Sunday April 16 3:35 PM ET

More Pain Seen Before Any Gain

By Eric Wahlgren

NEW YORK (Reuters) - Fasten those seat belts -- again. Another spasm of selling is seen seizing the U.S. stock market early this week before the buyers with the nerves of steel tiptoe back in, looking for big markdowns among old and new economy issues alike.

Although Wall Street pros expect the market to bottom out mid-week after Friday's apocalyptic drop, before then stocks could dive some more as investors who borrowed money to buy stocks may be forced to sell when faced with margin calls.

``I think we are probably going to have a weak opening and a few margin calls,'' said Peter Canelo, U.S. equity strategist at Morgan Stanley Dean Witter & Co. (NYSE:MWD - news), on Sunday. ``I expect some attempt at a bottoming in the middle of the week. But even if you see a low in the technology stocks, I don't necessarily think that it necessarily means we are going back to the races. It could be an extended consolidation in the 'new economy' stocks that could take us through the end of the year.''

With the stock market sinking faster than a brick tossed into Manhattan's East River, even strong corporate earnings reports, usually a dependable pick-me-up for share prices, are expected to do little this week to stop the plunge. For what it's worth, nearly 200 of the 500 companies in the Standard & Poor's 500 index (^SPX - news) are set to trot out their earnings reports over the next five sessions, including two of the Dow average's newest components, software giant Microsoft Corp. (NasdaqNM:MSFT - news) and Intel Corp.(NasdaqNM:INTC - news), the world's No. 1 chipmaker.

But consider the lot of Sun Microsystems Inc. (NasdaqNM:SUNW - news), which fell 1 1/4 to 76 1/2 on Friday, despite estimate-topping earnings from the leading maker of powerful computer servers used to run Web sites.

``There is just so much nervousness out there,'' said Larry Rice, chief investment officer at Josephthal Lyon & Ross, referring to the broad rollback. ``It certainly can't be Sun Micro's earnings.''

Alan Newman, technical analyst at H.D. Brous & Co. in Great Neck, N.Y., also predicted another downdraft before the market settles a bit.

``I suspect a lot further on the downside. Over the short term, I would expect some kind of bottom,'' Newman said.

``We just cannot keep going down at the same rate every day.''

U.S. OFFICIALS AFFIRM U.S. ECONOMY

FUNDAMENTAL ARE STRONG

Giving Wall Street motion sickness on Friday was the Dow Jones industrial average's (^DJI - news) record one-day point drop of 617.78, or 5.66 percent, to 10,305.77, as financial stocks erased all their recent gains.

More dramatic still, in percentage terms, was the Nasdaq composite index's (^IXIC - news) plunge Friday of 9.67 percent -- also a record one-day point decline of 355.49 -- to 3,321.29, as investors continued to bail out of high-priced tech shares.

The catalyst for throwing stocks overboard had been a stronger-than-expected Consumer Price Index figure for March that showed inflation at the consumer level rose at a much faster rate than anticipated. Core CPI, which excludes volatile food and energy prices, jumped 0.4 percent in March -- its biggest gain in more than five years.

But over the weekend, U.S. officials, including President Clinton and U.S. Treasury Secretary Lawrence Summers addressed the market's gyrations, saying the outlook for the U.S. economy was positive.

``I think that the investment climate and the markets will take care of themselves,'' Clinton told reporters covering his visit to California's Sequoia National Forest. ``I think that they'll go up and they'll go down, but I think long-term trends are quite positive.''

Summers, speaking after a session with officials attending the meeting of the Group of Seven top industrial nations in Washington, said fundamentals of the U.S. economy remained strong.

Although stunned by the fury of the recent selloff, top Wall Street strategists warned about overblowing the market's moves, saying the major indices had perhaps traveled too fast in too short a time.

Although the Nasdaq has fallen 34.2 percent from its March 10 high of 5,048.62, it is still above its closing level of 2,806.84, just six months ago on Oct. 14. The 30-stock Dow average, which is 12.1 percent below its Jan. 14 record of 11,722.98, is still ahead of where it was a little more than a month ago.

``To the extent that the market is now lower, we think that there's a higher price appreciation likely from current levels,'' said Abby Joseph Cohen, Goldman Sachs' (NYSE:GS - news) investment strategist, speaking on CNBC after Friday's carnage.

Cohen's decision to trim the proportion of assets she advises clients to keep in stocks contributed to the recent selloff, along with the renewed inflation fears and a few profit warnings from high-profile technology companies.

INTEREST-RATE FEARS TO WEIGH ON STOCKS

With March housing starts and April manufacturing activity in the mid-Atlantic region about the only data due out this week, the market will have little economic news on which to gain some traction, analysts said. Instead, analysts see more angst ahead about the rise in the CPI's core rate, which excludes volatile food and energy prices. The core CPI, up 0.4 percent in March, scored its biggest jump since January 1995.

The news on Friday reawakened old fears that the Federal Reserve may jack up interest rates by a more aggressive half a percentage point to snuff out inflation when the central bank's policy-makers meet again on May 16.

Until recently, Wall Street had been resting easy with the notion that the Fed would opt for no more than a modest, quarter of a percentage point increase. The Fed has raised rates by that amount -- or 25 basis points -- five times since June in an effort to slow U.S. economic growth.

``I think the biggest concern is that people can't figure out what the Fed will do,'' said George Rodriguez, senior vice president at Guzman & Co. in Jersey City, N.J. ``With the numbers that came out, there is a fear that the Fed may increase rates by more than a quarter of a percentage point.''

The interest-rate future remains cloudy. The central bank has singled out the rising stock market as one of the reasons for strong consumer spending, the main engine of U.S. economic growth.

But Wall Streeters said the broad pullback does not suggest the Fed may conclude their work is done for a while.

``I think the markets will be concerned that the Fed will do more with interest rates,'' Morgan Stanley's Canelo said.

``But given the decline, the staff of the Federal Reserve that believes the market has been fueling the demand may be a little happier.''

Despite last week's stock pounding, which intensified when the Dow -- the sponge that had been sopping up all the money flowing out of the Nasdaq -- fell with such vengeance, Wall Street experts still see strength in blue-chip stocks.

Recent strength in the bond market should help old-line shares, especially interest-rate-sensitive issues such as those of financial services companies, mount a rally, analysts said. But tech shares, they added, may remain shaky until Wall Street works out what's a fair price for a piece of the new economy, especially for companies with bold prospects but little or no earnings.

``I think you will see investors getting back into the market ... (but) maybe not as aggressively as they were getting in three months ago,'' Rodriguez said. ``There are going to be some tremendous values out there.''

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-- Carl Jenkins (Somewherepress@aol.com), April 16, 2000