November 2, 2002
As I write, the market is struggling to make up its mind whether it wants to keep going up. It is obvious it wants to go up more, but the hesitation comes from some valid concerns over the health of economic prospects. At this juncture, it will take the force and will of the speculators to push the market further from here and thus ignite a new round of buying from those who want to remain optimistic about the same economic prospects that are troubling so many people.
And thus, it seems like we get deja vu all over again. After over 30 months of bear market action, it seems the behavior from the bubble days dies hard! The best evidence of that is not so much how sharply the markets rose in the one to two weeks after the lows in October - that could have been expected. Instead, you can see the flurry of greed and speculation over in techland. Surprise, surprise! Sure, some, maybe a lot of this, is short-covering. Traders have heavily shorted tech stocks because they STILL represent the most over-valued part of the market. A lot of tech companies face genuinely grim prospects. But, if you look at the market indices, you can see that while the S&P and Dow have struggled to go anywhere in the past two weeks or so, the Nasdaq has slowly kept creeping upwards. Just this past week a lot of tech stocks that had been left for dead not long ago are now registering eye-popping gains in a matter of days: I am seeing pops from 20-50% in short order! Simply incredible.
And so, as I write this, I feel like a broken record getting broken again and again. By this time, it will not come as a surprise to any of you that I think this is all a bull trap. There is very little fundamental action that is supporting the moves in the market, and more so in techland. In fact, as the prospects for tech *worsen*, people seem to be in even MORE of a hurry to bid up these shares. This is all great action for traders, but, again, it is awful for investors. The risk/reward for trying to chase these stocks here is downright ugly. It is not a sin to try to join the fray, but you cannot go in there fooling yourself that you are investing for the long-term.
So, what are the prospects now? Well, as I mentioned in my last missive, I stated that it seemed to me the two lows we printed in July and in October had probably cleared out most everyone who truly wanted out of the market. The bias right now is clearly up, and I see little on the short-term horizon that will bring the market back to reality. We have survived another earnings season in decent shape as far as speculative sentiment goes anyway. Imagine, the market roared ahead even more strongly this time last year at a time when it seemed our entire world was teetering on chaos. Imagine how vigorous the buying could get if even a hint of genuine good news drops our way! A Fed cut next week could ignite just such giddy buying, but remember how much good the last eleven cuts did for us.
Regardless, I will currently stick to my last prediction that the lows we put in this year will not be broken until next year, perhaps in the Spring. Yes, those lows will be *broken*, not just tested. I say this because the market is simply not properly discounting the appropriate risks out there, and we should all by now know what lays ahead when the market gets too far ahead of reality.
It is often said the economists have predicted 7 of the last 5 recessions (or something like that). A similar thing could be said about the market when it comes to anticipating an economic rebound. All these rallies are part speculation, but also part genuine hope that things cannot get worse. Eventually, the market will get it right. But I cannot see the market getting it right for some time to come. If you keep in mind that we are most likely to print out a trading range for perhaps the rest of the decade, you will be reluctant to buy high when hope abounds, and your skepticism will serve you well.
In the meantime, do not be surprised if the market tacks on some big gains in the coming weeks. Be even less surprised when all the cards come crumbling down with a nasty thud. If you are inclined to trade, I would also bet that a correction in the next two weeks would actually be something you could buy into and profit from by mid-December or so. Should be interesting either way - just don't let the records get broken on you.
Be careful out there!