What's going on now?

By Duru

September 17, 2002

Whew! What a month September is proving for the markets, eh? Now that the market has sold off to take us pretty much back to where I left you, at the end of the post-Labor Day sell-off, I figured this would be a good time for a review...

Today's super-flash rally on the Iraq news is more confirmation than ever that the bear market is more deeply entrenched than ever. Typically, the market will rally all day long, and often for the rest of the week, on this kind of news. In fact, I was tempted last night to alert the bravest of you to use the inevitable rally to sell rather than buy. It went by so quickly, I barely had time to blink! And hopefully, it was so fast that poor innocent individual investing victims didn't have time to get sold all over again.

So, why does the market sell off on what seems like good news about Iraq and yet manages to RALLY into ominous dates like Aug 14th (companies had to come clean with the SEC) and Sept 11?!?! It is indeed strange. But you have to recognize the counter-intuitive way a long-term bear market can behave. So much of the "smart" money is riding this market down (with shorts, for example) that they rush to buy and cover their negative bets ahead of days that may feature big explosive rallies if all goes well (think back to that HUGE rally after we got no "big" terrorist event on July 4th weekend). Combine this with the market-faithful that buy ahead of these dates assuming that everyone is too negative, and you can get one bizarre counter-trend rally. And, so far, if you had sold into any one of these rallies, you would have more money in your pocket today than otherwise.

Today was a bit different. People are finally getting tired. People have finally seen enough fake rallies to last a generation. Today the Iraq news was coupled with the Administration's skepticism over Iraq's sincerity and very poor economic news in the industrial sector. It is once again getting very ugly. I won't get into the specifics I am seeing, but I WILL say that there is finally getting to be some really cheap companies out there. Take it for it's worth because that is as positive as I can get right now! The only problem is that a lot of these deals are selling off so hard, it seems they just want to get cheaper still! This kind of thing unfolds when investors are beginning to give up that any economic recovery is in the works. And I understand. After hearing so much talk from the talking heads, over-optimists, stock promoters, and government cheerleaders that the economy is "fundamentally sound" and a robust recovery is right around the corner (OK - the next corner!) who wouldn't try buying ahead of the good news?

Well, the good news never came, and the current news actually seems to be getting worse (again - I will save the gory details for another day). It seems we will get the typical Fall sell-off (not sure whether Sept or Oct will feature the big event), just as the post Labor Day pattern has indicated in recent history. But if you are looking for some deals, there are some to be had and more to come...just be ready to return them to the store for credit before the year is out. Conservative investors still need not even apply. Oh yeah, and mutual funds would be a *horrible* way to play any short-term rallies in this vicious bear market.

As always, be VERY careful out there!