Mid-Day Turnaround

This morning the stock market rose smartly, led by a huge rally in technology shares and strong gains in Asian markets overnight. Chatter about bubbles and crashes seemed to be giving way to a consensus that, irrational as it might be, the train was leaving the station and you had better get aboard. Bulls cheered as the S&P 500 and Dow both reached new highs. Then just after the lunch hour, attitudes changed. Tech stocks turned on a dime and headed down, ending the day lower.

Media reports blamed the sell-off on disappointing retail sales numbers, but that was already well-known hours before stocks began dropping. The catalyst for the tech sell-off appears to have been news that a Wall Street analyst had reduced his sales forecast for Baidu.com (BIDU), the so-called "Chinese Google." BIDU shares plunged and other tech stocks followed. The difference in the old forecast and the new one was only $2.2 million, but the symbolism was probably more important than the reality. Chinese stocks may not be immune from the law of gravity after all. BIDU is still up more than 200% this year, so shareholders can hardly complain.

In the last week, expectations for Federal Reserve policy have changed considerably, with the futures markets now indicating better-than-even odds that the Fed will keep rates unchanged at its next meeting on October 31. Given that stocks have climbed over the last week as well, the stock markets appears not be banking on lower interest rates. Investors seem to think that the Fed has achieved a nirvana state of perfect balance between economic growth and inflation.

The intermediate-term indicators are still solidly bullish for most domestic sector and style-based funds. Emerging markets like China are providing leadership for a global asset boom. We do not know when the real turnaround will come. For now, we think the best course is to hold on for the ride.