Recession? Dow Rallies. No Recession? Ditto - TheStreet

Groupthink, Wall Street Style

SAN FRANCISCO -- On Friday, the compelling sentiment was the weaker-than-expected

Gross Domestic Product

report meant there was a greater risk of recession than most folks had previously anticipated. The bullish spin was that such a possibility would prompt the

Federal Reserve

to ease interest rates sooner vs. later. The other mindset prompted buying of defensive stocks, which helped the

Dow Jones Industrial Average

rise more than 2% Friday while tech stocks faded.

Today, in the wake of the stronger-than-expected report on personal income and consumer spending, the consensus view switched: Now people think the economy

isn't

going into recession, which inspired a view that cyclical stocks had become outrageously cheap. Buying of said stocks --

Alcoa

(AA) - Get Report

,

DuPont

(DD) - Get Report

and

International Paper

(IP) - Get Report

most notably -- helped lift the Dow another 2.3% Monday while tech stocks faded again.

Of course, tech stocks had other problems, namely the

Lehman Brothers

downgrade of

Cisco

(CSCO) - Get Report

, which fell 5.2%, sparking a 2.7% decline in the

Nasdaq Composite

and a near 3% fall by the

Nasdaq 100

. The

S&P 500

, which has a lower tech weighting than the Comp, but a higher one than the Dow, rose 1.4%.

Several observers dubbed Lehman's report insufficiently negative to justify Cisco's decline. Such views helped the stock move off its intraday low of $45.25 to close at $48.06.

But the point is not what some analyst said about what company. The point is there is a

"re-evaluation of valuation" going on, a phrase used by so many sources lately I'm unsure who deserves credit for coining it. That is why/how erstwhile highfliers such as

EMC

(EMC)

and

JDS Uniphase

(JDSU)

are tumbling, almost regardless of what is said by them or about them.

"If a stock's got over a 50 multiple they're taking it down," said Tony Dwyer, chief market strategist at

Kirlin Securities

. "There's nothing wrong with EMC, but right now

investors are rotating out of high-multiple stocks into lower valued stocks, so they whack

EMC."

They went up on no news, they can come down on no news. Nice and symmetrical.

Regarding the progression of consensus view mentioned above, Dwyer encouraged investors to take the all important next step -- one many professional investors are now contemplating: If the economy isn't going into recession that means business spending isn't going to slow as much as currently feared. Which means tech stocks are -- you guessed it -- cheap, cheap, cheap.

A similar outlook compelled

Nightingale & Farber Capital

to buy

Micron

(MU) - Get Report

today, according to Gary Farber, a partner at the Seattle-based hedge fund. Micron rose 8.1% on the session, meaning the relatively small Nightingale & Farber had plenty of company (fortunately, they keep a coffee cake in the freezer, for just such an emergency).

"One morning people will get up and say, 'Cyclicals are up 25% and only growing 8%. Such-and-such tech stock may have decelerating growth but it's still growing faster,' and they'll rush back in to tech," Farber explained. "That's probably one reason we bought Micron."

Another reason is evidence some Korean chipmakers are switching production capacity from DRAM chips to flash memory, while tighter lending standards could force other Korean DRAM producers to shut down, he said. Both dynamics benefit Micron, he argued.

Farber's not making a macro call on PC demand, in contrast to our conversation

last week when he suggested there's a "fundamental change" ongoing in the paper industry and described how it will benefit International Paper (swear it). Unfortunately, I didn't have time/space to get to the IP story last week. But, for the record, it remains Nightingale & Farber's biggest holding and Farber said they didn't sell any shares into today's 8.3% ramp.

Tech: The Third Wave

Meanwhile, Dwyer reiterated some historic data

reported here recently, which compel him to believe "we are making a major long-term low" in the Nasdaq, comparable to the one established in August/September 1998.

The strategist also cited some "non-quantifiable" factors signaling a bottom, including sell-side analysts seemingly more worried about losing credibility with their institutional clients than with generating investment banking business.

The Nasdaq "could go to 2900, but I think we're going to 4200 or better in 12 months," he said, suggesting the risk/reward scenario justifies being early. "When they turn, you're not going to have a chance to get in."

But Dwyer conceded the obvious -- the bottom being put in place is not of the V-shaped variety. That being the case, I believe long-term investors

can

wait, at least until the Comp breaks out of the upper end of its trading range around 3500. For those more nimble, buying as it gets closer to the lower end of its range, at 3000, and selling as it approaches 3500 has worked well in recent weeks.

But as long as the Comp remains within the collar, long-term investors need not rush to apply.

Desperate Times, Desperate Measures?

Not much new to report on the Guru front this week. The bulls remain bullish, the bears bearish.

Notably, both Lehman Brothers' Jeffrey Applegate and

Credit Suisse First Boston's

Thomas Galvin cited in their most recent reports what is bound to become known as "The Yankee Effect." That is, the market fares well in years following a World Series victory by the legendary ballclub (which won this year's Series in case you've been hibernating/aren't a sports fan).

Applegate reports the S&P 500 has returned an average of 16% in the calendar years following a Yankee title. Galvin observed the Dow Industrials rose an average of 11% in the same years vs. an 8% average in the 99 years since the franchise was founded.

You would've thought the

Super Bowl

victories by the

Denver Broncos

in 1998 and 1999 (which nixed the "

AFC/AFL

jinx theory") would have put an end to these sports-related market theories. Regardless, it's a bad sign for the bulls when two of their most vociferous and respected supporters start resorting to statistics like these, no matter how whimsically.

For those who find merit in this kind of stuff, Galvin notes the last time the

New York Mets

lost in the World Series was 1973; the S&P 500 fell nearly 30% in 1974.

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.