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Wall Street pulling back
as rally runs out of steamAnalysts say the stock market
was due for a correction after
six months of strong gains
NEW YORK -- Many Wall Street analysts believe what stocks need now is a correction, a significant pullback after six months of rallies. And the market's performance this past week indicates one might already be under way.
Stocks suffered three big selloffs over the course of the week, and the Nasdaq composite index incurred its biggest one-day point loss in nearly 15 months Wednesday, losing 58.02.
"We are up six months. ... Where do you go from here?" said Larry Wachtel, market analyst at Wachovia Securities.
Wachtel said the market had to come down somewhat, but it's still not clear whether this past week's declines were sufficient to count as a true correction. The losses were certainly considerable:
>> The Nasdaq shed 6 percent in its worst performance in 17 months, since the week that ended April 26, 2002, when the index plunged 7.4 percent.
>> The Dow Jones industrial average lost 3.4 percent. The last time the Dow had a worse week was six months ago, or the week that ended March 28, when the blue chips lost 4.4 percent.
>> And the Standard & Poor's 500 index finished down 3.8 percent, its biggest weekly drop in eight months, or since the week ended Jan. 24, when the index gave back 4.5 percent.
Because there is no technical definition of a correction, it's not clear whether the market has corrected or is in the process. Analysts say corrections typically aren't apparent until after they are over and stocks head higher again.
The major indexes are on pace to end September lower, in keeping with the month's reputation for starting out strong but ending with losses. Historically, September has been the worst month on Wall Street.
September is tough on stocks for a variety of reasons. Companies often curtail spending as the end of the year approaches. Individual investors often cash in some gains, believing stocks have hit their highs for the year.
Since 1971, the Nasdaq on average has lost 0.8 percent in September, according to the Stock Trader's Almanac. Going back to 1950, the Dow on average, has also forfeited 0.8 percent in September, while the S&P has given back 0.5 percent.
But September patterns aside, analysts were expecting the kind of declines seen this past week. With the market rallying since March, investors are concerned that stock prices are too high given a still fragile economic recovery.
And, while there has been strong economic data and a number of companies have raised their earnings outlooks, there are reminders of lingering weakness. This past week, for example, investors were disappointed by a bigger-than-expected drop in demand for durable goods.
On Wednesday, stocks endured steep declines following an unexpected decision by OPEC to cut oil production by a target 3.5 percent beginning in November.
Worried that higher energy prices will thwart the economic recovery, investors sold off stocks, giving the Nasdaq composite its biggest one-day point drop -- of 58.02 -- since July 1, 2002.
"The market has been due and a little bit overdue," for a correction, said Jeff Hirsch, president of the Hirsch Organization, publisher of the Stock Trader's Almanac. "It is running into a time of year when a lot of restructuring goes on."
But not all market observers buy the notion that Wall Street must correct before going higher or that this correction is the start of more steep declines.
"In the past, after declines like we have had in the past three years, there were some huge rebounds without very meaningful declines along the way," said Thomas F. Lydon Jr., president of Global Trends Investments in Newport Beach, Calif.
He cited the mid-1970s as a time marked by huge rallies and not much correction, or what those on Wall Street also call stock price consolidation.
"We may not see that correction that everyone is waiting on," Lydon said. "As individual investors, you have to look deep inside and say, 'Am I committed to long-term investing and if I am, what do I need to see to commit to the stock market once again?"
The Nasdaq had a weekly loss of 113.63, closing yesterday at 1,792.07.
The Dow ended the week down 331.74, finishing at 9,313.08. For the week, S&P dropped 39.45 to 996.85.
The Russell 2000 index, the barometer of smaller company stocks, ended the week down 34.91, or 6.7 percent, closing at 485.29.
The Wilshire 5000 Total Market Index, which tracks more than 5,700 U.S.-based companies, ended the week at 9,646.46, down 407.61 from the previous week. A year ago, the index was at 7,872.54.
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