As Wall Street enjoys a three-day weekend, one question lingers on every investor's mind: Was this week for real?
What happened was pretty impressive. The market shrugged off some bad corporate and economic news to register a strong rally with few interruptions this shortened trading week. And, it was paced by the old favorites of yesteryear 1999 -- tech stocks. And, the
Nasdaq Composite Index surged 14%, notching
its first week of uninterrupted gains since March 2000.
The bulls among us are cautiously optimistic that the worst may be behind us. The bears among us, however, think this week was a head-fake, and that more pain is in store. Who's right will become clear soon enough; in the meantime it's informative to take a closer look at both sides of the debate. First, let's hear the bulls' five reasons why this rally will stick, then we'll get the bears' five reasons why it will collapse.
The bulls say:
1. The Worm Has Turned
Judging from the tape, it appears we may have gotten rid of enough shares to build momentum. Since closing at 1638 a week ago, the Nasdaq Composite Index has recouped 16% of its value. Meantime, the
Dow Jones Industrial Average has risen steadily to gain 10%, after hitting 9100 on March 22.
2. The Bad News Is Priced In
Now that first-quarter preannouncement season is pretty much in the rearview mirror, Wall Street pros are starting to think the worst is over. "The earnings news we've gotten this week has been consistent with the move down on the market already," says Jay Meagrow, vice president of trading at
. With profit warnings out of the way, many think stocks can perform better.
3. The Fed Is on Our Side
In response to the risks of a slowing economy, the
Fed has lowered rates three times this year. "Monetary conditions are friendly," says Steve Goldman, market strategist at
. "Since the third cut, the market has been less volatile." The central bank is expected to keep the axe sharpened -- most Fed watchers expect at least one more cut -- which is good news for stocks. Historically, the market has jumped an average of 20% in the 12 months after a rate cut.
4. Investor Psychology Is Improving
Despite dismal earnings news for the first quarter, investors are hopeful about the second half of the year. In fact, a steady stream of bad news this week couldn't reverse the upward momentum in the market. "Investors are expecting to hear upbeat comments on first-quarter conference calls," says Jim Volk, co-director of institutional trading at
. One encouraging sign: The
Chicago Board Options Exchange Volatility Index
, a good measure of anxiety in the market, fell 7.5% on Thursday.
5. Inventory Problems Are Getting Better
A good deal of the earnings news, from the auto industry to the semiconductor group, has been interpreted positively because companies are saying they're clearing out their inventories. "We believe overall inventories in the personal computer channel are under control far sooner than we would have forecast," said
Salomon Smith Barney
analyst Jonathan Joseph in an influential research note on the chip industry this week. On the heels of that report, the semiconductor sector soared 9% on Wednesday.
The bears say:
1. Visibility Is Poor
First-quarter profit warnings may have petered out, but the earnings storm isn't over. "We don't think there has been a major improvement in earnings fundamentals," says Thomas Van Leuven, stock market strategist at
. "We're skeptical of rallies that come before we get a clearer picture about the depth of earnings."
2. The Rallies Lack a Catalyst
Over the past week, stocks have risen steadily despite a constant stream of bad news. Because there was no clear explanation for the markets moving higher, Wall Street experts are skeptical. "The market doesn't turn around on a random day in April," says Bryan Piskorowski, market analyst at
. "Rallies are suspect until proven otherwise."
3. Valuations Are Too High
is down 93% from its all-time high. Still, it's trading at an astronomical price-to-earnings multiple of 150. "Nasdaq stocks need to put in another leg lower," says Scott Bleier, chief investment strategist at
, "to get as cheap as they were expensive last year."
4. Three Words: Bear Market Rally
For investors who've been burnt so many times before, it's hard to take this week's gains too seriously. As is typical in a bear market environment, nearly every rally in the past few months has been followed by a selloff. Market confidence is tenuous at best: There is still over $2 trillion sitting in money market funds, according to the
Investment Company Institute
5. Consumer Sentiment Has Soured
Further weighing on equities is data proving that consumers are feeling down. The University of Michigan's closely watched
Consumer Sentiment Index fell to 87.8 in early April, from 91.5 in March. While that level doesn't suggest a recession, it raises fear about the economic outlook and near-term stock market performance. Since consumer spending makes up about two-thirds of the economy, and since layoffs have been on the rise, further eroding sentiment -- and ready money these factors could chip away at the market.