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Published on 10/12/1998 All articles from this issue

Will bulls fall into a bear trap?

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By Clyde Noel

Special to the Town Crier

Stock Report

Is this the right time for investors to jump back in the stock market? Or is it a bear trap?

After last week, the market is now vulnerable for investors to take profits if they have purchased stocks during the past three months. That could bring on the ugly bear.

For the week, the Dow Jones Industrial Average was up 517.24 points to 8,416 for the biggest weekly point gain in history, while the Nasdaq composite index was up 128 points at 1,620.

The Town Crier Weekly Stock Index had an enjoyable week, being up almost 9 percent.

The stock market increases were created when the Federal Reserve acted to head off an economic recession by cutting interest rates for the second time in a month. The reductions were meant to encourage banks to lend money in the face of financial turmoil around the globe.

The Fed is prepared to cut the overnight Federal Reserve funds rate still further, and it's readily apparent that the Fed does not want to see a recession. The rate is currently 5 percent. What Federal Reserve Board Chairman Alan Greenspan did for stocks last week was provide a sense of confidence to the system. Investors offered an enthusiastic response by buying stocks.

Wall Street is telling investors that if "they snooze, they lose," which means the best strategy is to buy into corrections, regardless of whether it makes any sense from a fundamental base.

Fundamentally, stocks have risen over the last three years on constantly rising earnings, but the earnings story is now changed and analysts are slashing their profit forecasts because of depressed global economies.

One reason is the boatloads of low-priced Asian toys, televisions and automobiles arriving at U.S. shores, but the same ships are crossing back empty because Asian peoples generally can't afford to buy American products.

Nothing has changed significantly in the global economic environment since the market topped out at 9,337 in mid-July and went into its tailspin by dropping 1,900 points and bottoming out at 7,400 Sept. 1. For the year the Dow is still up about 6 percent.

Several companies in the Town Crier Index provided nice increases and erased the big losses in the technology-based index. Investors saw potential in companies like Adobe Systems, Applied Materials, 3Com, Cisco Systems, Flextronics, Legato Systems and Sun Microsystems.