Dow's bounce may not signal recovery

USA Today
Mar. 07, 2007

NEW YORK - A 157-point Dow gain is normally a sign of a healthy stock market. But when a big up day like Tuesday follows a 736-point drop in the previous nine sessions, the rally comes with its fair share of caveats and question marks. Wall Street has historically viewed large one-day rebounds after steep, scary declines with suspicion and trepidation. And traders' reaction to Tuesday's stock surge fit the age-old profile to a T.

Jittery investors still reeling from Wall Street's worst slide since 2001 welcomed the Dow's explosive gain. But the short-term boost was not enough to warrant an all-clear sign that the worst bout of selling since last summer had run its course. It also didn't serve as proof that the bull market, which peaked two weeks ago, was back on — at least, not yet.

"It's too soon to tell," says Hugh Johnson, chief investment officer at Johnson Illington Advisors. "I'm always skeptical. I'd love to see three to five days of stable markets to rebuild lost investor confidence."

That's not to say that there weren't positives to take away from Tuesday's breakout. The day began with stock gains in Asia, which spread to Europe and eventually to the USA. It was the best day for the Dow since July 24, 2006. And unlike last Tuesday, when the Dow plunged 416 points and all 30 of its components finished in the red, only one Dow stock fell Tuesday.

Reversals like that often signal a change in trend.

"We got a nice bounce," says Todd Leone, head of listed trading at Cowen & Co. "We are seeing some strong buying. It is real." But even Leone acknowledges that the psychology of the market has changed. Risk-taking, he says, is down. "People are a little more nervous," he says, nervous enough that another down leg can't be ruled out.

Janna Sampson, portfolio manager at OakBrook Investments, says the market could be turbulent through midyear until investors get a clearer picture of how the economy is holding up amid a housing slowdown and credit crunch.

"I'm not expecting a 20% decline, but I'm not expecting a big rebound, either," she says, adding that investors should ignore the volatility and remain invested for the long term.

But Rich Suttmeier, chief market strategist at financial website RightSide.com, is predicting a bigger decline. The fact that most of the stock market indexes around the world peaked at the same time last month was a sign of a market top, he says.

"We are in a transition from a bull market to a bear market," he says. "The new bear market started on Feb. 20 when the Dow peaked."

The fact that so few people are predicting a dire outcome could be cause for alarm, notes Michael Farr, chief investment officer at Farr Miller & Washington. "Denial is not a good investment philosophy," he says. "To deny there are any real worries is a risk of its own."