thestandard.com Desk Diary: Lost in the Dark
By Donald L. Luskin - MetaMarkets.com
May 11 2001 06:39 AM PDT
Without any reliable information to act upon, some investors are 'seeing things' and making moves they soon regret.
A week ago I wrote here that the Nasdaq's highs of Wednesday, May 2, marked the closing bookend of the Nasdaq's fabulous bull run that carried it 35.6 percent from the bottom on April 4. So far I've been right. From May 2 through yesterday's close, the Nasdaq has dropped 4.1 percent.
Since the top on May 2, five out of six trading sessions have begun with major gap openings. Of those five gaps, three were to the downside and two were to the upside. And two of those gaps - one on the upside, and another on the downside - were completely erased by the end of the day on which each occurred, with the Nasdaq closing in the opposite direction of the gap.
This choppy, erratic behavior is typical of turning points - in this case, a top. This time around it's driven by a desperate desire for information and the near total inability to get any - information about the direction of the economy, and information about the ability of wiped-out technology companies to recover to any semblance of their former greatness.
And in the absence of information, even the remotest clue gets greedily and fearfully blown up out of all proportion, acted on hastily, and then immediately regretted. Thus a market that can't keep its mind made up from one hour to the next, a market for which there is no lasting reality.
Remember sensory-deprivation tanks, the craze from the 1970s? You closed yourself up in a tank filled with body-temperature water, floating in silence and darkness. After long enough without any sensory input you'd start to hallucinate. Hey, it was fun, and it was legal. And that's what this market is like. In the absence of information, investors are starting to hallucinate.
Consider the near-hallucinatory, industry-wide upgrade yesterday of semiconductor equipment stocks by Morgan Stanley's analyst Jay Deahna. Released before the opening, it sent stocks such as Applied Materials, ASM Lithography, KLA-Tencor, Lam Research, Novellus and Teradyne soaring. Deahna upgraded every one of them to a rating of "strong buy," forecasting "40 percent plus upside in the next 12 to 18 months." Deahna's report was called "The Train Has Left the Station."
That's right, "The Train Has Left the Station." Could he have chosen a phrase better calculated to stampede greedy bulls and scared bears into hasty and ill-considered action? I suppose he could have said "All aboard." Well, actually, he did say that elsewhere in the report.
Why the upgrades? The only fact-based rationales for the upgrades were that cancellations and push-backs have "mellowed," and the citation of entirely speculative comments from companies in the industry (which themselves may not be fact-based). According to Deahna, Lam and Novellus have commented that orders may begin to rise in the second quarter, Intel has made positive comments about the PC industry, and some foundries have commented that utilization rates will likely bottom in the second quarter. Other than that, it's all based on a combination of charting, historical cycles, assumptions about the global economy, guesses about what other analysts will say - and the simple fact that, here in May, all these companies' stocks have already significantly recovered from their December or January lows.
It's fun, and it's legal. But unfortunately, all these stocks opened at or near their highs for the day, and closed at or near their lows - two of them (Applied Materials and Novellus) actually down on the day. That's because not more than an hour or two after Morgan's report hit the street, Credit Suisse First Boston, Goldman Sachs and Merrill Lynch were all out with withering critiques of Deahna's analysis.
But their critiques were based only on their own particular hallucinations, which are no better or worse than Deahna's. The fact is, we're all stuck in the sensory-deprivation tank together.
We just don't have the inputs we need to make reasoned decisions at this point. We're lost in the dark. We ain't got no visibility. There's a word for that in investing: risk. And markets don't like risk.
And that's why this move is just a bear-market rally. All the rest is just hallucination. |
