We've had the big rally. Is the big retest coming?
The past few weeks have witnessed powerful rallies on the major market indices. Since sinking to a two-year low on March 22, the
Dow Jones Industrial Average has climbed 12.7%. Since stumbling to a 31-month low, the
S&P 500 is up 12.7% as well. And since hitting its own 31-month low on April 4, the
Nadsaq Composite is up a delirious 32%.
An informal polling of market strategists and technicians -- the guys who crunch numbers and hunt for trend lines in indices and stocks -- indicates that most feel the Nasdaq, the S&P 500 and the Dow are safely out of reach of those closing lows, for now. But they think a serious retest could strike some time this summer or early fall.
That's the third quarter, when companies could change their tune about that second-half rebound everyone has begun, again, to count on. (A serious retest entails more than a modest retreat from the heady gains of the past few weeks; essentially, it means the indices slide back after a rally to earlier lows. For more on the nature of retesting check out
Justin Lahart's recent column.)
"Over the short term we're not very likely to retest the lows," said Don Kaptanakis, senior market analyst at
. "But invariably you'll get a corrective phase, which could set in June, July, August or September."
Jeff DeGraff, senior technical analyst at
, Ricky Harrington, chief technical analyst at
and Dana Feick, market strategist at
, second (and third and fourth) that scenario.
"It's premature to expect a retest right away, but it's also premature to call a bottom," said Harrington. "We're not likely to get through 2001 without a retest of those lows, and it will probably happen by the third quarter."
The differences arise over what will happen in the meantime. Kaptanakis expects a rally on all three indices. Quantifying it for the Nasdaq, he said he's aiming for 2400, after which it might not fall as low as 1600, but could slip down to 1800. The Nasdaq's closing low on April 4 was 1638.80; it ended trading Friday at 2163.60.
DeGraff, on the other hand, expects several weeks of churning to precede a possible retest in late June or July.
Their reasons are various: Wednesday's surprise interest-rate cut, the growth in money supply since January, the fact that trading volume is concentrated in advancing stocks rather than decliners, and indications that first- and even second-quarter earnings are already priced into stocks.
Now, for the maverick prediction.
One lone strategist offered an altogether different scenario. Tracy Herrick, market strategist at
forecasts, a retest before the end of April, but after that, he says the major indices won't look back. Herrick says that stocks should dip in the next 10 days because first-quarter earnings news has begun to sour. But a strong buildup in money supply -- up 28% since the beginning of the year -- should offset that decline, he says.
"Money supply growth is high," he said. "So it will preclude any continuation of the bear market."