Despite four weeks of invigorating gains, the major market indices still are on track to decline for the third year in a row, something that hasn't happened since the end of the Great Depression.
With two months left in the year, the
Dow Jones IndustrialAverage
is down 14.5% since January, while the
is off28%; the
is behind 21%.
Optimistic strategists cited this rarity of three straight down years when they made their calls at the start of 2002; now they all look mistaken. Similar psychology could support stocks in the next few months as traders take long positions in anticipation of a strong 2003.
"We are heading for another down year. But the losses will not look as bad as they did in September," said Scott Bleier, president ofHybridinvestors.com, a Web-based research firm.
Since Oct. 9, the Dow is up 18%, the Nasdaq has gained 25%, and the S&P is ahead 17%, amid consensus the market bottomed for real in October.
"Going back to the 1940s, the lows put in by sharp price declines in August and September have typically held for the remainder of the year," said Steven Goldman, market strategist at Weeden.
Certain fundamentals support the thesis. While third-quarter earnings season was disappointing, it wasn't as bad as initially feared. More recently, investor anticipation for an interest rate cut has helped the rally. (The
policymaking arm will announce a decision on Wednesday.)
Three in a Row
"Stocks are anticipating a return in the economy," said Goldman, even after lackluster reports on durable goods orders, consumer confidence, gross domestic product, employment, and manufacturing.
The optimism is reflected in the way the tape has lately reacted togood news, such as a federal judge's affirmation of
antitrust settlement and rejection of stiffer penalties on Friday, market watchers believe.
"The charts were starting to suggest that this rally was rolling over," said Tom McManus, equity strategist at Banc of America Securities. "But I think the action on Monday is going to wake people up."
Stocks confounded shorts betting on a correction Monday morning, even if blue-chips gave back most of the gains. Still, the Dow managed a half-percent rise and the Nasdaq advanced 2.6%.
That's a Load of Bull
In the most recent
poll, only 28% offinancial advisers surveyed held a bearish opinion of the market. Just two weeks ago, 43% of those experts surveyed were pessimistic. While some view the decline as bearish, others think the opinions reflect psychology that will support the market for the time being.
"That would seem to confirm the idea that people are pricing in a good environment for stocks in the near term," said John Bollinger, head of Bollinger Capital Management, a technical research firm.
The S&P 500 trades at a price-to-earnings multiple of 24 times current earnings, compared with 19 in January.
Stocks are coming down from bubble valuations after a five-year period during which the market gained more than 20% each year. While some argue those excesses have been smoothed by the recent dramatic drops, the market isn't currently trading at multiples common to a long-term bottom.
"We are still at very high P/E multiples," said Bollinger. "The bigbull markets, of 1950 to 1966 and 1982 to 1998, were born in years in which P/Es were at seven times current earnings."