Bull vs. Bear debate: Is pullback over?
The stock market has taken investors on a roller-coaster ride the past two weeks.
First came the plunge: the Nasdaq composite's worst weekly drop since June 2012.
Then came the rebound: the broad U.S. market's best week since last July.
Now comes the face-off between bulls and bears centering around the key question: Is the pullback over?
The bulls say the worst days are behind us.
They cite the Nasdaq composite's ability to rebound after teetering last Tuesday on the brink of its first 10% correction since late 2012. They say the pullback, while severe, was confined mainly to the frothy parts of the market — and never truly put the "blue chip" part of the market at risk. And they note that market indexes were able to stay above key long-term levels deemed critical to market stability.
The bears are not so sure the selling is done.
They say hard-hit growth stocks in the Internet and biotech space still need to come down more after big run-ups caused them to get overly pricey. They warn of more volatile days ahead, with wild swings causing fear levels and stock prices to rise and fall sharply. They also point to possible flashpoints, or shocks, such as the Russia-Ukraine crisis, or concerns about Federal Reserve policy, or a sharp rise in interest rates, which could also derail the bull market.
WHY BULLS SAY WORST IS OVER
• It's not about the economy
The scary pullback, which dragged down the Nasdaq 8.2% on a closing basis, wasn't caused by fears of a recession, the normal trigger for a major decline. It was centered on just a handful of sectors that went up too far, too fast, says Nicholas Sargen, chief investment officer at Fort Washington Investment Advisors.
"This isn't about the economy; it isn't about corporate profits," Sargen says. "It is more about the fact that valuations in tech and biotech have gotten excessive. We're in the midst of a correction but not necessarily for the entire market, (just) the segment where valuations got stretched. I don't think the broad market is unduly expensive." (Many high-flying stocks had price-to-earnings ratios north of 100, v. a P-E of around 16 for the broad market based on 2014 profit estimates, according to Thomson Reuters.)
• Key price levels held
At the low point of its decline, during a midday 2% swoon last Tuesday, the Nasdaq was down more than 9% from its March 5 high. But thanks to a massive reversal, dubbed "Turnaround Tuesday," which occurred right at its key 200-day price average, the Nasdaq was able to wipe out those daily losses and finish the week up 2.4%. The Nasdaq posted its fifth straight up day Monday and is now down just 5.4% from its 2014 high.
Walter Zimmerman, chief market technician at United-ICAP, says the Nasdaq's ability to avoid falling below that key level and into official correction territory, suggests the decline is history.
"I think the stock market correction is over," he says.
• Nasdaq pullback normal, healthy
Given the decent shape of the economy, the broad market doesn't look as if it will get dragged down by the loss of momentum in pricey growth stocks, says Rod Smyth, chief investment strategist at Riverfront Investment Group.
"I would be more inclined to look at this as a correction in an ongoing bull market," says Smyth. "Given the size of the Nasdaq's move higher since its last correction in November 2012 (a gain of 54%), correcting 8% or 9% doesn't seem like something to get alarmed about."
WHY BEARS SAY SELLING MAY NOT BE OVER
• Still-pricey valuations
Those momentum stocks that took a beating are still not cheap, which means they'll likely be subject to further bouts of selling as Wall Street looks to bring those pricey names down to more normal valuation levels, says Ann Miletti, senior portfolio manager at Wells Fargo Advantage Funds.
• It's not 2013 anymore
The market has lost its momentum, and investors should expect more ups and downs ahead, insists Bill Hornbarger, chief investment strategist at Moneta Group. More stock market weakness is possible, he warns, given the geopolitical risks related to the Russia-Ukraine crisis and a recent rise in gas prices.
"What we are telling our clients is that 2014 will be the opposite of 2013," he says. "Last year, the economy was just OK and the markets did really well. This year, we expect the economy to improve and the markets to be just OK."
• Bubbles are bursting
"The market is in a long-term topping process," says Richard Suttmeier, chief market strategist at ValuEngine.com.
His proof? Bubbles are bursting in many pockets of the market.
"The damage has been already done.," says Suttmeier. "Look at all the biotech and momentum stocks that broke. I see bubbles bursting in individual stocks, and individual stocks eventually equals the market."