Nasdaq Composite index flirts with key 2,000 level

(UPDATE: updates with close, new comments grafs 5-8, 19-20)

By Brad Schade

CHICAGO, March 9 (Reuters) - The Nasdaq Composite stock index (^IXIC - news) is nearing a key psychological juncture at the 2,000 level almost a year to the week after reaching its all-time high of 5,132, but technicians said that level may offer only temporary support as the index heads for deeper losses.

``Right now it looks pretty bad,'' said Hans Kashyap, president of Analytics Research Corp.

The Nasdaq index on Friday dropped more than 120 points to a low of 2,041.78, a new low for the bear move that began a year ago next week. The index ended the day at 2052.78, off 59 percent from its peak almost a year ago.

Intel Corp.'s announcement late Thursday that it faces weak sales due to the slowing economy fueled pressure on Nasdaq stocks, as did Friday morning's jump in February U.S. nonfarm payrolls that reduced expectations for continued aggressive interest rate cuts by the Federal Reserve.

A close below the previous low of 2,071 is be a negative for the technical outlook, and ``I would be looking for further move to the downside...about 200 points to about the 1,850 area,'' Kashyap said.

Gregory Nie, technical analyst at First Union Securities Inc. also noted that a long-term trendline dating back to 1994 on weekly charts currently comes in at about 2000.

``If we go below that there is major long-term damage,'' Nie said, adding that two areas of support after that level is broken will be in the 1,800 to 1,900 area and again between the 1,500 to 1,700 levels, dating from late 1997 and early 1998.

``We have in place the exact opposite of a bull trend,'' said Paul Cherney, market analyst at Standard and Poor's MMS. ``The mantra for so many years, from 1995 up until the beginning of 2000, was 'buy the dip.' Well now it's exactly the opposite -- it's sell the rally. None of the rallies we get are able to generate follow-through .''

The ``dead cat bounce'' of the last week, in which the Nasdaq had run out of sellers and moved higher from a deeply oversold position, did little to alleviate the overextended condition of the market, technicians said.

``We're still oversold and trying to work off that oversold condition,'' said Todd Gold, vice president of technical research at Gruntal & Co. He said investors who saw last week's recovery as a possible bottom and a buying opportunity may actually be extending the decline.

``Bottom callers are actually harming the market more because you're seeing retail investors and some institutional investors jump into some of these stocks with a long-term horizon in mind and they're doing it too early,'' Gold said.

``That's actually aiding the downward momentum because those people join in when we have a panic selloff like this,'' he said.

Gold said the Nasdaq is still firmly entrenched in a downtrend and the 1,800 level ``is more of a target than support.''

The 1,800 level represents the breakout point in December 1998, when the then advancing Nasdaq Composite broke above the prior high from July of that year, Gold said.

But even deeper losses could be in store.

``We've broken under what most people thought was a firm bottom at 2,251, which was the low of January 3,'' Kashyap said. Breaking that support level projects a nominal move downward equivalent to the move from the initial low to the peak, meaning a fall to near the 1,600 level, he said.

To avert such a decline, Kashyap said, the index would need to move back up above the February 26 high of about 2,310.

``That would give us a short-term bottom, projecting a move back up to 2,600 to 2,700,'' he said.

Cherney also is looking for other technical signs that would indicate capitulation on the part of bears, including volume of 2.3 billion shares on Nasdaq, and a Chicago Board Options Exchange individual equity option put/call ratio of 0.75 and a total CBOE put/call ratio of 0.99.

Cherney said the equity put/call ratio was at 0.76 just before the close on Friday, but Nasdaq volume was just under two billion shares.

-- Of course (this@had.ABSOLUTELY NOTHING TO DO WITH.y2k), March 09, 2001

Answers

What happened to all the "DOW 100,000 by 2030" talk?

-- I think (the@party's.over), March 09, 2001.

Of course it had nothing to do with Y2K. It had everything to do with "investors" spending real money on companies that were made of bits and bytes, investors who would have bought Dutch tulip bulbs.

A friend of mine told me early last year that he was going to sink a bundle into a net company. I told him he was nutso to pay for a "company" that was nothing more than a few servers and had a dotcom for a name. Hell, I am no investing wiz by any stretch, but please, even I saw the dotcom shakeup coming, which means anyone who did not see it is a true bonehead.

-- Uncle Deedah (unkeed@yahoo.com), March 09, 2001.

C'mon Unk, you can do better than that. See, there were all these 2- digit years in software. After rollover, programs that used such dates in calculations could make mistakes. But we were looking in the wrong place for the *symptoms* of those errors.

Turns out the symptoms showed up when people decided to bid up the price of non-companies with non-products, in the foolish hopes that a new business model would do away with the old-fashioned and silly requirements for things like actual products and actual sales to actual customers. Do you think so many investors could possibly have been so stupid without some systemic cause of this systemic failure.

And what was that cause? It was computers mishandling dates! What else could it possibly have been? QED!

-- Flint (flintc@mindspring.com), March 09, 2001.

Have your fun guys but confidence is ebbing. Confidence is the only thing that makes a stock worth buying and lack of confidence is the only thing that forces a sale. You need a primer? These ain't apples. Apples have intrinsic value and stocks don't.

-- Carlos (riffraff@cybertime.net), March 10, 2001.

"Apples have intrinsic value and stocks don't. "

I think you need another coat of primer....to whitewash your silly ass with!

Only a bonehead would say "stocks don't have intrinsic value" heh, yeah right.

You sound like someone who doesn't own a single stock, and probably never will.

Almost as bad as the bonehead that signed the e-mail "THIS HAD NOTHING TO DO WITH Y2K"....what a dumbass. Economies rise, and economies fall....'tis the nature of this thing called....life. Ups, downs, and all the in-betweens.....you conspiracy nutz need to get laid or sum'pin.

-- GO (getl@id.now), March 10, 2001.

The fact of the matter is that most companies did fear problems with Y2K, they just didn't like to admit it. Most companies geared up production pre-Y2K and overstocked their inventories. Many of them borrowed money that the Fed floated to them, and now they are paying it back. A lot of what happened in 1999 gave the illusion of increasing business, which immediately dropped off after the rollover. Some of these companies were sitting on excessive inventories, so they had to reduce production in 2000 and pay the bills for the excesses of 1999. Even though there were no actual physical disasters caused by the rollover, the economic effects really screwed up the normal business cycle.

-- (Y2K fucked up our economy @ big. time), March 10, 2001.

I've seen a few articles that mentioned briefly that the huge sums that major U.S. companies spent in 1998-99 to combat Y2K problems did dent their subsequent IT budgets, providing one catalyst for the tech industry downturn that began late last spring. Companies like AT&T, Citigroup, and GM spent close to $1 billion each correcting Y2K problems. So Y2K had some indirect impact on financial markets. Not huge, but some.

There were other factors, too, of course, not the least of which was a grossly inflated stock market to begin with. The Nasdaq composite index, covering some 5,000 companies, has fallen 60% since a year ago. That's the most that a major U.S. stock index has EVER fallen in one year. Even in the years 1929-1932, no major index lost that much in one year. Since last March the Nasdaq has lost over $4 trillion in valuation--a mind-boggling sum. Since January 1st of this year it has dropped almost 17%. Most disturbing is that the Nasdaq 100 index (covering the big cap tech companies) has dropped almost 23% since Jan. 1st. When you see the big boys leading the way down, there's trouble afoot.

Fortunately we have a vastly richer, more diversified, larger economy than 70 years ago. And the other indices have held up better than the Nasdaq has. The S&P 500 is down about 20% from its all-time high in early 2000; the Dow is down about 10% from its all-time high. But the Dow, consisting of the best of the best, the bluest blue chips, is a narrow index--just 30 companies. Yes, they are huge companies, with heavy market capitalization. But still just 30 companies. In recent years a lot more money went into the Nasdaq than went into the Dow, alas, as everyone and his brother rushed to get into the "New Economy" stocks.

The problem is that there's still a lot of overvaluation out there, at least by historical standards. According to a recent Reuters financial news article, the average PE ratio is 21, 23, and 53 on the Dow, S&P 500, and Nasdaq, respectively. Over the past 75 years, the average PE for all U.S. stocks has been about 14. Of course that varies by company, type of industry, etc. A company especially vulnerable to economic cycles (like an airline) will typically carry a PE around 8; a potential "high growth" company (like many techs) may carry a PE of 25 or even higher, depending on what its prospects are and how speculative investors are. Even granting all that, you can see that there's still significant overvaluation out there, unless you buy into one of the "New Economy" valuation models (models that seem to have helped get us into this mess in the first place).

About 250 Nasdaq companies have lost so much stock value that they are in danger of being "de-listed" (no longer listed on the Nasdaq because their share price has fallen below the minimal acceptable level); that's typically a death sentence for a company.

Overall, the manufacturing sector, accounting for some 20% of the U.S. economy, is in deep recession. However, the massive layoffs announced in that sector are misleading--most will be by early retirement and attrition. The other 80% of the economy, the service sector, is still fairly steady--partly because consumers continue to spend more than they earn, unfortunately. Unemployment thus held steady last month at 4.2%. But unemployment is a *lagging* indicator, remember. If, for instance, you study the years 1929-1932, you'll note that, although the market drops in late 1929 and early 1930 were triggered by a coming recession (classic overproduction of goods and buildup of inventories), essentially the severe financial damage occurred first, and then eventually came the heavy economic fallout and surge in unemployment,with national income cut in half by 1932 and unemployment over 25%. Nothing that severe is at all likely in our current downturn, of course; I'm just using the pattern as an example.

What nobody really knows at present is just how much damage has been done, and might further be done, to the underlying U.S. financial structure. There's certainly some creaking. Also, all this occurs in the context of a credit bubble. The Fed has been inflating the broad (M3) money supply in recent years as though there's no tomorrow; not surprisingly, given all that "easy money" and continued high energy prices, some inflation has begun to pop up in the Producer Price Index, the Consumer Price Index, and wages. More significant, the U.S. savings rate is now negative, and the worst since records have been kept; and total U.S. nongovernment debt (personal and corporate) now totals over $18.3 trillion (almost $8 trillion in personal debt and about $10.5 trillion in corporate debt), which are records. As usual in economic downturns, banks are starting to tighten credit policies, ironically now threatening a credit crunch. That's why the Fed wants to keep lowering the Fed fund rate, but also hates to do it because of those inflation signs popping up. Greenspan is really between a rock and a hard place. Last year saw the most (21) large bankruptcies ever recorded (bankruptcies in companies with over $1 billion in assets) since the new bankruptcy laws were instituted in 1979. Look for even more this year.

A few other factors to watch: about $7 trillion in U.S. assets are held by foreign investors, including huge sums in Treasuries by the Japanese. As our manufacturing base has shrunk, we've run up large current account deficits; our monthly trade deficit is well over $30 billion. Basically, we've been buying goods from other countries and selling them our financial "paper" in return: investments in our stocks, corporate bonds, and Treasuries. Nice work if you can get it. But it's a dangerous game in the long run. Japan is in serious trouble; its finance minister, Miyazawa, flatly said the other day that public finances are "nearing collapse." No senior minister in Japan has ever said anything remotely like that before. Japan has been using "New Deal"-type govt. spending programs in recent years to try to bail itself out of its own collapsed financial bubble (the Nikkei index is down over 68% since 1990), and to keep some of its biggest banks afloat--but it hasn't worked. Instead, Japan has been left with a national debt 134% the size of its GDP, and the rivets are beginning to pop. Fortunately, unlike in the U.S., the Japanese have enormous household savings, so the average Japanese is not likely to be selling pencils or fish sticks on the street corner any time soon, despite the country's crisis. But Japan's financial system is very shaky; the banking system, the world's largest, was propped up, not reformed, after the 1997-98 Asian crisis. There's a close, almost incestuous, relationship among govt., banks, and corporations in Japan--the whole system needs reform. Unfortunately, nobody has a clue how to do it without bringing the national economy crashing down. It's a bit late to rebuild the ship when it's floundering. So look for Japan to flounder some more. Since Japan is the world's second largest economy, and largest creditor, this will likely have various unpleasant repercussions in the global financial system. In SE Asia, S. Korea, Taiwan, and Thailand are already struggling with their own financial problems. (Taiwan has been hit hard by the global drop in demand for tech products, of course.) Australia is slipping into recession. Europe is steadier, though Germany and the UK have started showing some signs of trouble recently. Turkey is in financial meltdown. In Latin America, Argentina is the one to watch.

Overall, the world is in somewhat better financial shape than during the Asian crisis (which, as you'll recall, eventually spread to Latin America and Eastern Europe); on the other hand, we here in the U.S. are in much weaker financial shape than two years ago, and so less able to lead the world to recovery if need be. We're in some trouble if the Japanese have so many problems that they need to start selling off our Treasuries, etc., to deal with their cash flow problems at home.

Regardless of causes, we have a bear on our hands.

-- Don Florence (dflorence@zianet.com), March 10, 2001.

The bear is growling.

-- dont like zoo's (staying@away.fromthebear), March 18, 2001.