Panic to Sell Becomes a Panic to Buy; Either Way It’s a Bad Strategy

Panic is once again demonstrating that it’s an equal-opportunity emotion on Wall Street.

The panic to get out of the stock market, and particularly technology shares, in February and March gave way to a panic to get back into the market the last two weeks.

On Nasdaq, the stampede of buyers pushed the tech-dominated market’s composite index up 10.3% last week, which followed the 14% surge of the previous week. Those were the third- and second-biggest one-week percentage gains in the index’s 30-year history.

By Friday, profit-taking finally set in, but the sellers barely got the upper hand: The Nasdaq index ended down 0.9% at 2,163.41. That still left it up 32% from its two-year low set April 4--a nice chunk of change by any measure.

The blue-chip Standard & Poor’s 500 index, also off 0.9% Friday, is up 13% from its two-year low, also set April 4.

Just another rally in a bear market? That’s the risk, of course. Before this one there were four significant Nasdaq rallies in the last year. The biggest of those occurred from May 23 to July 17, lifting the composite index 35.1% before investors began to pull away again.

The smart move in all of those rallies was to sell into them, though even those who did sell probably had no inkling how low technology stocks would sink by this year.

What’s different this time? Obviously, prices are lower. Despite a 51% gain since April 9, shares of network computer maker Sun Microsystems, at $19.71 on Friday, still are down 36% from their level at the end of January and 69% since the end of August.

So what? some would say: Sun’s earnings have collapsed, as they have for many tech firms as companies and consumers have slashed spending on computers and related equipment. Sun reported Thursday that its latest quarterly results fell 73% from a year earlier, to a mere 4 cents a share.

Brokerage Goldman Sachs, like many of its peers, believes Sun will recover later this year. Goldman now expects Sun to earn 53 cents a share in the next fiscal year, ending June 2002. Based on the current stock price, that means Sun is valued at 37 times the 2002 earnings estimate--about double the price-to-earnings ratio of the average blue-chip stock.

With valuations at similar or higher levels for many tech leaders, the shares simply aren’t bargains, Wall Street’s bears say. So this rally is bound to stall out sooner than later, they argue.

But bear markets generally don’t last forever, Japan’s experience since 1989 notwithstanding. Nasdaq’s 13-month decline was long and brutal by bear-market standards. Years from now, investors will look back on the prices that some (albeit not all) tech shares reached in recent weeks and they’ll wonder what sellers were thinking.

Indeed, some investors have already had that thought--hence the panic rush back into many of the stocks since April 4.

A key catalyst for the rally was that more than a few tech companies said in recent weeks that the sales and earnings picture is at least stabilizing. In a market so dominated by bad news for months, just a hint that the outlook isn’t worsening has been a bullish tonic.

Yet there is no way to measure how much of the buying since April 4 represents bargain-hunting by investors who plan to hold these stocks for years, and how much is from speculators merely looking to play what they figure could be a strong short-term bounce.

Other buyers have been in the market recently because they have to, not because they want to. Those are “short sellers,” traders who borrow stock and sell it, betting that the price will fall.

Their bearish bets had reached record levels by early April. But as the market rebounds, short sellers risk financial ruin if they maintain their bets. To close them out, they have to buy stock in the open market to repay the shares they borrowed--buying that adds more steam to a market that is already going up.

Into this mix jumped the Federal Reserve on Wednesday, with its surprise half-point interest-rate cut. Just when many investors had given up hope that the Fed was serious about staving off recession and/or rescuing the stock market, the central bank reasserted itself with dramatic flair.

Were they bailing out investors--something Fed Chairman Alan Greenspan has insisted he does not do? Greenspan could point to the stock rally that began a week earlier and say the market had already rescued itself. In any case, with the tech-stock bubble drastically deflated over the last year, many investors’ portfolios are long beyond rescuing. Greenspan is no hero to millions of stock owners, no matter what he does with interest rates now.

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Whether the bear market is over will be obvious only in retrospect. Everyone has an opinion about that now. Given the dismal track record of so many highly paid Wall Street analysts over the last year, your opinion is just as good as any of theirs.

Bull markets often begin with violent rallies. But the action of recent weeks may be just another fakeout. That the market can turn so suddenly shouldn’t surprise anyone by now. Volatility has been at extraordinary levels for nearly 18 months--first on the way up, then on the way down, now on the way up again.

The market moves fast because it can. Blame the technology that has given everyone instant access to market information and the ability to trade at the push of a button. If the technology isn’t going away, why should volatility go away?

It’s easy to tell investors to “just relax”--as Charles Schwab, head of the giant online brokerage of the same name, does in those TV commercials the firm is running.

But let’s face it: If you feel panic now because the market is rising and you haven’t put down your bets, that feeling will only get worse if this rally continues for weeks or months.

Do you need to make a move? To answer that, start with a few other simple questions:

* What portion of your assets is in stocks right now? You may already have a big bet on equities relative to other assets. If so, you’ll ride any rally. You may not need to put more money into stocks.

* Are you looking for a short-term trade, or to make a long-term investment? If your goal is to make a quick killing if stocks (or one particular stock) continue to climb, that isn’t investing--it’s speculating. Just don’t confuse the two, and don’t use investment money to speculate. (That’s the mistake too many investors made with technology in that sector’s go-go days.)

* If you want to put more into the market, is that a move you can make only with retirement monies, such as in a 401(k) plan? For many people that is probably the case, because those plans often hold virtually all of their investment nest egg.

If that’s your situation, have you reviewed the investment options in your plan, to see which stock funds are offered and whether there are some you’d like to own that you don’t now--or some you’d like to switch into from other funds?

Unless you’re a speculator, panic is an emotion that shouldn’t rule your financial decisions in up or down markets. Take time to plan, and to think through the potential risks as well as the potential rewards of your investment moves.

That advice would have saved a lot of people a mountain of money, and a great deal of anguish, if they had followed it a year ago.

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Tom Petruno can be reached at tom.petruno@latimes.com. For recent columns on the Web, go to http://161.35.110.226/petruno.