I'm curious about that myself ...... I think that many are trying to look past the negatives are trying to be
contrarian about where stocks will go. Don Luskin wrote a really nice article that highlights that even with
us most likely in a bear market we could still have some very powerful rallies.
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Hope Is Not a Strategy
By Don Luskin
Special to TheStreet.com
4/16/01 9:03 AM ET
Since the April 4 lows through Thursday's close, the Nasdaq Composite has risen 21.1%. And from the March 22 lows, the Dow Jones Industrial Average has risen 11.2%. That's enough to really get your attention -- and to make you really mad if you missed it. It's enough to make you ask whether this is just a bear-market rally, or whether this could be -- I'm not sure I should dare to say it out loud -- something more.
How quickly the mass psychology has changed. A month ago, my email-box was stuffed with smug "I told you so's" from the bears, with the most strident self-congratulations coming from the recently converted ones. The message was always "I'm so smart to have gotten out!" Now those guys aren't sending so many emails -- funny, but they go silent on me when the only possible message is "Oh my God, I can't believe I sold that!"
Calling It Like It Is
Now my email-box is brimming with angry "Get on the bandwagon" notes from bulls who are furious with me for arguing that we're in a bear-market rally and for being so disloyal to the tech-stock cause as to have a couple of small short positions in networking and semiconductor stocks. After I expressed my skepticism about the rally on my weekly appearance on CNNfn's "New Economy Watch" show Thursday, I even got flamed for trying to talk down the market so I'd make money on my shorts. Well, let me set you all straight: I may have a couple of short positions, but the funds I manage are long, long and more long -- and they always are, by their stated investment policy. That's hurt plenty over the past year, so believe me when I say that I haven't the slightest interest in talking the market down!
I say that this is a bear-market rally because this is a rally and we're still in a bear market. It's that simple.
When I see the catalyst that changes the overall course of least resistance for stock prices from down to up, I'll proclaim it from the rooftops. Right now, there ain't one. Yes, little rays of hope are certainly out there, and one or more of them may mature into a catalyst. I've written about them extensively here.
Bottoming pattern in gold, indicating that the deflationary spiral may be slowing down.
Long bond yields trading above the fed funds rate for the first time since the top last March.
Senate Majority Leader Trent Lott talking about deflation-fighting on the floor of the Senate.
Slowdown of order cancellations and increase of new orders with optical networking component makers.
Over-adaptation by traders to surviving in a bear context.
The statistical evidence that the "rubber band has been pulled back too tight."
And I've been all over this rally, too, from the very beginning. I just don't think it's necessarily the birth of The Great New Bull Market. If that makes me disloyal to the cause, then so be it.
And don't tell me that "there's never a catalyst," or that "the market always turns before the good news starts to come out." If that's what you think, you're throwing big words like "never" and "always" around too easily to cover up the fact that you've got nothing to go on. The height of that mind-game was when Salomon Smith Barney's semiconductor analyst upgraded the whole semiconductor sector last Wednesday -- his entire thesis in a nutshell was "There are absolutely no bookings. I've never seen it this bad. It can't get any worse. It's got to get better." Sorry, but that flies in the face of one of the iron laws of investing: Hope is not a strategy.
I'm not trying to bring you down if you're bullish right now. I'm just trying to make you think -- not just feel.
Semantics Don't Matter
But as a practical matter, I'm not sure it matters whether we think of this move as a bear-market rally or not. The markets are so extravagantly volatile that even countertrend moves like the bear-market rally we are in right now can make you some real money. A bear-market rally in today's context can be as large a move as a whole bull market in years past!
So there's no edge in getting hung up on semantic distinctions that were created in ancient market environments that have little resemblance to today's. Take a look at this weekly chart of the Nasdaq Composite and you'll see what I mean, based on nothing more than simple technical arguments.
The Nasdaq Composite has already moved up 21.1% from its bottom in this move, yet you can barely see it on the chart. The scope of the tremendous run-up of 1999 and 2000 and the equally tremendous collapse in 2000 and 2001 leaves far more room for spectacular gains -- entirely within the context of the existing bear market.
The simplest way to parameterize the bear market is just to draw a simple trend line across the March and September 2000 tops -- that's the red line on the chart. This trend line is at 3131 today. A rally that took the Nasdaq back to that level would move it 59.6% from Thursday's close, on top of the 21.1% already racked up since the bottom on April 4. That move would still be totally underneath the downtrend defining the bear market -- a bear-market rally, by definition. But what a rally!
Another way to parameterize the bear market is to calculate the 52-week moving average -- that's the gray line on the chart. The moving average is at 3171 today, 61.7% above Thursday's close.
The moving average is only a couple of points lower now than it was in the week of the top in March 2000 -- it was at 3176 then. At the time, the Nasdaq was 64.1% above the moving average. Today it would take a 61.7% move to get back up to the moving average. In other words, the Nasdaq is as far below it now as it was above it then. So there's nothing at all unbelievable about thinking we could get back up to it -- all within the context of a bear market. This is what I mean when I say that the rubber band has been pulled back too tight.
Even less spectacular bear-market rallies would be, well, still spectacular! The downtrend line defining the powerful "second leg down" of the bear market that began after the top on Sept. 1, 2000 (the light green line on the chart), is at 2236. That's another 14.5% from Thursday's close. That's lots of room to run, and the Nasdaq would still be entirely within the context of even this steep intermediate-term downtrend.
Let's not get hung up in taxonomy. We're in a rally, and it has room to run. Does calling it a bear-market rally mean you can't make money on it? No. Does believing it's not a bear-market rally mean you don't have to still be careful every single day? No. So stop playing word games, and get out there and trade! |
