Wed04162014

Business & Real Estate

Stock investors suffering from 'Mad Dow disease'

Stock Report

nce the "new economy" stocks became infected and crashed, the stock market went from a slow correction to a free fall frenzy last week. Even the economic doctor, Alan Greenspan, couldn't help with his 50-basis-points interest rate reduction.

Until last Friday, the Dow fell seven of the last 10 trading days, and six of those days were losses of 200 points or more. For the week, the Dow industrials were down 319 points to 9,504.

Disappointment that the Federal Reserve cut short-term interest rates only a half-point was enough to convince Wall Street investors to sell because they had expected a three-quarter point cut. Then on Tuesday, Wednesday and Thursday, investors went into a selling frenzy.

Has the market hit the bottom? The volatility index (ups and downs and 200-point swings) is at its highest level since 1998. We can expect more of a downside.

The Dow could rally to 9,800 and fall to 9,200. Before the end of the year, the blue chip index could fall to 8,300 before it finds a bottom to build on.

We haven't come close to value in the market because the price/earnings (PE) are still high and the market isn't focused on fundamentals. Until the stock market represents value, there is still more risk involved and less potential for profit.

The Nasdaq composite index rose 30.98 points for the week gaining 2 percent. The Town Crier index of 50 stocks increased 11.40 percent for the week because of several big price jumps in local equities.

Adobe Systems increased 24.66 percent; Coherent, 28 percent; Lam Research, 28.33 percent; Legato, 33.52 percent; LSI Logic, 29.33 percent; National Semiconductor, 26.06 percent; Rambus, 61.71 percent; and Varian Semiconductor, 25.25 percent.

The Dow Jones industrial average sank into bear territory last week when the average fell below 20 percent from its high. In January 2000, the high was 11,722. By the end of last week, it was 9,504.

In perspective, there are 4,623 stocks in the Nasdaq index and close to half of them have lost more than 50 percent. Some 10 percent of Nasdaq listed stocks are down 90 percent from their peak.

With a 6-to-9 month lag before an interest rate cut kicks in, investors are focusing on the immediate problems of bloated inventories (Cisco), disappointing earnings (Oracle), and trouble overseas (Japan).

There is no instant fix. Investors shouldn't let their guard down yet even though optimistic analysts are saying we have reached the bottom of the trough and things will be much better in the second half of the year.

I'm not going to lie to you, or give you a false impression of the market. I don't think any analyst will disagree with me when I say the economy stinks right now.

The broker/analysts who tell you they know when things will be all right are blowing air. You can find them every day on CNBC, The Nightly Business report and www.siliconinvestor.com.

Noel, a seasoned investor, covers the stock market for the Town Crier.

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