household spending fell 2.1% in November, and a 1% decline in consumer prices for 2000, the biggest drop since 1971. In reaction, Japan's yen fell to a 16-month low vs. the dollar and a 10-month low vs. the euro intraday in currency trading.

But as bad/serious as the international situation may be, it does not appear to rise to the level of systemic risk evident in the fall of 1998, when the Fed so famously approved an "emergency" rate cut. Notably, Japan's Nikkei 225 jumped 3.8% Monday and rose another 0.5% today amid expectations the slowing economy will force the Bank of Japan to reverse the quarter-point rate hike it made in August.

The reactive nature of Alan Greenspan's Fed further attests to the unlikelihood of a rate cut prior to Jan. 30. Finally, the fact that mere discussion of an early rate cut generated so much enthusiasm, and actual buying, suggests things haven't gotten so bad (as bleak as they were) to justify emergency action by the Fed.

The irony is that those still clinging to the early rate-cut scenario must now hope for something approaching doomsday to see it come to fruition. But with the Nasdaq Comp now closer to 2500 than 2000, it seems those peddling such theories got what they really wanted for the holidays, anyway -- widespread discussion of a possibility, however remote, powerful enough to stem the damage.

Aaron L. Task writes daily for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send your feedback to Aaron L. Task.

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