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In our January newsletter, we said
that if it turns out that the “second half
recovery scenario” does not materialize
then “ NASDAQ will easily penetrate its recent
lows, and we would expect it to reach 1400-1800
before year’s end.” Apparently, investors have
concluded that the “second half recovery
scenario” is probably a fantasy and here we are
with NASDAQ at 1890! In the meantime, Wall Street
strategists, analysts, pundits, gurus etc., have
been appearing on CNBC categorically proclaiming
the “bottom” for the last 1000 points, yet it
remains stubbornly elusive. The Beast has so
little respect and regard for all these
“experts”, it wasted no time to slap Abby
Cohen in the face when it promptly plunged right
after the celebrated Mrs. Cohen increased the
equities allocation in her model portfolio (Ouch,
there is justice after all!) So, is there a bottom
in sight at all, or is this market just a
bottomless pit worthy of no affection, and
consideration by the not-too-long ago adoring
public? Being the type ourselves who never miss an
opportunity to serve the community and demonstrate
our good and noble citizenship in times of stress,
we will offer our observations and views to the
beleaguered public. First of all, people need to
keep in mind that bear markets take place because
there is a real, or, perceived change in the
fundamental picture going forward. Unless the
fundamental picture changes again, for the better,
or, stock prices reach a level which has
discounted even the worst of all possible future
outcomes, then the bear will still be in charge!
At this point in time, has the fundamental picture
changed for the better, or do stock valuations
indicate that even the worst of all scenarios is
fully discounted? There is no clear answer at this
point because earnings estimates are still coming
down. If the revised earnings hold, then the p/e
for tech stocks is around 30 for 2001 earnings,
which makes tech stocks fully valued at current
levels. If future earnings were to be revised
upward they would be undervalued, if they were
revised down further, then even at current levels
they are overpriced. Is the economy going to get
better or worse? How is the consumer going to
react to the “unwealth effect?” Can monetary
policy cure the ills of the economy? Even if it
can, can you count on this FED to execute it
sufficiently and timely? Is the economic downturn
in the U.S. going to lead to a global recession
further eroding corporate profits? Are there any
international crises looming (alas the Asian
crisis) -due to deteriorating global economic
conditions- that we do not even know yet? These
are just a few of the questions, one must be able
to answer accurately, in order to determine if
corporate earnings have bottomed and soon they
will be revised upwards (implying tech stocks are
currently undervalued) Although we are smart
fellows, we do not think we are smart enough to
answer all these questions accurately. So, we
rather wait until we have some more concrete
evidence, upon which to base our conclusions.
Second, because the decline is not a “technical
correction” technical support levels quite often
do not hold, in fact, bear markets by the virtue
of their function, they redefine support and
resistance levels. At the moment NASDAQ has
technical support (+/- 25 points) at 1750, 1600,
1500 and 1350. Which one is going to hold? For now
the 1750-1600 zone should provide -at least- a
temporary comfort zone, from which the market will
attempt to regroup. Unless, very aggressive
monetary policy by the FED next week, causes the
market to rally strongly from current levels) We
think the best choice at this time, is to quit
expecting that a particular support level will
hold, and instead, wait until the market proves
it. Third, a market that has lost 60% of its value
-like NASDAQ- is not going to find its bottom in
one day. The market needs to go thru a
“bottoming process” during which a “base”
will be formed that will become the “launching
pad” for the next bull market. Has NASDAQ built
a base yet? Not even! As the events of the last
two weeks have unfolded, it looks that the market
is still in a declining mode. The market needs to
stop falling, before it can begin to build a base.
That hasn’t happened yet. Therefore, as far as,
investors are concerned, nothing yet points to a
bottom. On the other hand, traders may find this
market just as rewarding as a bull market. The
reason is, bear markets are punctuated with
furious and sharp rallies, offering great
short-term gains for those traders who just wish
to go long and can stomach the volatility. A sharp
rally doesn’t mean the end of a bear market
(although sometimes it may) but who cares if you
are a short term trader? Plus you can always go
short! In conclusion, if one considers
himself/herself an “investor” there are two
many unanswered questions at the moment to
determine a) where the ultimate bottom will be,
and b) if one should turn bullish, or, more
bearish! Adopting a “Neutral” position (stay
in cash), and allowing the market to provide the
answers, before committing large sums, will enable
one to get thru this mess with relatively minor
pain. Also if one considers himself/herself as a
“trader” having a “market neutral”
strategy (being both long and short) should
provide enough flexibility to gain from market
moves in either direction. Keep in mind that for
seven straight weeks, the market has traded in
only one direction “down.” In our opinion, a
sharp “bear market” rally can not be that far
from here. Whether it starts from current levels,
or from lower ones, it does not matter, because in
either case it should be between 25%-35%, which is
a very respectable return.
Our
Market Positions:
Dow:
Neutral,SP500:Neutral
NASDAQ:Neutral |
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GROUP INC.