Newspaper article The Christian Science Monitor

For Market to Rally, Sell Your Stocks ; as Long as Residual Faith Sustains Prices, Says One Theory, Wall Street Can't Recover

Newspaper article The Christian Science Monitor

For Market to Rally, Sell Your Stocks ; as Long as Residual Faith Sustains Prices, Says One Theory, Wall Street Can't Recover

Article excerpt

Matt Thompson used to trade stock options, trying to make a little money on the side. He would chart price movements and read newsletters. But after his portfolio headed south last year, he pulled out from options and took up the guitar instead. "I just totally unplugged from the whole thing," says the Grafton, Ill., resident.

There's just one thing: He's holding his remaining tech stocks. Yes, he's discouraged from buying more, but "I'm not discouraged enough to sell." Like many investors, he hasn't given up completely on the stock market.

Strange as it may seem, that may be bad news for those expecting a recovery. According to a popular contrarian view on Wall Street, investor sentiment has to really sour before stock prices can stage a large, sustainable rally. The more gloom, the more investors sell, and the further stock prices fall. At some point, the theory goes, prices reach such ridiculous lows that they set the stage for a frenzy of buying and the next strong rally.

Yet so far, despite new lows set by blue-chip and technology stocks this week, investors' outlook remains a little too upbeat, analysts say.

For those who believe in the predictive power of investor sentiment - and not everyone does - that suggests more depressing times ahead. "The last four years, we've seen a lot of optimism where people basically want to be bullish," says Michael Burke, editor of Investors Intelligence, a biweekly newsletter in New Rochelle, N.Y., which tracks the sentiment of stock newsletter writers. Its latest reading shows bulls still outnumbering the bears, 42.2 percent to 34.5 percent. "They're still not readings that say everybody is worried," says Mr. Burke.

Other surveys show much the same: discouragement but not enough for investors to throw in the towel.

In July, for example, the index of investor optimism hit a record low - 46 - down from a relatively buoyant 121 in March. That decline closely tracked the new lows the market indexes were setting at the time. But as soon as the markets rebounded in August, so did optimism, according to UBS and the Gallup Organization, which created the measure. With a big spurt in the Dow Jones Industrial Average, the optimism index rose to 52. And this month, even though the markets plunged again, the index registered another small gain, to 60.

The poll took place before this week, however, when bad earnings reports and uncertainties about Iraq helped send the Dow to a four- year low. Also this week, the Nasdaq, which lists many technology- related stocks, reached a six-year low. "Many investors are still not convinced that the economy has hit bottom," UBS/Gallup concluded. While 45 percent thought it had, a slightly larger group, 52 percent, believed it hadn't.

With the market bouncing back a bit on Wednesday, these kinds of halfway sentiments are not the signal that market-watchers are looking for. …

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