There's growing sentiment among Wall Street's number crunchers that the long awaited pullback of the major stock averages has begun.
Stock market analysts have warned of the dreaded "correction" for months now, and all that the leading stocks have done in that time is to continue their record-breaking climbs to the Dow Industrial Average's June 16 record of 1,248.30.
But two carefully watched "technical" analysts, stock watchers who look to sometimes arcane statistical measures of the market's performance rather than to more basic economic data and trends, have been telling their customers in the past week, for the first time, that the correction seems to be at hand.
One of the analysts, Bob Nurock of Investor's Analysis Inc., a Paoli, Pa., firm, said today that he expects a correction that could pull the Dow Jones Industrial Average 80 points below today's close of 1,220.12 to as low as 1,140. Moreover, Nurock sees the pullback continuing until the fall and going beyond the highly capitalized, widely held securities that most investors carefully watch.
"I think this will turn out to be the intermediate correction between the first leg of a bull market and the second leg," Nurock said. "We are now on the first full-blown correction destined to reach all sectors of the market. It will be drawn out and will be frustrating to bulls and bears alike, rather than a well-defined correction."
Asked about the odds of such a market move being under way, Nurock said that there is a four-out-of-five chance that the Dow industrials will fall below 1,180 soon. In Nurock's view there are two signs foretelling this drop. One is the recent apparent hesitancy of investors to do much trading at all, a fact reflected in low trading volume, and the second is the consensus among many other Wall Street analysts that calls for only a slight dip in the Dow.
"The consensus now believes that the Dow will probably hold above 1,180, then mount a further rally," Nurock said. "Since I tend to think the consensus proves to be wrong, it probably will have to go lower."
Similarly, Richard J. Yashewski, director of technical analysis at Butcher & Singer Inc., thinks a correction of 10 percent or more is due in large part because there are few positive signs that investors are inclined to continue to prop up stock prices.
"We've had a 10-month virtually uninterrupted rise," Yashewski said today. "We can see that every time the market was losing momentum it was rescued by two important factors--a bullish interest rate situation and also a solid 'wall of worry' "--the fear among investors that if they cashed in, they would miss the rest of the bull market.
Now, "both of those props have been seriously weakened," Yashewski explained. "Interest rates have headed in the wrong direction" and increased evidence of short selling of stocks--sales based on assumptions of falling share prices--as well as all the attention investors are showering on new issues, all spell bad news for watchers of the Dow averages.
In addition, Yashewski pointed out that fewer and fewer stocks are reaching new highs on each of the three major stock exchanges. "Sentiments in the market seem to be deeply negative," he said.
But like nearly anyone on Wall Street, including Nurock, Yashewski remains extremely enthusiastic about the stock market, at least after it gets over its current phase, predicting that the Dow industrials are likely to reach 1,500 by the close of 1984. "The best thing for a bull market is a harsh cleansing of its excesses," Yashewski said.
But the analyst is concerned that any bad news, particularly on the international debt front, could pull stocks down further. "This market is so frothy and overbought that it will be unable to withstand very negative news," he added. "There's been too much merriment."
It should be noted, however, that there's a fair amount of skepticism about the kind of occasionally offbeat gauges the technical analysts look to. For instance, Barton M. Biggs, the Morgan Stanley & Co. managing director and top strategist, derides most of the so-called technical analysis, but is convinced that on April 1 his firm had already made two-thirds to three-quarters of what it would make for the year on trading stocks.
"We're playing it that the market isn't going anywhere for the next four or five months until we see signs that rates are coming down and the course of the recovery is a little more certain," Biggs said today. "But there's still two stock markets--the big-quality stock market which is still very attractive, and the junk-stock market which is ridiculously overpriced."
Are the technical analysts onto something in the summer of '83? Biggs was asked. "As far as I'm concerned," Biggs said, "the technical analysts fulfill the age-old desire of people in uncertain businesses to look at sheep entrails."