If September was Mr. Bear's appetizer, and if October was his entree, then certainly November was his decadent dessert. He slumbers for years, but when he wakes up, he has a voracious appetite to satisfy before he goes back into hibernation.
Awakened, Mr. Bear lumbers through equities thick and thin. He squeezes the religion from the Buy And Holders who populated every corner of the street, chanting their buy-the-dip mantras like some capitalist Hare Krishnas.
Back this time last year, with the mania for anything tech at full force, I suggested that an appropriate analog for the U.S. stock market just might have been the rite of passage of the Japanese stock market, which blew off after reaching nearly 40,000 on the very last day of the decade of the 1980s. "That's the job of the market: to teach each new generation religion — that life is bigger than you."
To date, the Dow's closing monthly high was 11,497, for the month ending December 1999. Does anyone remember a study that I showed last February, done by my good friend and superb technician David Reif, CMT (Chartered Market Technician; and there ain't many of those around)? The study showed what can happen when the market takes out the prior December low in the following January or February: There is an 80% probability of a down year. That scenario certainly has played out this year — and in spades.
The Nasdaq — being then the strongest market and the market du jour — went on to make a nine-week overthrow. It didn't top out until the first week in March. Perhaps there were some hedgies prematurely short in stocks with P/Es of 200 or greater, having a hunch that Y2K was not the hoax that it proved to be, the hint of the century that this was going to be an unusual year. Perhaps the final dizzying weeks of that Nasdaq orgy were caused by a combination of hedge-fund covering, daytrader infidels, and momentum money managers' high jinks.
Be that as it may, the first leg down in the Japanese stock market was approximately 40% over 186 days. This week, the Nasdaq bounced with vigor after 184 days down and a 50% decline. So history, although it may not repeat exactly, often rhymes.
If you look into your heart of hearts, you know that blinded fools were rushing in last spring where angels feared to tread. When 20-something-year-olds, without regard to risk management, make millions from catching falling anvils, something is out of whack. The idea that these newbies can buy falling daggers in blind faith, based on the belief that Unsustainable Price Movement must correct itself, doesn't wash at confession time. And this is confession time.
It's a religious reversion to the mean — big time, under the big tent. Listen: It may be easy to accumulate 5,000 to 10,000 shares of a stock falling out of bed. Naturally! Everybody's trying to sell it! But if you're wrong, how do you get out? This is what's called an anthill strategy. Everything works fine, until something bigger comes along that squashes the whole hill.
So what is the Holy Grail? The three commandments of successful speculation are risk management, risk management, risk management! And when things get more risky, then more risk management needs to be used. Otherwise, the whole hill of beans that you've created over the years disappears.
That's the job of the market, though: to teach each new generation religion — that life is bigger than you.
The other day, I spoke to a good buddy of mine who manages a great deal of money. We recalled a conversation we had back in April, when I asked him about his exit strategy.
I was shocked then at his laughter and reply: "What exit strategy?"
He explained to me that people were paying him for "exposure to the market." Well, those people got frostbite.
To be kind, let's just say that salvation is dynamic and not static, that you need hands-on management. There are no free lunches. Let's just hope that the frostbite doesn't cause too many lost limbs.
As my friend and I talked about the year since then, I said to him, "If you look back, you knew things had to end badly."
He agreed, and then complained that if he had not been fully exposed, he would have gotten redemptions. People would have pulled money from his management!
Oh, to have the courage of our convictions! Let's just say that the tech mania started out as religion, blossomed into blind faith, and exploded into a dot.com cult — a frenzy for false idols.
Markets crawl before they walk, walk before they run, run before they sprint, and sprint before they run like hell. It trickles before it rains; it rains before it pours; it pours before it thunders. And so it always shall be. And when it starts to thunder, if you have any good sense, you'll come back inside.
It's interesting that our modern-day parable of boom-to-bust revolves around the Internet, which one wise friend of mine referred to a few years ago as a modern-day Tower of Babel. Last spring, I quoted someone who once said, "Any fool can believe the truth. It takes a genius to believe a palpable lie."
The point is this: Never confuse information with enlightenment. Moreover, don't confuse the heat of a market rally with light. This year's Nasdaq action should baptize the unwashed masses, but I doubt it. There's a sucker born every minute — two are born on Wall Street.
If you can't trust the CEOs and the brokers, then whom do you trust? If you can't believe the analysts, then whom do you believe? If you can't put the gurus on a pedestal, then who goes there? And if you can't pray at Alan's Altar, then where do you pray? The only redeeming virtue is the Tale of the Tape. The only salvation is the Stop-Loss Order.
Considering the convoy of butterfly ballots, winding its way to Tallahassee, an appropriate song for this week's piece might have been Willie Nelson's "On The Road Again." But as the rally petered out on Friday, it's hard to tell what to think.
However, as the 10-minute bar chart of the Nasdaq from Thursday shows, the Composite exploded out of a nice bottoming pattern. One might suspect that the catalyst was all those lunchtime double martinis in New York. (Yeah, they're still doing 'em. The differences between lunch now and lunch six months ago are that back then, there was some steak and lobster to go with celebratory martinis, and that now, the martinis are taken on empty stomachs to kill the pain.) Whatever the reason, many tech stocks proved resistant to a continued sell-off in the December S&Ps during the day.
When the Composite put in an Expansion Range Double Stick Buy Signal, and when the "second-mouse move" got the cheese, the index staged a full-frontal attack out of an inverted head-and-shoulders pattern on the 10-minute chart.
The late rally ran through the morning high at 2,640 before settling in at 2,600. The markets followed through nicely on Friday. The Nasdaq was up over 150 points at one time, and the S&P was up over 20 points at one time … until the Supreme Beings cast a shadow of doubt upon the Unified Oneness of Purpose and Resolution in the bayous.
Still, for traders, Thursday and Friday offered a cornucopia of lovely long-side setups. Interestingly, the Nasdaq pulled back to the high of the first rally at Friday's close at 2,645. If we're going higher, this level should act as support. Often, genuine rallies get going after several false starts. But as long as extenuating news events prevail, it looks like a crap shoot.
Short sellers get scared when the rubber band is too stretched, and they don't want to give back too much of their fat profits. But that doesn't mean they're being converted into the bullish sect. The bears will continue to test the waters again and again, until they're wrong two or three times consecutively. Moreover, the shorts may go to work on happier hunting grounds, vis a vis the S&P/Dow, as they lay off the techs. The bear camp may believe that the honey pots are sweeter in the S&P and the NYSE.
In conclusion, in what looked like a promising beginning to a new month, Friday petered out. But the jury is still out — literally. Better to be an agnostic and to play both sides.
Jeff Cooper has been a professional equities trader since 1982 and is the author of three best-selling books on trading.
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