The stock market's recent choppy action could presage a downturn.
February 21, 2004: 12:08 PM EST
By Justin Lahart, CNN/Money senior writer
NEW YORK (CNN/Money) - The Bull may not be on the way to meet his Waterloo, but it does look like he may have tough slog in the weeks to come.
Although both the Dow and the S&P 500 ticked their way in February to their highest points in two years, besting the run they made in January, they were only able to hold these levels fleetingly. And all in all, the market has been volatile, with investors apparently spending more effort on switching positions from one area to another than buying the market wholesale.
It's a script, thinks Raymond James chief investment strategist Jeff Saut, that we've seen before. The market makes a spike higher in January, peels off a bit, and then chops its way to incremental new highs.
And along comes trouble.
"If the pattern plays out, you'll get the first decent downside correction we've seen in a year," said Saut.
He envisions something like a 7 percent to 12 percent drop in the major averages in the weeks to come -- a selloff that could spark further declines down the road, because it would shake investors' confidence and make them take a look at where the market has got to. Stocks have got too far ahead of their fundamentals, Saut thinks, and with the economy shifting into a slower growth phase, they look vulnerable.
But John Bollinger, the head of Bollinger Capital management, does not foresee stocks having such a tough time right now. Historically, the last week of February does tend to spark a decline, he says, but nothing severe. And by the onset of March, stocks tend to move higher again.
Bollinger also reckons that a lot of the volatility we've seen lately has to do with the way the Democratic presidential candidates have been focusing their efforts more on hammering on the White House than hammering on one another.
"They've got a huge amount of media coverage and their big message is that the current administration has [messed up] the economy," said Bollinger. "I think we'll chew sideways until we get through this feeling of negativity and then go back to the upside."
Headline effects
Some observers reckon the Democrats' downbeat message on the economy is biting not just into the stock market, but into consumer confidence as well -- the cause of the drop-offs in recent consumer sentiment polls.
Lehman Brothers economist Joe Abate is not so sure -- it's not news to most Americans that the job market remains stubbornly soft, he points out.
Furthermore, the confidence report that gets cited the most for dropping -- the University of Michigan (hail hail) consumer sentiment index -- showed a spike that wasn't captured in the more closely followed (by economists, at least) consumer confidence index from the Conference Board.
With hope, the Conference Board's release of its February confidence reading, due out Tuesday, will clear the air. Most economists think it will fall a bit; Abate believes it will rise.
The Lehman economics team's overall take on things is a bit more dour than that of most Wall Street firms. With so many numbers coming in below expectations lately, this had made Abate and his colleagues look quite good lately.
Abate isn't sure how long that's going to last, however: That time honored excuse, the weather, really does seem to have slowed things artificially, and there should be some snapback in the months to come -- particularly with tax refunds coming.
"The odds are that things are going to be a little stronger than people anticipate in another month or so," said Abate. "With the exception of the labor market data, which will continue to stink."
Key events in the week ahead
- Tuesday the Conference Board releases the February reading on its consumer price index. Economists polled by Briefing.com expect it to fall to 93 against January's 96.8.
- Economists expect January existing home sales, due out Wednesday, fell to an annual pace of 6.45 million versus December's 6.47 million.
- January durable goods orders, due out Thursday, are expected to show a rise of 1.4 percent compared with a December gain of 0.3 percent.
- Economists expect that January new home sales, due Thursday, came in at an annual pace of 1.095 million versus December's 1.06 million.
- The government's second take on fourth quarter gross domestic product comes out Friday. Economists expect annualized growth will be revised down from the initial take of 4 percent due to 3.8 percent, due to a wider-than-expected trade gap.
- The University of Michigan releases its final reading on its February consumer sentiment index Friday. The initial reading was 93.1.
- Economists expect the February Chicago Purchasing Managers' index, due Friday, to slip to 63.5 from January's 65.9. Any number over 50 represents manufacturing growth in the heavily industrial Chicago area
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