You know the drill - but could this time be different?!?!
October 15, 2002
Excitement is in the air once again, and I am sure everyone knows what your favorite party pooper has to say about the monster gains the stock market has had since the recent lows. However, I have a slightly different twist this time, so perhaps you want to bear with me for a few sentences. I am keeping this somewhat brief because the story is still spinning.
I meant to write late last week that this particular rally could actually take on a different character than the other bear rallies we have had. First and foremost, we re-tested major lows very quickly this time around within two months. It is not too hard to argue that most of the selling has exhausted itself - almost everyone who truly wants out of this bear market has gotten out by now. The people short this market are running with fear bleeding from their fingers: they are scrambling to get out of the way of what looks like a speeding train and are trying to buy stock faster than the eternal optimists who keep calling market bottoms. If I am correct, this set-up will put a noticeable bullish bias into the markets moving forward near-term. Such a bias is already clear as people are back to celebrating all good news and completely ignoring bad news.
However, such a sharp rally puts a lot of money in people's pocket that they will not be keen to lose this time around. It also brings a lot of people even who were trying to time a bottom back in September. So, the sharper the rally, the more the selling tension builds, and the more likely it is that people will begin selling on bad news and discounting good news again. Tonight's poor earnings from Intel will give the first serious test of this thesis for tech stocks. In fact, tech stocks will be the most vulnerable to renewed selling pressure because the outlook for the tech economy continues to get *worse* rather than even stabilize.
From my perspective, *nothing* has fundamentally changed. We have some companies blowing away earnings estimates, and they should survive any coming correction to this rally. But we also have plenty of companies admitting that a strong economic recovery is still not on the horizon. All the fundamental weaknesses and dangers that I have pointed out in recent missives have not suddenly gone away and no fundamental changes are underway to reverse them yet. So, from a fundamental perspective, you should treat this rally as your *last* chance to get out at decent prices, if you have not already gotten out.
On the other hand, this sharp rebound and the resulting volatility is a welcome boon for traders. Nov-April is seasonally strong for stocks and supposedly the third year of a president's term is typically strong as the prez does everything he can to get the economy going in anticipation of a re-election bid. Big investors are again rotating money out of low-yielding (and high-priced) bonds and back into equities. Such sentimental underpinnings could actually keep this rally going after the necessary correction to this recent sharp outburst. So aggressive investors who did not get in before this rally may still have a chance to get in at better risk/reward points. (Always remember that the near-term is typically controlled more by psychological action than fundamental action).
So, I find it most difficult to even fathom how long this rally could continue, but given the nature of this rebound, I can sadly report that we still have not seen the bottom to this market, and we should see these recent lows violated sometime in 2003. I was correct in surmising that the July lows would get violated, but I imagined the violation coming on a BIG move down, maybe even a crash, in Sept or Oct. Instead, we got essentially a tickle and a tease of a re-test. However, I just cannot see yet another major re-test of the lows happening so soon again, but, it is something to keep at least one eye on in the rear-view mirror.
Overall, only real changes in the economic backdrop could get me to change my overall bearish stance on this market. As I mentioned before I will continue to squint, grimace, and frown to try to see them!
In the meantime, conservative investors will just have to keep waiting. Aggressive "investors" should look to protect profits and fight not to get caught up in any buying hysteria or wild euphoria and continue to proceed with caution - enjoy this while it lasts. Do not forget that the market's biggest moves up have come AFTER the bear market started. Bull markets simply do not feature these kind of sharp rallies, and most will begin only after some sort of base has formed with some sustained sideways action.
Be careful out there!