I copied this from the market direction thread:
IS IT ALREADY TIME FOR CAUTION AGAIN? May 18, 2001.
I've been saying for some time, that given the market's extreme volatility, upside and downside moves are taking place rapidly, with gains and losses that
normally take a year or more, now taking place in one to three months, so it will be necessary to take on somewhat of a trader's mentality. Recent market
action has not changed that expectation.
Swings between bullishness and bearishness by Wall Street, the media, and investors are also taking place rapidly. Sentiment swings that used to take as
long as a year or more, are now taking place much more quickly.
Last summer the market enjoyed its typical summer rally even though the bear market was underway. Investor optimism and confidence rose with the rally,
and by the end of August investors and the media were convinced the bear market was over before it had hardly begun. However, the market headed south
again and was soon hitting new lows. By the end of December the Dow had declined another 1,000 points, the Nasdaq 45%, and investor sentiment had
dropped again into the depths of pessimism.
No sooner was sentiment in a deep dark hole than the January rally began. The S&P 500 gained 9% in a month, a 108% annual rate of gain. Wall Street
again became convinced buyers were back and the bear market was over. But, once again the market reversed to the downside and by early April the S&P
500 was down 19%, while the Nasdaq was 43% lower.
Again investor sentiment plunged along with the decline in stock prices. So my buy signal on April 1st, and expectation of a significant ‘bear-market rally’,
was met with considerable skepticism. Wall Street and the media were focused again on the negatives, ignoring the oversold conditions and extremes of
pessimism that usually mark temporary market lows.
In just seven weeks the S&P 500 has gained 17%, the Nasdaq 36%. And now Wall Street and the majority of investors have become bullish again,
expecting once more that the bear market is over, that the next bull market has begun.
Will they be right this time?
Wall Street, anxious to concentrate on the positives, tout stocks, and get investors buying again, thinks so, while astute participants like Jack Welch, CEO of
General Electric, and Warren Buffett, are less optimistic. Welch warned a few weeks ago that we’re only in the early stages of a serious consumer
recession, while Buffett warned that investors will be lucky if the market averages a gain of 6% per year over the next several years.
Alan Greenspan and the Federal Reserve also seem unconvinced of the rosy scenario Wall Street has again adopted.
The Fed released the minutes of its March 20th FOMC meeting this week. It makes interesting reading. Concern about the economy sliding into recession
prompted the Fed to cut interest rates an aggressive one-half percent at the meeting, and the minutes show there was considerable debate about the need for
an even larger rate cut. The Fed governors were worried that the pick-up in consumer spending in the first quarter, which produced the better than expected
economic numbers, is not sustainable due to the high debt load consumers are already carrying.
The Fed also released a summary of its more recent monetary-policy discussions, which reveal still more concern. In a special conference call between Fed
governors on April 11 the need for an additional ‘emergency’ rate-cut was discussed. That additional rate cut took place a week later. All this concern on
the part of the Fed took place in spite of the better than expected economic numbers that were coming in.
In yet another conference call on April 18, the Fed governors discussed another concern, the decline in capital spending plans by corporations, that
companies are in fact going in the other direction, closing plants and idling equipment.
And now, on Tuesday of this week, the Fed cut interest-rates yet again, and indicated still more rate cuts may be needed down the road in an effort to halt
the economic slide.
So the Fed sure doesn’t seem to agree with Wall Street that the worst is over.
Corporations seem to be getting the same vibes. Not only disbelieving Wall Street’s story that a recovery is underway, they don’t even expect a bottom to
be in place soon enough to justify them waiting it out. So they’re shutting down plants and laying off employees at a 50,000 a week pace not seen since the
1990 recession.
Since the market has already achieved my expectation for a significant bear-market rally from the April 4th low, and with so little confidence about the
economy’s future among those in the best position to know (the Federal Reserve, and corporations), I believe the time has come for investors to fight off
the tendency to be made overly optimistic by the rally that has already taken place. The S&P 500 is still selling at 24 times earnings, a level of valuation
usually seen at bull market tops, not bear market bottoms.
The market is now in its usually unfavorable seasonal period from May to November, when it has historically suffered most of its serious corrections. The
last five bear markets followed that same seasonality, each ending between August and November.
Keep in mind that risk-management is just as important a factor in investing as is risk-taking.
Sy Harding is president of Asset Management Research Corp., publisher of The Street Smart Report Online at WWW.StreetSmartReport.com, and author of
Riding the Bear - How to Prosper in the Coming Bear Market. |
