Don Hays calling last week's rally a "dead bull bounce." Sees NAZ at 1400 this year.
Don and Zeev going head to head:
April 22, 2000
Market Bull Rebirth? 'Dead Bull Bounce'?
REUTERS INDEX | INTERNATIONAL | BUSINESS | TECHNOLOGY
Filed at 5:15 p.m. ET
By Reuters
NEW YORK (Reuters) - When the stock market rose from the dead this week, was the bull
market reborn? Or was it the story of the ``Dead Bull Bounce'?
Investors braced for ``Meltdown Monday' after last week's record-setting stock plunge. But it
never happened.
It was a quick and dirty correction. The Nasdaq composite index erased the memory of last
Friday's record point drop of 356 points with record gains of 218 and 254 points on Monday
and Tuesday, respectively.
The Dow Jones industrial average wasn't left behind as it zoomed 277 points on Monday and
185 points on Tuesday -- after Friday's worst one-day point drop ever, a bone-jarring
618-point loss.
But experts warn that this incredible volatility should not be ignored. The market is sending
an important message to investors.
``It's another one of those fake-outs,' said Don Hays, president of Hays Advisory Group, a
long-time bear.
``Psychology does not change overnight and typically when we get these market breaks as we
had during last Friday's climatic day, you tend to draw in those 'buy the dip' followers -- the
biggest herd in the history of the stock market,' he said.
Ned Riley, chief investment strategist of State Street Global Advisors in Boston, said the
market's slide was a warning shot across Wall Street's bow.
``While the ship is still floating, it's moving at a slower pace,' he said.
``I think there's another setback coming after we've had two very sharp corrections in
two-and-a-half weeks,' Riley said. 'I give all the credit to those that have said they would
always buy on the dips for the rally. But I have to question that philosophy, and when and if it
can be sustained by a change in the stock market and the economy.'
Indeed, there is evidence the economy is slowing. The five interest-rate increases by the
Federal Reserve since last June are taking their toll.
In the latest snapshot of the economy, housing construction -- one of the engines driving
America's growth -- took its steepest dive in six years last month, falling 11.2 percent as
mortgage interest rates ticked higher.
Hays said the brief but nasty market downturn had signaled the undoing of the ``pyramid.'
``We had a pyramid scheme for a while in the market. The more the market went up, the more
people loaded on their margin debts to buy more stocks and it kept getting built even higher,'
he said.
``Now, the market strategists who had been right in preaching the buy-the-dip gospel for the
last few years were back at the pulpit, telling their disciples the market is a screaming buy,'
Hays said.
The ``buy the dip' believers' favorite indexes have been the Russell 2000 small-stock index,
which is down 21 percent from its March high, and the Nasdaq composite, off 28 percent
from its peak on March 10, he said.
Hays' bet: The market will again come under the gun and revisit another ``short-term bottom
within the next two weeks that will lead to a two-month market consolidation with little upside
potential.'
He said the Nasdaq will be the spoiler as it retraces back to 1,400 by the end of the second
quarter. But even at that level, the market would still carry a high price/earnings ratio of 75
versus a normal P/E of 30.
``Despite the big selloff, I still don't think that those bullish people really believe that the bull
market is over,' said Hays. ``Abby Cohen, Goldman Sachs' stock strategist, consoled them,
and Donaldson, Lufkin & Jenrette patted them on the back by raising its asset allocation in
stocks and everyone was running with the bulls.'
But watch out for the next step.
``Here's how bear markets start,' Hays said. ``The first phase will drag the Nasdaq down by
several hundred points through the recent low. But the second phase, possibly by
mid-summer, will hit all stocks -- Dow and Nasdaq -- with massive capitulation that will wash
out the remaining bulls.'
For the year, the Dow is down nearly 6 percent. But the worst performer is the
technology-laced Nasdaq, which is down almost 10.5 percent for the year after being up 24
percent at its March 10 high of 5,048.62. The Nasdaq hovers at 3,643.
``The price action versus the emotion in this two-week bear market suggests that it's the same
ballgame all over again,' said Riley. ``Most people are continuing with the strategy of buying
Internet, techs or anything that is related to that sector of the marketplace, and ignoring the old
economy stocks.'
Safety in numbers?
``It's a lemming-oriented market with these tech-alcoholics,' he said. ``But the more the
market bounces on that kind of a mindset, then the less valuation matters and the greater the
vacuum one creates by this dichotomy that continues to exist.'
The one good thing that came out of the recent rout was that the seasoned value managers --
Wall Streeters who lost their jobs for underperforming the market because they stuck to the
old rules of buying stocks that have real earnings -- finally got vindicated.
But it was an entirely different story for the Young Turks who specialize in the ``new
economy' stuff as their stocks melted down 30 to 60 percent.
This new generation of traders had never seen the teeth of a grisly bear market, as temporary
as this one was. Most were in high school during the 1987 stock market crash that wiped out
nearly 23 percent from the Dow average.
For the last couple of years, stock picking has been a dart-throwing sport, with the goal to hit
the right names, usually the ``sure' winners such as dot-coms, biotechs or just plain techs.
``These traders have had wonderful ego trips because they've been right so many times,' said
John Geraghty at North American Equity Services. ``They had never had to survive in a
hostile market because they had never had to do anything but trade in a one-market direction.'
But the experienced and seasoned traders who have dealt with both bear and bull markets are
perfectly able to ``hedge up' in an adverse market situation. Their tools include options, short
sales or dollar-cost averaging.
``Those people are a dying generation,' Geraghty said. 'Now you have 'quick buck' day
traders and money managers who have to perform and keep pace with the once high-flying
Nasdaq. But they can only trade from the long (buy) side of the market. They don't have the
tools to deal with a down market.'
As they say on Wall Street: Bull markets make geniuses out of everybody. In bull markets,
everyone has the right answers. But bear markets humble people.
Time is running out on the nouveau traders. Wall Street is a place where money is made and
lost.
``I don't think they have the time to learn the art of trading in a two-way market,' Geraghty
said. ``For years, they've sharpened their skills of trading in a simple bull market. But the
market is now taking away their equity and they don't have the tools to defend themselves.
The volatile market is here, NOW. It's no longer a theory. It will stay that way for some time.'
For the Easter holiday-shortened week, the Dow Jones industrial average was up 538.28
points at 10,844.05. The Nasdaq composite index gained 322.59 points to 3,643.88 and the
Standard & Poor's 500 index was up 77.78 at 1,434.54.
(Questions or comments can be addressed to Pierre.Belec(at)Reuters.Com). |
