Microsoft Slams Stocks; Sideways Trade May Last Some Time Yet

NEW YORK (MarketWatch) -- With even Microsoft Corp. unable to predict the future, the market is likely facing for weeks to come a steady stream of companies offering equally murky views of the year, in what analysts say is part of the bottoming process for stocks.

"You've had positive news -- Apple -- and negative news -- Microsoft and EBay -- and, while good and bad, mostly bad, the stock market has just traded sideways for about three months now," said Dan Greenhaus, equity strategy group, Miller Tabak & Co.

This, he added, "is what you see as markets enter a bottoming process."

Others see the same process in the economy.

"The difficulty for the market is on the one hand, the economic data is dismal, and we get reminded of that on an almost daily basis. However, there are some early indicators we might be in a bottoming process for economy," said Michael Sheldon, chief market strategist at RDM Financial Group Inc.

Those early indicators include mortgage rates falling back below 5%, and improvement in the TED spread, which measures financial stress, from 4.6% after Lehman Brothers went bust to around 1%, said Sheldon.

Thursday afternoon, the market staged a sizeable comeback from losses that followed a pre-opening jolt when software titan Microsoft reported an earnings drop and said it plans to shed as many as 5,000 workers. It declared itself unable to offer a forecast for the remainder of 2009, citing economic uncertainty.

"We've been rallying since noon and rallying quite hard since 1:40 [p.m. Eastern] on the backs of financial and tech names which have come off their lows considerably," said Greenhaus, who gave Microsoft, IBM and Ebay Inc. as examples.

Meantime, Apple Inc. pulled close to its high of the day, And in the financial space, Morgan Stanley and Goldman Sachs Group Inc. took off, "and the market followed suit," said Greenhaus.

EBay Inc. reported its first-ever earnings decline after Wednesday's market close. .

Bucking the negative trend, Apple Inc. reported quarterly profit that topped expectations, with its shares rising 7.2%.

The patchy results overall -- combined with bleak economic data on jobs and housing -- had the Dow Jones Industrial Average falling roughly 250 points, and more recently off 152.29 points, or 2%, at 8,075.81, with 28 of its 30 component stocks trading in the red.

The S&P 500 declined 17.21 points, or 2.1%, to 823.03, with financials once again pacing the losses that stretched to include eight of the index's 10 industry groups.

The Nasdaq Composite declined 45.95 points, or 3.1%, to stand at 1,461.12.

Bear bottoms

Looking back at previous bear markets, the so-called 'V-shaped bottom' doesn't generally appear to be in evidence. Instead, equities fall to "whatever level becomes the bottom, then [engage in] horizontal trading" for a period of time, said Greenhaus.

Once the stock market found its bottom in 2000, it moved sideways for about 11 months, while the 1990 bear market involved six months of lateral trade, the analyst said.

Depending on the length and depth of the recession, "we could trade in this channel for two years. We have to consider the possibility that we could trade laterally for longer than most people think," said Greenhaus.

For the S&P, Greenhaus expects the trading range to be from about 800 to 1,000.

"At 740 (for the S&P), the market started to get a handle on valuations going forward, if you assume earnings going forward are $60.00, and the market tends to find a bottom at 12 or 13 times forward earnings, saying 60 times 13 is 720 - 12 or 13 times 60 bucks is about where the market found a bottom," he said.

"If you assume market is going to earn 60, 65 bucks going forward, then fair value is reached in upwards 700s. That said, if this current recession proves deeper and longer, and we have continued earnings revisions o the downside, that would further depress stock prices. That is the issue going forward, to what positive effect do these government moves have?"

To that end, Thursday's session included a Senate panel's approving Timothy Geithner to be the next Treasury secretary, with the nomination now moving to the full U.S. Senate.

"As we get closer to the confirmation of Geithner as the new Treasury secretary, that could help lift market spirits as hopes for the second part of TARP (Troubled Asset Relief Program] comes into focus along with the quick passage of the Obama stimulus package," said Cardillo.


By Kate Gibson