Tape Churn: Investors Struggle With a Market That Seems to Make No Sense

Stop Making Sense

SAN FRANCISCO -- Riddle me this, Bat People...

Almost everybody agrees that when stocks such as Amazon.com (AMZN Quote - Cramer on AMZN - Stock Picks) and Yahoo! (YHOO Quote - Cramer on YHOO - Stock Picks) go up on "bad" news (analyst downgrades), as they did today, it's a "good" sign for the market. In a close-but-have-a-cigar-anyway example, Charles Schwab (SCH Quote - Cramer on SCH - Stock Picks) ended down for the session but well above its preopening indication of $27, despite being downgraded by Morgan Stanley Dean Witter.

But what does it mean when, simultaneously, stocks such as i2 Technologies (ITWO Quote - Cramer on ITWO - Stock Picks) are going down on seemingly "good" news of an upside preannouncement and analyst upgrade? Or Caliper Technologies (CALP Quote - Cramer on CALP - Stock Picks), which fell for a second-consecutive session despite an apparent victory Sunday in its patent lawsuit with Aclara Biosciences (ACLA Quote - Cramer on ACLA - Stock Picks)? (Aclara, naturally, had risen on consecutive days despite having to pay Caliper $32.5 million in stock as part of the settlement.) Or financial stocks, as represented by the Philadelphia Stock Exchange/KBW Bank Index, which fell nearly 2% today and now stands just 1.1% above its close on Jan. 2, the day before the Federal Reserve's intermeeting rate cut?

The answer is..."There's no rhyme or reason" to the market right now, according to Sam Ginzburg, senior managing director of equity trading at Gruntal. "People are looking at this tape in amazement."

That said, the mixed performance of the major averages today -- the Dow Industrials fell 0.5%, while the S&P 500 rose 0.4% and the Nasdaq Composite gained 1.9% -- seems somehow fitting.

"Methinks this goes on with no real super breakout [up or down] for quite some time -- my gut says two or three months," Ginzburg predicted.

The trader's comments reflect a growing belief that major averages have, indeed, finally witnessed their ultimate lows. But at the same time, it's become apparent to most market professionals that it's going to be difficult for stock proxies to generate sustainable, consistent gains. More churn, in other words.

The practical result is a growing frustration among market participants.

"If you get off the desk, you're going to miss something as a trader," Ginzburg explained. "And when a trade does present itself, the odds of making money are a lot less" than they were a year ago.

Because momentum, both downside and upside, is a fickle mistress, he said many traders are now far quicker to exit a trade if it doesn't work immediately, and more eager to book profits when trades prove successful. "That is what's causing so much of the jerkiness, the up and down movements" in individual stocks as well as indices, Ginzburg said, acknowledging there are few independent thinkers on Wall Street.

In addition to frustration, exhaustion is starting to become the prevailing sentiment on many desks, the trader conceded (while simultaneous declaring his love for his job and chosen profession). The good news, for those with a true long-term horizon, is that -- as with companies -- the investors who have cash "will win at the end of the day," Ginzburg concluded. "I don't when, I don't know where, but the market is going to turn."

When, Where, Why, How

Unwittingly (I think), Ginzburg's outlook jibes with the majority view: Specifically, that the second half of 2001 is going to be better than the first. (For the sake of this column, let's omit those who say the historical pattern of the market's post-ease gains won't be repeated this time.)

So the question, of course, is whether long-term investors should get aggressively long now in anticipation of the second-half revival.

Joseph McAlinden, chief global investment officer at MSDW Asset Management, a Morgan Stanley Dean Witter unit with more than $450 billion under management, believes so. If market averages haven't already bottomed (he believes they have), they will not fall below recent lows if a retest should occur, he predicts.

Recalling that the Nasdaq roared ahead in the fourth quarter of 1999 and early 2000 despite three Fed rate hikes, McAlinden wondered: "Why we think on the first easing move everything should be hunky dory? We're going to need a second or third easing before getting a really strong market recovery."

But "I'm not afraid to buy now because I think the Fed cuts rates further," he said, adding that the current debate about how bad the recession is going to be is a classic sign of a "turning point."

While unable to talk about specific stocks, the investment chief said he would move toward a balance between value and growth stocks, believing they will rise in tandem but that "the stuff that got hammered most" will perform best when the rally starts. (Longtime readers of the column will recall McAlinden's prescient call to overweight value back on Aug. 11.)

But his "biggest call of all" for 2001 is a recommendation for an above-average weighting in non-U.S. equity markets, beginning with Europe. "You can get the benefit of both economic recovery around the world and a weakening dollar," he said. "The biggest currency play is going to be dollar/euro."

The euro has dipped vs. the dollar this week, closing in New York trading today at around 94.52 cents. But that follows a six-week rally that brought the euro to its highest level vs. the greenback in six months.

Market developments permitting, tomorrow we'll present the argument that investors are better served to wait for the "all clear" signal from the stock market.