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Strategies & Market Trends : MDA - Market Direction Analysis -- Ignore unavailable to you. Want to Upgrade?

To: Les H who wrote (56600)	7/14/2000 6:59:02 PM
From: Don Green	Read Replies (1) \| Respond to of 99985

Bear Market Strategy By David Dreman Next IT'S PRETTY CLEAR TO ME THAT A BEAR MARKET IS approaching. Record volatility is one warning sign. Near-record margin debt on speculative issues is another. Then there's the humbling of red-hot initial public offerings: Until mid-March this year's new issues shot up an average of 120% on their first day of trading. The 2000 crop is now trading at an average 65% below offering prices. Nasdaq's story is particularly disquieting. Before its recent (temporary) rally, it had fallen more than it had during the 1987 crash and the 1973-74 slump. That's the sharpest break in the post-war period. Why is more bad news on the way? Continued overvaluations. Let's focus on the Nasdaq 100, home of the largest tech and Internet stocks. Despite the drubbing it took this spring, this index remains at five times its level of just four years ago, with a staggering average weighted P/E of 144. The enormous speculation in these stocks--by day traders and aggressive growth funds alike--is unabated. Their average holding period is less than three months. Frenetic trading at unprecedented valuations spells disaster waiting to happen. The S&P 500 and the Dow Jones industrial average are not immune. They are trading at roughly double their historically normal multiples of earnings. The S&P and to a lesser extent the Dow have large weightings in technology, rendering them particularly vulnerable. The S&P is 33% in tech and a further 8% in communications. We have already seen large declines in the Dow and the S&P several times in the past few months when the Nasdaq tanked 5% in a day. Over the past decade a crowd of newcomers who bought on dips created a floor for the market. There will come a time when these buyers lose their courage or run out of money. Meanwhile the market's chaos has obscured the dramatic shift in market leadership. Value stocks, which tech mavens branded as dinosaurs just a few months back, are back in style. Financials, energy, public utilities and tobaccos have moved up significantly amid the tech slaughter. Tobaccos, for example, which trailed the S&P by 7 percentage points in March, have since outperformed it by 27 points. Given the situation, how should you position your assets to both protect your capital and be able to pick up some winners if the market drops further? You have a number of ways of lowering your portfolio's risk exposure. First, sell tech stocks trading at huge multiples of earnings or revenues. Do this during brief tech rallies like the June one. Use capital gains from the sales to offset other losses you have forbes.com