The week that just finished left the stock market feeling pretty tender. That's the way it usually feels when the
Dow Jones Industrial Average
drops 500 points.
The stuff that seemed to provoke the move made it worse. There wasn't any one big thing -- a sudden sense that the
needs to tighten, or some market-shattering event scudding in from overseas -- that sent the market down. Instead it was a bunch of smaller things that, in the aggregate, pulled things lower. A decline in the dollar against the yen, worries about the supply of semiconductor chips after the earthquake in Taiwan.
Thursday's drop was endemic of the week, when comments from
President Steve Ballmer, who said he believed his company's stock was overvalued, were seen as a major motivation for the selling. (
looked at Ballmer's comments in a
story and an on-the-scene
column Thursday.) Never mind that Microsoft has long indicated that it thinks its shares are a bit rich. Interesting for a stock market that for so long been focused on economic data -- with the supposition that good numbers will send it higher, and bad numbers will send it lower -- to get blinded by something like that.
"Lo and behold, it's not a number," said Steve Shobin, chief technical analyst at
. "It's the seemingly innocuous statement from an official at a major company."
It's a weak market, and though Shobin does not care all that much about the head-and-shoulders-pattern in the
that everybody and his dog is talking about, he doesn't think the market has bottomed yet. "Most bottoms have been marked by aggressive selling, by a sharp rally in the bond market, by a big bounce in the
New York Stock Exchange
financials, by a solid rise in the trade-weighted dollar and by a thorough debunking and defrocking of the market's leadership."
Worrisome stuff -- none of which we've really seen yet. Yet this doesn't mean the market can't catch a bit of a rebound. By some lights, that's the way the week will probably start out.
"You've had a lot of technical breakdowns here," said Larry Rice, chief investment strategist at
. "That usually leads to a trading bounce and then a resumption of the declines." As for the possibility of the more cataclysmic selling that typically beckons a solid bottom, "the only reason for that is, we get an event here," said Rice. Otherwise it could be a steady erosion until stock valuations come down to historic levels.
G7 Will Be a Big Deal
Bounce or bottom, it looks like Monday will see stocks move in one of those directions in a pretty dramatic way. Stocks have been keying off the dollar a lot lately, and the dollar is going to be keying off of whatever comes out of the
finance ministers meeting in Washington on Saturday.
If the G7 in any way suggests that it is agreed on the need to support the dollar -- something the Japanese government is keen to see -- than dollar shorts will be sent running for cover. The dollar will go higher, and stocks would probably follow along.
Most people in the market are putting rather low odds on the G7 doing that, though. "My guess is the phrase that will get used will be something like, 'It is desirable to foster an environment that produces currency stability,'" said Phil Suttle, economist at
That probably wouldn't do the dollar any good.
"The only thing that could reveres the dollar/yen move in terms of a statement would be something along the lines of, 'The yen should be weaker,'" said Dennis Heidt, chief dealer at
. "Anything less than that, I think the market continues dollar selling." With no evidence of coordinated intervention, Heidt thinks the dollar could head below 100 yen -- though the
Bank of Japan
might step in Monday to try and slow the decline.
The flip side of all this is that the market may have gotten far too dour on the G7. A week ago, there were people putting out research notes on how it could end up being as significant as the Plaza Accord, and now they're saying nothing will happen. That seems to make the risks asymmetrical. Good news could send the dollar up higher than bad news could send it down.
No sooner will the market be out of the G7's frying pan than it will step into the Fed's heat. The
National Association of Purchasing Management's Purchasing Managers' Index
comes out on Friday -- the first major piece of economic data to come out after a long drought. And the last to come out before the Oct. 5 meeting of the
Federal Open Market Committee
. Though most economists think there won't be a tightening, the market will use the NAPM to handicap whether the Fed will turn the screws once more before the year is out.