It was too good to last.
The three-day stock market rally came screeching to a halt yesterday as the Nasdaq plunged almost 6 percent.
Awful news from Palm Inc. and Nortel Networks Corp. came on the heels of more corporate layoffs that shocked investors out of their bullish mood and frightened buyers away.
“It wasn’t so much that people were selling, although they were, but it’s more that no one was stepping up to buy,” said Luke Mazur, chief investment officer for Highmark Capital Management, Inc.
Floor brokers close to the action agreed.
“Buyers that were cautious became spooked, “Robert McCooey Jr. of The Griswold Co. said of the flight out of stocks.
The Dow Jones industrial average plunged 162.19 to 9,785.35 after dropping as much 220 points during the day. The S&P 500 Index, a broader indicator of market health, declined 28.88 to 1,153.29.
The Nasdaq – loaded with battered tech stocks – took the biggest hit, losing a whopping 6 percent of its value after dropping 118.13 to 1,854.13. It now stands 63 percent below its high-water mark last March.
Yesterday’s sell-off wiped out almost $314 billion of U.S. shares’ market value, according to the Wilshire 5000 Total Market Index.
Many Wall Street wizards think the shakeout is a good thing, since the three-day rally of triple-digit increases – over 600 points for the Dow – simply shot up too much, too quickly.
“The sell-off corrected the rally,” said Michael Davey, technology analyst for Investec Ernst & Co. “We got a little bit happy, but it was a little bit suspect.”
Here’s why: First-quarter earnings from companies in the S&P 500 project a drop in profits of 7.5 percent from same period last year.
That’s the worst first-quarter profit forecast since 1991, according to Thomson Financial/First Call.
Moreover, about 70 percent of the nearly 900 earnings advisories reporting so far have been negative, a record low since First Call began tracking the data five years ago.
Yesterday Nortel, the biggest maker of fiber-optic equipment, fell $2.76 to $14 on news it expects its losses to widen and that it will fire an additional 5,000 people by mid-year, eliminating 15,000 jobs in total.
According to Highmark’s Mazur, these poor earnings and the inability to value “properly” values stocks, is the basis for the “sawtooth action” we’ve been seeing.
“We get a rally that is not sustainable,” he explained.
The thinking goes like this: We cannot hit a bottom without a massive sell-off, or capitulation, by investors who finally relent and sell out.
“Everybody’s waiting for the catharsis, for the individual investor to throw in the towel.” said Investec’s Davey.
“With all the carnage in the markets, many people just won’t let go,” explained Mazur.
“Investors hold on the rallies, maybe buy a little. Then the sell-offs follow, and they sit on their hands again.
“So we get the rallies and the valleys that we’ve seen these past few weeks.
“This is wear ’em out and scare ’em out market,” Mazur said.
CHART/GRAPH
So, dead cats DO bounce!
The markets plunged in a massive sell-off yesterday, proving to many that the three-day Dow rally was little more than a dead cat bounce.
THE LOWLIGHTS:
* The Nasdaq composite index plummeted almost 6 percent after a raft of technology companies warned on earnings.
* After gaining almost 7 percent since Friday, the Dow Jones started to give it back yesterday, tumbling 162.19 to 9,785.35.
* Experts said the markets will remain volatile as investors take profits whenever rallies emerge.