Investors made the arduous journey from the fun house to the outhouse and back again this week. This marks the third consecutive week with such dramatic movements, and the extreme gyrations had investors feeling panicked, relieved and -- ultimately -- exhausted.
Investors came in Monday with high hopes after the market's big turnaround that ended the
prior week. But such sentiment was dashed when optical-networking stocks cratered midweek after disappointing results from
Nortel
(NT)
. That led to some harrowing losses Wednesday and early Thursday, which ended with another remarkable recovery. When the week was done, the
Dow Jones Industrial Average
had risen 3.6%, while the
S&P 500
was down 1.2% and the
Nasdaq Composite
had shed 5.9%.
Deja vu All Over Again
The week began with the Comp retreating a bit, but few traders voiced much concern. The Dow, meanwhile, posted a modest rise behind strength in
Honeywell
(HON) - Get Report
, which received a buyout offer from
General Electric
(GE) - Get Report
.
The pattern of strong blue-chips and weak techs reemerged Tuesday. Disappointing news from
National Semiconductor
(NSM)
weighed on chip stocks while strong earnings from
Colgate-Palmolive
(CL) - Get Report
inspired consumer stocks.
The big news Tuesday came after the close of trading, when Nortel reported results that bested consensus expectations but raised questions about the growth of optical networking, something investors presumed would continue unabated. The concerns manifested themselves in a huge selloff Wednesday that rattled not just Nortel and rivals such as
JDS Uniphase
(JDSU)
, but communication-chip makers such as
PMC Sierra
(PMCS)
and contract manufacturers such as
Sanmina
(SANM) - Get Report
.
The Dow fared better than its tech-heavy counterparts, but still fell 0.6% amid weakness in
Hewlett-Packard
(HWP)
and
AT&T
(T) - Get Report
, which confirmed reports it would break itself into four components.
For bulls, the lone solace in the Nasdaq's 5.6% decline Wednesday was the feeling that optical-networking stocks represented the "final bubble" that needed to burst. The event confirmed to some that the end of the seven-month selloff in tech was finally at hand.
That viewpoint was tested in dramatic fashion early Thursday, as the Nasdaq fell as much as 4.5% amid continued concerns about growth after
WorldCom
(WCOM)
said it, too, would curtail capital spending. But as so often witnessed in recent years (and weeks), market averages came roaring back just as investors began fearing the worst.
Once as low as 10,265.06, the Dow recovered to close up 0.5% to 10,380.12, while the S&P 500 finished off fractionally at 1364.44 after trading as low as 1337.94. The Comp closed up 1.3% at 3272.18 vs. its intraday low of 3081.36. None of the averages revisited intraday lows hit on Oct. 18, although the
Nasdaq 100
did briefly, before recovering sharply to close up 1.9% to 3167.14.
Ironically (fittingly?) the comeback was fueled in part by expectations JDS Uniphase would refute concerns about a slowdown in optical networking. Such hopes were rewarded when JDSU reported not only stellar earnings and revenue, but issued ebullient forward guidance.
Thursday's performance ignited expectations for a big rally on Friday, but it was not to be -- at least not for the Nasdaq, which recovered from a midmorning decline to close up 0.2% to 3278.36. Optical-networking stocks did rebound, but the index was beguiled by weakness in mega-cap tech names such as
Applied Materials
(AMAT) - Get Report
and
Cisco
(CSCO) - Get Report
, as well as pronounced declines in biotech after
Amgen
(AMGN) - Get Report
issued some cautious comments late Thursday.
The developments in high tech somewhat obscured a rough week for many biotechs. Hurt by Amgen and disappointing news from
Chiron
(CHIR) - Get Report
, the
Amex Biotech Index
fell 2.3%.
While the Comp struggled a bit, the Dow soared 2% Friday while the S&P rose 1.1%. Blue-chips were inspired by consumer stocks, up again in the wake of
Kellogg's
(K) - Get Report
acquisition of
Keebler
(KBL)
, as well as financials such as
J.P. Morgan
(JPM) - Get Report
. For the week, the
Morgan Stanley Consumer Index
rose 3.5% while the
Philadelphia Stock Exchange/KBW Bank Index
climbed 2.9%. Elsewhere, the
Amex Pharmaceutical Index
rose 2.4%.
Still Bullish
The action this week signaled, to some, a growing defensiveness among investors in the face of slowing economic activity. Indeed, weaker-than-expected
GDP
and
employment cost index
reports, combined with softness in oil prices --- which rattled energy stocks such as
Smith International
(SII)
and
Halliburton
(HAL) - Get Report
(which had additional company-specific problems) -- raised expectations the
Federal Reserve
may soon ease monetary policy. A
controversial stance, for sure.
To others, the rotational activity was natural and healthy.
"People are trying to set themselves up to look OK for the end of the month -- getting rid of the dogs and into new stuff they think is overvalued," said Ned Collins, executive vice president of U.S. stocks at
Daiwa Securities America
. "We may not be totally free and clear of all the pain, but I do think we're very close to a bottom."
Getting October finished is important for both psychological and practical reasons, Collins noted. Oct. 31 marks the fiscal year-end for many mutual funds, whose tax-related selling contributed mightily to the wild swings this week, for both major averages and richly valued tech stocks such as
Juniper Networks
(JNPR) - Get Report
and
SDL
(SDLI)
, traders said.
Collins' optimism is shared by many on Wall Street.
"We continue to view downside risk as unusually low and the potential upside seems large," Robert Robbins, chief investment strategist at
Robinson-Humphrey
, wrote Friday. The previous day, he predicted the S&P 500 would continue to generate 16% compound annual returns for another five years.
But Robbins' short-term bottoming call was predicated on the S&P 500 closing above 1381, its intraday high Oct. 17; the index finished the week at 1379.58.
The S&P 500's failure to establish a clear upward bias reflects a broader conundrum: Recent action indicates the intraday lows hit Oct. 18 should hold, but what kind of recovery unfolds remains unclear.
Those expecting the V-shaped bottoms evident in recent years have been repeatedly stymied, yet those expecting steeper losses also remain frustrated.
So it was again in the week just past.
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.
