Better Luck Next Time
November 14, 2003
This is a "quick" follow-up to my missive yesterday...
The one main issue I purposely avoided last time was in speculating on whether we could still get a buyable correction on the way to, and past, the major market milestones of Nasdaq 2000 and Dow 10,000. For anyone keeping score, today (Friday) sure felt like the beginning of something awful. Indeed, if I were to get back to my more pure bearish ways, I would seize upon today's action as proof that the market is over-valued, in the process of forming a major top, and headed for one serious bruising. Someday, I will get back to that script, but for now, I still hesitate to set up full camp with my fellow bears just yet. Here are a few things to note as you stare in trepidation at the latest market action and hope that the market has better luck next time:
1. The rally of 2003 started and continued in the face of a lot of bad news. Only in the past month or so has the news noticeably gotten better in aggregate. The fact that we got some more bad economic news this week (higher inflation, bigger trade deficit, dollar getting extremely weak again - I consider this a negative, poor showing by retailers, the ever-expanding mutual fund scandals, etc....) means that things can *still get better.* And let us not forget that we have yet to make a serious dent in unemployment. Once the market gets its sea legs back, this sort of quasi-contrarian logic will come to the fore again and drive the market higher. I know it sounds stranger than having a body-builder or an actor for governor (hmmm...or is it?), but this is the way things tend to work when a market is in transition from one cycle to another. As long as there is a tangible prospect for things getting better from a point where they were absolutely awful, then bulls think of current prices for stocks as being cheap...almost no matter where the prices are sitting at the moment. This is a lesson that took some time for me to truly grasp. Hence, I would argue that we can still piece together a credible recovery scenario, and the resulting logic will eventually drive buyers back into the market. (I am sure that those of you who know me can hear the snide optimism dripping from my pen right about now....=smiles=).
2. Just because the milestones are within reach, does not mean there will not be a fight first to get there. Wednesday's rally was almost too early and from the wrong spot to make a credible run past the milestones. It would have made hitting those milestones "too easy" this week. These numbers loom large enough in people's eyes that we should expect a lot of churn around this area. It will cause some buying excitement and others will assume it is time to sell on the news again. However, this week did expose the market's impatience at this juncture. A lot of people are sitting on nice profits after losing big money for THREE years straight. It makes sense that as the year nears a close, people tend to look for excuses to lock-in profits rather than opportunities to buy. Not only did we get some bad news to sell on, but the good earnings news that has come from many bell-weather companies, especially in tech, almost makes it seem like things have already gotten as good as they can get. A weird double-whammy. There is no telling how low this angst will take us, but I would argue that a dip here is buyable for the aggressive types and speculators. Again, refer to #1 above to review the logic that will likely get people buying again.
3. While this latest churn seems painful, when looked at with respect to the entire leg nth and strength of this rally, it is again a pinprick, mere peanuts. I remember this point everytime I see people in a panic about the latest few percentage point of losses. If you joined the fun early and hung on, then about now you are dusting off your pajamas and telling the market to wake you when it's done! The one caution I would state for the record is that from a "technical" perspective it will not take much more of a sell-off to make the market look quite ominous to a lot of players that watch these things. If THAT were to happen, all bets are off as the massive amounts of selling a more serious correction would invite will likely take all of us by surprise. This has been the on-going risk that this rally has deftly avoided up to now.
4. In the end, this mild sell-off made a sustainable rally PAST the milestones all the more likely. If we had shot straight into the milestones and beyond, we would have marched right into the kind of unsustainable, rapid rise that often sets up the final move upward in a heated rally like this one. The kind of selling we are seeing now shakes out the weaker hands and clears the runway of doubters and naysayers, leaving plenty of room for buyers to take off again. Again, it is only when certain thresholds are violated do we truly begin to worry. I hope that I can identify them for you in time. However, calling tops has obviously been a fruitless exercise for a while, so I can almost guarantee I will be late with any such warning. In fact, I am sure even if I were to issue such a warning, there would still be enough reasons hanging around for the optimist to completely ignore me...and heck, even be right yet again!
So with that, we are no closer to any real predictions of what the market will do in the near future, and I shudder in realizing just how much prognostication I dared to touch in this missive. But I hope I was clear in drawing out some likely scenarios, some plausible explanations, or at least giving you fodder for thinking through on your own what is going on.