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Strategies & Market Trends : Booms, Busts, and Recoveries

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To: tradermike_1999 who started this subject	12/21/2000 7:50:31 PM
From: tradermike_1999	Read Replies (1) of 74559

wrote this last night: Today was a complete disaster. That is probably an understatement. This Nasdaq slide has been worse than what we saw in April. 1 out of every 5 Nasdaq stocks made a new 52 week low today, including Cisco and Microsoft. It was coming. Even though the Nasdaq fell a lot in October and November it never had the fear and climatic type of selling that marks a real bottom. People remained wildly optimistic according to investor surveys and put/call ratios and seemed to just want to hope it would go out. I remember day after day I'd watch the Nasdaq fall and the VIX indicator(nicknamed the fear index), which measures the premium investors are paying for options fall at the same time, indicating complacency in the stock market. We are finally getting that fear needed to make a bottom, but it is an ugly and horrible process. The hope has turned into panic. This is a brutal washout that is going to ruin tens of thousands of people. No one can guess with any accuracy where the bottom is going to be. The selling is reaching full blown panic levels and anything could happen. It could fall 50 points and bounce tomorrow or it could fall 300 points. Sounds crazy, but it could happen. That is not much help to you, but it is impossible to say anything with any certainty at this point. So what do you do now? If you are short just move the stops down when the market opens tomorrow. Put the stop at around this afternoon's high. If you are still in by tomorrow afternoon move them down to tomorrow's intraday high. As for going long I'm not going to try. There is no way you can guess the bottom and any rally that comes could collapse on you. Once this market does put in a real rally and bounce it will probably have to come back down near the low and test it. Make a double bottom so to speak. So the rally will be shortable. But if it then bounces above the next "bottom" it will be worth buying. That is when I would then go long(in fact I plan on doing that, but it won't be for a few days so I'll talk about that then). Once the market forms a bottom will it last? Is it one worth investing for the long haul on? You could, but it could be a very long time before it pays off in any meaningful way. Personally if I do go long I'll take profits on that rally. The problem is that even if we get a permanent bottom in the next few days it could be at least 8-12 months before the Nasdaq recovers from this collapse and goes into a bull market phase and it may take even longer. A lot depends on how long this economic slowdown lasts. Look at the two charts above. Both the Nasdaq and the S&P(this is not just a tech selloff) are in bear markets. Both are below their 150 day moving averages and it is going to take at least 8-12 months for them to go above them in any meaningful way. Even if Greenspan were to cut interest rates tomorrow it will take a long time for the markets to digest these losses. That means that the Nasdaq will have to drift and churn for months before it can morph into a bull market. So even if you can buy right on the bottom the money you invest is likely to be dead money for months on end. In the meanwhile you can get a better return in bonds or a money market fund. Another point, and this is just as important - the stocks and companies that will lead the next bull market are going to be different than the ones that were hot this time. You can't tell what they will be now. I'd rather keep my money on the sidelines and wait for stocks to consolidate and buy the next bull market leaders than throw my money into what might remain duds. That said, I still see that there will be plenty of opportunities for short term trading, but I wouldn't try to invest for the long haul in tech stocks right now. There are two things I'm thinking as I look at those two charts above and gather my thoughts together tonight. One is I know people are getting wiped out now. I hope you are not one of them, but odds are that many people reading this are feeling a lot of pain. Last night someone came up to me and asked me if they should buy Etoys. I told them no - "don't touch it you'll lose every penny you put in." They then told me that they had bought shares of it at $5 and they bought more on their brokers advice. It has fallen so low that it would now cost them more in commissions than what they would get for the shares. That's how bad things are. There are a lot of Internet and technology stocks like ETYS that will never come back. If you are in those you'll just have to accept those losses and chalk them up as a lesson learned. If you are in real companies that have profits and earnings and are in for the LONG HAUL than I wouldn't worry to much now. It's frankly too late. In the worst case they'll be back to this year's highs in a decade. Probably much sooner than that. It's not the end of the world. The second thing is something I have already alluded to - it is going to take time for this market to come back. Look at the charts above. This slide has been horrible. I've said before that I'm looking forward to the time when the market first enters a bull phase and I can invest for the long haul. When you look at the chart you can see that this is just one day in many. Look at a chart that stretches back to 1900. We've had a lot of bear markets and several stock market meltdowns. They all came to an end eventually. Today was just one day.

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