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July 13, 2001

Rally or Dead Cat Bounce?

Question: This week's earnings announcements have been dismal, but the stock market doesn't seem to be taking much of a hit. Does the current rally have legs or will investors wake up and smell the poor fundamentals?

Answer: It's always difficult to predict exactly when the next big sell-off will occur. We certainly don't think that this rally will hold up over the long term -- and it is certainly not the start of a new bull market. Unemployment ratcheted up a notch last month. Consumer spending and borrowing continues to slow down. Manufacturing remains in a recession. The tech sector is rapidly deteriorating. Even exports have declined, indicating that demand abroad is slowing, too.

This bear market is just getting started. Earnings have fallen considerably over the past year and a half. According to Thomson Financial/First Call, companies in the S&P; 500 are expected to report profits 17.3% lower than one year ago. Of the 1,789 companies that will report their earnings over the next two weeks, we expect 77% of those reports to miss estimates.

There is only so much bad news investors can take before they lose faith in Wall Street's "wait and see" mantra. And, in our opinion, it's better to be in front of the selling wave than to get dragged down by the undertow.


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