T,
I've been giving a lot of thought to recent market action and have developed the following theory...
Many investors today are what I call "New Era Investors", people who over the last decade have decided that the Wall Street Journal, Barrons and IBD are more important than their hometown papers; CNBC, CNNfN, Bloomberg TV and Wall Street Week are more entertaining than 60 minutes or Oprah and with the advent of online trading NDB,Etrade and Schwab are certainly more fun than planning a trip to Vegas. It is for these reasons that the market experiences the violent swings of volatility and "Buy the dip" has been the mantra of the average retail investor, 401K holder or IRA daytrader.
Unfortunately for most of these armchair gurus, they haven't had to weather a real recession and have no idea what one feels like.They think recent market pullbacks are the same as when the Asian Contagian hit the street and anyone who bought instead of sold made big money. Let's us also not forget that a large percentage of Wall Street experts were still thinking about how they were going to spend spring break in 1987 and 1990 rather than what's negative GDP growth, stagflation or Federal Reserve liquidity injection.
These factors have in my opinion allowed what has developed into a terrible fundamental market climate to be propped up and appear as if we've hit some type of bottom. Buy the dip is still the mantra of those that have a few dollars left in their accounts following the NASDAQ plunge and "it must be the bottom because negative announcements are met with buying pressure" the battle hymn of the Perma Bulls.
I for one as I've told you for over a year am sitting on 80% cash, a few gold stocks, some healthcare and one biotech. When the recovery that everybody says will occur in Q3 & 4 doesn't come, I'd hate to own anything in the asset class known as common stocks.
People hate to admit defeat but the average investor has been defeated and refuses to acknowledge it. The final capitulation will see the NASDAQ closer to 1000 and the S&P around 800. With a P/E of close to 28 and a historic mean of 15, which way to you think the market (SPX) will go? Buy the dip will be replaced with Pushing on a String, and 10% (if we're lucky) will be the norm rather than 10 baggers.
We're in for a long recovery process but not before the excess is wrung out of the market and the economy. People think because CSCO is a teenager, it's cheap...we all know better. NT just erased over 12 years of profits with one $19 billion write off, INTC is still trading at a PSR way above historic norms and the Rust Belt is about to get a whole lot rustier.
Keep putting up those fantastic charts and more will become believers. Cheers! |
