Nasdaq Composite braces for its worst year ever

"The day before and after Christmas have a huge statistical probability of posting gains," said an analyst. "You can look it up. "But fundamentally, I don’t think we’re out of the woods," he added. "In fact, I wouldn’t be surprised to see another big downdraft after this bounce." Investors are going to face a pretty steady diet of profit warnings in the intervening trading sessions, if the recent trends are any indication.

"Normally, in the week before Christmas and the week after, you don’t get many warnings," said Charles Hill, director of research at First Call, which tracks trends in earnings reports. Last year, for example, 28 companies issued earnings warnings the week before the Christmas holiday, and 21 weighed in the week after.

But this year, First Call tracked 96 warnings the week before Christmas, and that figure had increased from the 85 in the preceding week; normally, the figure would go down. While it is difficult to project how many warnings Wall Street will see, it figures to be more than last year’s holiday trough. The cumulative effect of all these warnings has been devastating to the market, market watchers said.

"Investors have been scared to death by this market," said Philip Orlando, chief investment officer at Value Line Asset Management. "They buy a stock that they think has hit a bottom, and next thing they know, it’s gotten crushed again." Stocks such as Xerox, which has traded below $5 on a wave of earnings warnings, or Lucent Technologies, which, traders said, has been given up for dead, are just two examples of the companies that have been serial offenders on the warnings front.

Others, such as Gateway, initially defended their profit performance, only to subsequently acknowledge that the skeptics, not the company, had been right. That has destroyed equilibrium and confidence in the market. "The towel’s been tossed in for 2000," said Thomas Galvin, chief investment strategist at Credit Suisse First Boston.

How did it get to be thus? After all, last year’s performance by the Nasdaq composite proved to be one for the ages – up a stunning 85.59 per cent, the biggest year ever. To go from first to worst is something commonly seen in professional sports, not investment. But the fundamentals have been very challenging: the Federal Reserve only this week ended the cycle of rate increases after six; the economy’s growth has slowed from an 8 per cent rate earlier this year to less than 3 per cent in the third quarter; and profit growth has winnowed damatically. Estimates of fourth-quarter profit growth for companies in the Standard & Poor’s 500 Stock index have fallen from a 28 per cent target on October 1 to the current projections of less than 8 per cent.

The rebuilding from these challenges could be painfully difficult. The Fed may help, but even if it starts cutting rates next month, the benefits may be far off, analysts said. The next near-term target, on a technical basis, for the Nasdaq Composite Index stands at about 2950, about 17 per cent higher than Friday’s close, according to Peter Green, a trader at Gerard Klauer Mattison. But even that is an interim target; by the end of the first quarter of the year, the index couldbe back at the 2500-point mark again.

That’s actually fairly upbeat, compared with the analysts who fear the index may fall another 50 per cent from here. In and of itself, that kind of pessimism actually helps, from a technical standpoint, because as bearishness builds, the market’s technical characteristics improve. In effect, technicians argue, if everybody turns bearish, there is nobody left to take stock prices lower. "We’re getting more constructive characteristics," Green said. But he is a reticent optimist at best. "We’ve seen a lot of damage done to this market."