JW,
You and your friends here may enjoy this. This is from his public site. I stopped listening to Don, got caught in the April downdraft and have since got religion, i.e. I listen to other than those who say the market only goes up! lol! The bottom line is to cut your losers and ride the winners. The truth is that it is easier said than done. Good luck to you. Va. remains between Ma. and Fl.
Click here: Financial Services-Hays Advisory Group
(http://www.haysadvisory.com)
Don Hays
The Denial Phase Has Ended
I am really enjoying writing this monthly commentary for the general public part of our web site. For the last 23 years I have alternated from writing and recording a morning market commentary to my current pattern of writing one three times a week for my web-site and clients. I'm one of those fortunate people that love their job. But in this intense market analysis, sometimes you get so involved in the day-to-day market analysis that you almost forget what conditions were a month ago. So this new exercise gives me the opportunity each month to go back and review the previous monthly comments to refresh my memory of prior conditions and comments. This is month number 5 for our monthly comments, and there probably has been no other time in US history when so much has happened in the market in such a short period of time. And much of the action has been done under a camouflage that almost obscured the real personality of the market. I covered that last month in the chart and commentary that illustrated the percentage of stocks that trade on the New York Stock Exchange that have been trading above their 200-day moving price average. Many professionals use the 200-day moving average as the dividing line, with stocks that are trading above that average considered in a healthy bullish (strong) trend, and stocks under that average being in an unhealthy bearish (weak) trend. That chart illustrated the bull market myth that has been so popular in the last two years. The chart shows that the majority of stocks hit their peak of bullish patterns 30 months ago, in November 1997, and have been faltering ever since, even though the popularly covered indices continued making persistent new highs.
Then in our March edition, with the NASDAQ composite index--heavily weighted with big-cap technology companies--moving above the 5000 level, and achieving a 265 price-earnings ratio, I shared a few thoughts how the Federal Reserve and the revered Alan Greenspan's runaway money supply had fed this feeding frenzy of speculation, but that game was about over. Despite the new high by the NASDAQ, the Dow Jones Industrial Average and most other indices had made their high three months earlier. In hindsight, that did prove to be the month that burst the speculative bubble of the NASDAQ, and began what I believe would prove to be the first phase of the bear market in that "New Era" index.
That's enough review for this column, so let me get to a little description of bear markets. In many ways the stock market has not seen a traditional bear market in at least 10 years, and by some definitions in the last 20 years. I believe that we now are in the beginning stages of a good old-fashioned bear market. To help those of you who didn't invest in those days of 1960-1984, let me describe what a bear market looks like. It always begins with a huge flurry of positive news, with corporate earnings reaching new records. Everything is wonderful, and everyone knows that these conditions are going to last indefinitely. For that reason, savings levels go down, and consumer spending goes up. Everyone has a job, and the phones are ringing off the hook trying to entice you to come work for another firm that offers special signing bonuses or perks to join up. Obviously, you are a genius, and you need to look like one in a new car, new clothes, and new and bigger house. To finance these items, all you have to do is to buy stocks. Since so much of your money has gone into houses, cars, clothes, etc. you know that you should leverage your stock purchases to help yourself get rich enough to pay off your debts, and the brokerage houses and banks are eager to loan this new genius money to finance more stocks. No risk, since stocks ALWAYS go up.
This certainly fit the pattern of last March, with margin debt (debt financed through brokerage firms using stock as collateral) exploding, a price/earnings ratio for the NASDAQ reaching an unheard of level of 265, consumer sentiment at historic levels, and the economy so hot that the unemployment level dropped to 3.9%. At the same time, another indicator hit a level that in the past has always been a prelude to a change of trend, from a hot economy to a much slower economy. This indicator is called the "Quit" ratio, and measures those workers who are voluntarily leaving their jobs. That means they are confident they can get a better job, with higher pay, better benefits, and more signing bonuses than their current job that does not appreciate their true genius. In all times in history, that this "quit ratio" has moved up to 15% of the total workforce, it has been a sign that the Federal Reserve was going to about to cool off this major inflationary trend. Almost immediately after our March commentary, the NASDAQ began a sharp decline that reached its lowest interday level on May 24. From its high of 5132 reached on March 10, 2000, it dropped to 3042, a 41% loss. This certainly has cooled the speculative fever some, but still the television shows (and many Market Strategists) were still having a hard time telling whether this was a bull market or a bear market-hence the name denial phase.
To get back to the description of a typical bear market, there are generally at least three phases. Between each phase there is an interlude when the market moves back up some, but each of those interludes serve to usher in the next bearish phase. Phase II is described as the "concern" phase. In this second phase the first sign of weaker corporate earnings begins to creep in. During the interlude investors actually become more optimistic, because their biggest fear up to now had been a Federal Reserve that was going to continue to raise interest rates. But now the news is showing a slowing economy, so that dominant threat is being diluted. Good news, right? Only for a few weeks, but it does serve to allow a few weeks or months of a rally. As noted in our title, I believe we have started that interlude. I do not expect the NASDAQ index to make up more than about 50% of its decline, but believe that one more big cloud of camouflage could even lift the Dow Jones Industrial Average to one more all-time record high before the Phase II of the bear market begins. Putting an exact time for the end of this "interlude" is frivolous, but here I go anyway. My guesstimate is that the second bearish phase will begin by late July of this year.
So what should an investor do? As we have been suggesting since our first report in January of this year, every investor should arrange his or her portfolio in a defensive posture depending upon your risk/reward tolerance. If you have fallen victim to the herd mentality, and find yourself very much over-exposed to equities, I strongly recommend that this interlude rally be used to perform defensive portfolio adjustments.
That's enough "bear market" explanations for now, but in the months ahead I will continue to complete the description of the bear market's third phase that is described as the "capitulation" phase. It is longest lasting, and the most destructive as the final bulls turn to bears. That will produce our buying opportunity, and if I am right perhaps the most exciting buying opportunity in the history of stock markets. So stay tuned, but for now get defensive.
Don't be fooled by the "denial" rhetoric in these next few weeks.
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