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Stock Slide: Time to Buy on a Dip, or Sell?

Your Money

By Guy HalversonStaff writer of The Christian Science Monitor / October 20, 1997


Last week's stock stumble raises concern about a market that remains near record levels even as profits show signs of weakening.

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More trouble may lie ahead, say some analysts, citing not only earnings but also other key indicators such as interest rates and investor sentiment.

Indeed, if a dip turns into a dive, a major uncertainty is whether small investors will hold or bail out of stock mutual funds.

Surveys suggest that the great majority of mutual fund and stock investors now adhere to a "buy and hold" approach, irrespective of daily market swings. Many draw a lesson from the market crash that occurred 10 years ago yesterday: The market can fall hard, but it doesn't stay down forever.

Buy-and-hold attitude

"These are retirement dollars," says one suburban New York nurse who invests in mutual funds. "They stay put."

Pondering the 200-point drop in the Dow Jones Industrial Average last week, she says, the stock market always eventually goes "back up."

The issue of investor attitudes is far from academic.

Recent turmoil in the market leads a number of analysts - although perhaps still a minority - to believe that a downturn is likely in the months ahead, perhaps already under way.

The extent of the downturn - whether it is a "correction" of 10 percent or a deeper "bear market," largely depends on the behavior of small investors, the analysts say.

"It's worrisome," says Prudential Securities analyst Hildegard Zagorski, referring to the market's pummeling last week.

Both large and small companies were hit, with the Dow closing the week at 7847.03. The Nasdaq Composite Index fell 32.78 points Friday to close at 1,666.88 points.

Factors propelling the market downward, says Ms. Zagorski, include disappointments about lower corporate earnings and fears of a new interest rate hike by Federal Reserve policymakers in November. Economic reports last week showed signs that the economy may be stronger than anticipated, raising concerns about inflation.

Last week's turmoil was "an earnings-driven event," says Jos Rasco, an economist at investment firm Hoenig & Co. in Rye Brook, N.Y.

While Mr. Rasco is not prepared to say that the market is entering a period of correction, he sees a high likelihood that it will.

"Historically, the market has not risen this dramatically very often." He counts only a handful of periods in the 20th century in which the market shot up over 29 percent. In each case, he says, the market corrected some time within the next 12 months.

Tech profits in question

Technology companies saw some of the hardest selling last week, including bellwethers such as computermaker Compaq and and chipmaker Intel.

In a sign of how touchy investors have become, even a 42 percent surge in earnings at Compaq was not enough to assuage concerns.

Mainstream consumer companies such as McDonald's were also battered by profit concerns.

Investor sentiment is another sign troubling some analysts. If everyone is bullish, it can signal a market ripe for a plunge. While current indicators are mixed, bullish sentiment is "getting up there," says Richard Dickson of Scott & Stringfellow in Richmond, Va.

One barometer of mood: Only 14 percent of investors were bearish two weeks ago. "On a historic basis, that's very, very low," Mr. Dickson says.

The market "is getting into very dangerous territory," says David Blitzer, chief economist at Standard & Poor's in New York. "It cannot go on forever like this." He cites both earnings concerns and a possibility rise in interest rates.

Mr. Blitzer, however, says that a pullback - which he expects to occur at some point in the months ahead - will probably be modest, around "5 percent to 10 percent."

What troubles him is that already-high stock prices may not go anywhere "for about a year, as happened to the market in 1994."