What a Week: Low-Volume Rally Yields to Low-Volume Selloff
This week, the smartest investor I know was the hedge fund manager who spent the week on the beach in Hawaii. Up more than 40% year-to-date, he put his portfolio in neutral, ditched the coat and tie and took a long walk on the beach with his honey. That was the call of the week.
He didn't miss much. It was a frustrating week of the kind most folks in the market haven't seen too often -- a low-volume decline in most stocks. Tech continued to bounce down, even big boys like
Cisco
(CSCO) - Get Report
and
Sun Microsystems
(SUNW) - Get Report
. Lower-P/E "defensive" stocks like food and drugs held up better.
For the week, the
Dow Jones Industrial Average managed to edge up just under 0.2%. That was far better than the
Nasdaq Composite Index, which dropped 3.9% and came within a whisker of its
April 14 low of 3321.29. One measure of the broader market, the
Wilshire 5000
, slipped 1.3% for the week.
Monday, the market continued the prior week's rally in advance of the
Federal Open Market Committee meeting to decide the future direction of short-term interest rates. No one cared that oil prices nearly hit $30 a barrel or that
industrial production jumped 0.9% in April, the fastest pace in almost two years. Nor did folks on Wall Street worry about the
news that famed speculator
George Soros
had put 90% of his Quantum Fund's money into cash. Traders put a positive spin on the news, figuring that Soros might come back into the market and provide added buying power.
Stocks kept on their merry way
Tuesday after the government announced
consumer prices were steady last month. This straw-in-the-wind further calmed anxieties about rising inflation. Later in the day, the FOMC, as expected, raised the target
fed funds rate 50 basis points, to 6.5% from 6%. The market, despite hearing the
Fed say that rates were headed up, finished higher.
Goldman Sachs
guru Abby Joseph Cohen sent out a market comment titled "Favorable Prospects Ahead." In Abby's opinion, stock prices already reflected higher interest rates and slower economic growth. No one knew it, but Tuesday marked the end of the rally.
The Controlled (?) Burn
Wednesday, investors began suddenly to dwell on the Fed's warning of more rate hikes. Stocks fell as investors reconsidered their previous giddy enthusiasm for higher rates. (Go, Alan, go!) When television screens across America showed scary pictures of the out-of-control forest fire deliberately set by the
National Park Service
in New Mexico, investors wondered whether the Fed's own "controlled burn" might spark a similar conflagration in lower Manhattan. Tom Beale, the technical analyst in Cambridge, Mass., who runs
Yankee Prognostics
, was the first to note the potential similarity between the FOMC and the Park Service.
Beale wrote on May 12:
But what the Fed is executing really is a "controlled burn," a preventive measure to forestall worse inflation but not cause a recession. One has only to consider the "controlled burn" of national park timberlands last week that was meant to reduce the risk of big forest fires in the area. ... So just remember, while Mr. Greenspan may be a god, even gods are known to screw up the rate raising process and create disasters (just talk to the Japanese).
Wednesday's decline set the desultory mood for the rest of the week. Pricey tech stocks became less pricey Thursday as the Comp fell 2.9%. The Dow held up, just barely. All in all, it was an uninspired performance that had investors bored and frustrated -- bored at the lack of action (volume just keeps dwindling) and frustrated that their longs are not going up. It was beginning to seep into people's minds that the market might be grounded until the Fed finishes its controlled burn, whenever that may be.
The market was not helped by press leaks from Washington that the
Justice Department
might recommend that antitrust regulators block
MCI WorldCom's
(WCOM)
$115 billion bid for fellow long-distance carrier
Sprint
(FON)
. (So Friday, it was no surprise when Justice did just that.) Traders and strategists alike kicked into late-August mode and bailed out of their offices at the bell. Investment managers like Brian Gilmartin of
Trinity Asset Management
whined, "You have a Justice Department that's hell-bent on making life tough for growth companies."
There could be more days of whine and hoses as we head into summer, according to investors and analysts.
"Every week feels like a bull market one day and a bear market the next," says Rich McDermott, a portfolio manager at
Schottenfeld Associates
, a hedge fund based in Manhattan. "Nothing works for an extended period of time, and it could be this way until the Fed resolves this thing. It's going to be a long, drawn-out summer."
Friday certainly felt like a bear market as stocks began on a downbeat, bottomed in mid-afternoon and ended with a resounding 1.4% loss on the Dow and a 4.2% drop on the Comp. One measure of how bad a day it was --
Philip Morris
(MO) - Get Report
was one of the percentage gain leaders on the NYSE.
Professional traders reacted badly to comments by
New York Federal Reserve Bank
head William McDonough that consumer demand remained too strong. The specter of another 50-basis-point hike, in June, droops over Wall Street.
Still,
Morgan Stanley Dean Witter
feels complacency remains in the market. In a report issued after the Fed rate hike this week, Morgan Stanley chief strategist Byron Wien said, "Since the principal problem with the market today is that valuations for many growth stocks remain high, a move up in interest rates should cause the correction in this sector to continue." (Watch for a
TSC
Streetside Chat with Wien this Sunday.)
As traders headed home for the weekend, they muttered about the meaning of yet another departure of a Street legend,
Stanley Shopkorn, who left this week. Shopkorn may be back, but investors are left to wonder if it is bullish that good, veteran investors like Shopkorn and the folks at Soros have decided to take the summer off.
Hawaii, anyone? Aloha.
