Posted on October 4, 2006
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By Michael Nystrom
October 4, 2006
After making a tentative new high on the Dow, the market’s second day follow through action (10/4) was strong. What can I say? I’m a bear, but I have to call it like I see it. This slow, steady, methodical advance reminds me of Nasdaq 1999, when the market doubled in a span of less than a year. Phony or not, this market has the potential to move a lot higher, very quickly and today it declared its intention. So much of today’s program-based trading keys off momentum. This creates a positive feedback loop that sends stocks to new highs and buys any dips before they materialize.
As I’ve mentioned many times, never argue with new highs! Phony or not, what we have are new highs. If you’re a bear, get out of the way! Take a look back at Nasdaq 1999. The market bounced around between 2,500 – 3,000 for most of the summer, and when it finally broke through 3,000 — to new highs — in early November 2000, it barely corrected before hitting 4,000. Boom. 33% in two months. That was the work of the momentum buyers, creating new highs, buying the new highs, preempting the dips before they appeared. The march upwards was steady, strong and breathtaking. Bears were shown no mercy. Timid bulls were given no pullbacks to establish positions. It was day after day of steady, momentum driven advances.
If you recall late 1999, there were just as many skeptics as there were bulls: Only 3 years earlier the market had been trading at 1,000 – it had already come a long way without a correction. Nasdaq stocks had PEs over 100, over 200, over 500, if they had any earnings at all! Stocks would move 5, 10, 20% in a day! It was an unsustainable, unbelievable bubble, and bears knew it couldn’t last forever. Many bears tried to hold out, but they added their own fuel to the fire by throwing in the towel, little by little. Who could blame them? What bear could withstand a 100% gain in under a year?
Dow October 2006
Which brings us to the present. I’m a big skeptic of these new highs and I know there are lots of skeptics out there. People liked my article The Dow’s Phony New High. I got more email than ever today, and my message board is full of bears – and a few bulls. The fundamental problem the bears are having now is that we look at the big picture – the very big picture - and cannot believe how the market cannot see what we see.
The economic news is BAD: Real estate bust. Consumer debt out of control. Government debt simply unpayable. Zero household savings. A hollowed out American economy. An aging population. Baby boomers on the cusp of retirement. Etc. You know the story. How can the market go up in the face of all this bad news?
I sympathize completely. However, the bulls look at a much smaller slice of the pie: Interest rates are coming down, oil prices are coming down, the trend in stocks is up. Easy 1-2-3: buy stocks! It is a no-brainer. New highs? Buy more! This has been an effective strategy for the past quarter century, and this strategy looks like it’ll continue to work for at least a little while longer.
The Dow has made a new high two days in a row, which is a reality that we bears have to deal with. This is dangerous territory for bears. Once the bulls score a new high, there is no telling how high they can take it, as I have said many times and as Nasdaq 1999 reminds us. I was surprised to find that both today’s Wall Street Journal and Investors Business Daily treated the new high with a healthy dose of skepticism, not hyping it too much. The Money & Investing section of the Journal did have a goofy picture of a cartoon bull, lording over a knocked out bear, and red roses covering the page. But it was not all rah-rah. Under the fold, there was even a story, Despite Blue-Chip Gains, Hedge Funds Increasingly Are Faltering and Closing.
After today’s gains on very strong volume and breadth however, I imagine that their tune will be more bullish tomorrow, and will turn into a breathless orgy before it is all over.
Today’s Boston Metro, the free little daily newspaper digest that everyone reads on the subway here, was a little more optimistic. It had a big picture of the NYSE and a bold headline about the new closing high, and went on to say this:
[the new high] comes at a time when the stock market is more conservative, even more muted than the Wall Street of early 2000. Then, investors were still piling exuberantly into high tech stocks. In 2006, the market’s gains come only after investors’ careful parsing of economic data and corporate earnings reports…
Ha ha ha! Did you hear that? Are you investors out there carefully parsing economic data and earnings reports? No, I think it’s more like: New highs! Yeah! Buy the momentum!
And this is the similarity with 1999. Since its mid-July low, the market has seen very little in the way of corrections. The action has been slow, steady, and methodical. Just like before, dips are bought before they even turn into dips. This market hasn’t seen a 10% correction in over 3 years. Interest rates are coming down. The price of oil is coming down. Stock prices are going up and that is all that is necessary to start the positive feedback loop of higher prices.
As the great trader Jesse Livermore said, “There is only one side of the market – it is not the bull side or the bear side, it is the right side.” When it has run its course this rally will most certainly meet the same fate as Nasdaq 2000, and the greatest shorting opportunity of a lifetime will be upon us. But bears, keep your powder dry!
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