Don't Measure a Bear With a Bull's Yardstick
By John Roque
Special to TheStreet.com
3/29/01 2:33 PM ET
I'm all for the currently popular "value" or "oversold" arguments. You know: The ones that go something like:
Stocks look cheap based on ...
or
According to this indicator, stocks are undervalued and ...
or
This indicator shows stocks are oversold, and has been successful at calling turns in the market five of the last six times the indicator has been this oversold.
But what hasn't been considered in detail yet is that most of the "cheap," "undervalued" or "oversold" arguments are a direct result of indicators that have been used in a bull-market era. And, as such, these arguments and indicators offer investors reasons to remain complacent.
Or what about the indicators that go back to the 959-day bear market that occurred from Sept. 12, 1939, to April 28, 1942? The problem is that people concentrate on recent events when making historical arguments and they often overlook significant eras.
Perhaps this is a misplaced digression, but this morning on sports radio WFAN, a caller stated that Duke University guard Jason Williams (who is a very, very good player) may go down as the best college player of all time. I'd wager this caller is not aware of some great college players like Lew Alcindor, Jerry Lucas, Oscar Robertson or Bill Walton (or, as my friend Scott says, "What about Phil Ford, David Thompson, or Charlie Scott?"). I don't mean this as a holier-than-thou statement, but most sports fans (and investors) are not historians.
I've heard the counter argument that:
Time frames are compressed now. Information is dispensed so rapidly that people make decisions quickly. Bear market time frames are going to be shorter because industries, companies, CEOs, and the Fed can, and should, react much more quickly to counter dislocations.
This is indeed a compelling argument. But the excesses that built up in the stock market during the prior few years had never occurred before. So it is reasonable to consider that even if by some mysterious and magical miracle the major indices and broader market stop declining today, the rebuilding process is going to take a long, long time. Longer than you want to consider -- because there is no evidence of any basing patterns.
Consider the following examples as guidance to how long a rebuilding process might be necessary:
Wal-Mart (WMT:NYSE - news - boards) gained about 350% from January 1989 to early March 1993. It then fell 41% from March '93 to early '95, and did not make a new high until mid '97.
Home Depot (HD:NYSE - news - boards) gained about 1,100% from December 1988 to December 1992, and then went sideways for 3 1/2 years before recording a new high.
The S&P Oil & Gas Drilling Equipment index rose more than 300% from 1976-1980. It then fell 71% from 1980 to 1986, and did not make a new high until 1996.
The S&P Drug Index rose about 225% from 1965 to 1973. From '73 until its low in '78, it lost about 38%, and did not make a new high until 1985.
In short, while a rally is possible at any time, I don't believe a sustainable rally is in store for stocks in general because there are virtually no base patterns around -- and bases provide the fuel for meaningful, tenured and durable rallies.
Most bottoms involve a retest of some sort. In other words, the V-bottom is not usually the way most bottoms are formed. Rather, it may be helpful to think of bottoms as processes, which involve time, and not events.
Some might say, "How can you expect a rally here when there has been no capitulation?" But this capitulation question has become very thorny, with everyone either looking for capitulation or dismissing the need for it. First off, it has been a great idea to stay negative on stocks while awaiting capitulation -- to date stocks haven't stopped going down, and volume hasn't soared. So the capitulation-waiters have been correct to stay sidelined.
But the Nasdaq has changed the rules, so to speak, regarding the double-counting of some volumes, so capitulation may not occur as many expect. For example, peak volume on Nasdaq was 3.1 billion shares on Jan. 3, and the average volume since that time has been 2.1 billion. Volume on the Nasdaq on March 22 was 2.46 billion, or 18% greater than the average since Jan. 3. Is that capitulative?
Who knows? It is just that most bottoms have occurred when volume has soared and become capitulative (i.e.-- "bid-wanted" situations, the dumping of stocks, etc.). Or, perhaps capitulation is already occurring this time, but in a cumulative sense. In other words, the constant and consistent selling that has occurred over time. This selling has caused the 21-day moving average of declining volume on the Nasdaq to rise to as much as 60% of its total volume three times in the past two months -- in late February, early March and again on March 19.
Just like we'll never know how many licks it takes to get to the center of a Tootsie Pop, we may never know how much volume is necessary for a capitulation-type effect. It is for this reason that I still believe it is a good idea to stay cautious |
