Market on Its Heels

Psychology won't recover easily following the long string of disappointments. A selling climax may be required

By Arnie Kaufman

When stocks are especially weak in April, look for a decline in May, says S&P market analyst Paul Cherney. The S&P 500 fell 6% last month. From 1957 through 2001, the index dropped more than 3% in April only five times, and all of these declines were followed by setbacks in May, with the May losses averaging more than 4%.

While the S&P 500 is doing poorly, Nasdaq is the real sick puppy. It slid close to 9% last month, is down 17% for the year to date and off 68% from its March, 2000 peak. S&P chief technical analyst Mark Arbeter believes that last Friday's breakdown of the 1630 support level puts Nasdaq at risk of falling into the 1473-1595 area, the range on October 3, when institutions decided it was time to step in and buy aggressively

Improvement in the profits of the technology companies that dominate the Nasdaq was expected to arrive later than the upturn for most other business sectors. Recent reports suggesting the economic recovery will be slower than anticipated, including the surprisingly large jump in the unemployment rate for April reported last Friday, are being taken to mean the recovery for technology earnings will be further delayed.

Meanwhile, tensions in the Middle East remain high, keeping alive the threat of a surge in oil prices. Lower-than-anticipated tax receipts are pushing up estimates of the federal budget deficit, which could force bond yields higher. And the U.S. dollar, though still elevated, has eased recently, heightening concern that foreigners will be turned off to dollar-denominated assets.

Given the disappointing market performance of recent months and continuing uncertainties, investors are clearly in a defensive mode. While many stocks offer sound long-term value at current levels, there are few takers. Aside from some good corporate news, a round of heavy selling on high trading volume may well be needed before a sustainable upward trend develops.

Kaufman is editor of Standard & Poor's weekly investing newsletter, The Outlook

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