Wrestling With a Bear? Maybe Not, but It`s a Good Time to Plan - 500 Beiträge pro Seite

[investor_007]

Wrestling With a Bear? Maybe Not, but It`s a Good Time to Plan
By Brett D. Fromson
Chief Markets Writer
10/17/00 7:15 PM ET



What would you call this kind of a market?


The tech-heavy Nasdaq is again testing the May lows.

The big old Dow looks pretty ill too.

The old-economy-laden New York Stock Exchange Composite Index, which never participated in the 1999 rally, is back down to where it was 18 months ago.

So is the S&P 500 index.

Since Labor Day, the most effervescent "new" tech stocks, like Broadcom (BRCM:Nasdaq - news - boards) and Juniper Networks (JNPR:Nasdaq - news - boards), are flat to down.

"Old" tech greats like Microsoft (MSFT:Nasdaq - news - boards) have slipped to new lows not seen in two years.

Semiconductor maker Micron Technology (MU:NYSE - news - boards) just hit yet another new low for the year.

Nontech companies like AT&T (T:NYSE - news - boards) are at depths not seen in three years.

The Russell 2000 index of small companies is back where it was a year ago.

Dot-coms like Yahoo! (YHOO:Nasdaq - news - boards) are collapsing.
On Wall Street, they call this a bull market.

Yes, according to the sell-side strategists, we are not in a bear market. They say that this is simply a market in transition from an era of 20% annual returns to a period of 10% returns. Many smart folks, like my friend and colleague Jim Cramer, see the recent market slide as a buying opportunity within a longer-term bull market. In short, they say, we are unlikely to see a sustained decline in stock prices from current levels.

It is certainly possible for the market to rally from current levels, as the strategists say they expect. But what if they are wrong, and we are staring a grizzly in the face, and we don`t know it? If you charge ahead in full bull-market tallyho, you could be mauled.

Even on Wall Street, where risk normally brings reward, there are times when it pays to take fewer risks than normal. Think about it this way. If there is a 50-50 chance that we are in a bear market and you take some money off the table, you may save yourself a fair amount of money and still have buying power for when great stocks are being given away. Worst case is that the market rallies back above, say, pre-Labor Day levels, and your gains lag the market averages.

Why fear a bear?

The first thing that makes me smell one -- You ever smelled a bear? Yikes! -- is the market action of the past year. The market leaders -- technology stocks -- were dramatically overbought from October of last year to March of this year. They are now in the process of being oversold. They do that in bear markets.

My second worry is more fundamental. The uniquely benign conditions that led to the great bull market of recent years are over. It was a virtual petri dish for creating the King Kong of all bull markets. The Cold War was freshly over, and peace reigned in all the major nations of the world. The global economy kept humming through thick and thin. Inflation was nonexistent. Earnings were great and growing. Interest rates were lower. A flood of new money came into the market.

Third, have you looked at the chart of the Dow recently?

Dandruff Protection, Not Investor Protection
The Dow`s head-and-shoulders pattern emerges in this chart

Source: BigCharts



I`m no technician, but the Dow has taken on a classic head-and-shoulders formation in the past year and a half. (One professional investor I know refers to this as a "circus formation," as in a "big top.") The left shoulder was formed last year. The head was made in January when investors ramped the Dow stocks. The right shoulder formed about six weeks ago. My concern? When head-and-shoulder formations break, the right shoulder -- i.e., what`s to come -- tends to take on the same shape as the left shoulder. If the Dow did that, we could be looking at Dow 7700! If we get Dow 7700, where do you think the other averages might go? Not up.

Another index I like to follow is the RLX, Standard & Poor`s retail stock index. It looks like an ad for shampoo, too. At the very least, it signals a struggling consumer, which is not great news for the economy or company earnings.

Blue-Light Not-So-Special
The S&P Retail Index signals a slowing consumer

Source: BigCharts



Fourth, big investors remain extremely bullish. According to International Strategy & Investment`s survey of institutional equity managers, the big pension funds and endowments remain more bullish on stocks than at anytime in the past six years, with the exception of two months ago. That means a lot of selling if they ever revert to more normal levels of bullishness. You can argue that many mutual funds will never again be anything less than fully invested in stocks, that they will simply rotate from one market sector to another. Do you really want to make that assumption with your money.

Fifth, we are heading into the first year of a new presidential term no matter who wins next month. Maybe I have spent too much time in Washington, but that sets off my alarm bells. A new administration has one overriding objective -- to get re-elected four years hence. The traditional way to ensure that is to take the painful hits as early in the term as possible. Clear the economic decks in 2001 so that you can win politically in 2004. In short, take a recession sooner rather than later. Not good for stocks.

So what should you do other than go to cash? I`d suggest putting some money in the sectors already working pretty well in a lousy market. Look at the oils and the drugs and the consumer staples. Some oils, for the moment at least, offer real earnings momentum. Did you know that Valero Energy (VLO:NYSE - news - boards) just reported third-quarter earnings of $2.01 a share vs. 40 cents a year ago. Now that is earnings mo! The stock at $33.50 trades at about four times earnings if you assume they can earn two bucks a share each quarter for the next year.

I do not mean to scare anybody. I simply want you to think about the downside before we all get overexcited when the market goes lower. If you decide this notion is hokum -- and perhaps it is -- at least you re-examined your assumptions. If you agree with me that there is a 50-50 chance of a bear market, then you know now to take defensive steps. Either way, you are none the poorer.

[Senkrechtstarter]

Diese Warnung sollten wir alle so sehen: 50:50

Der Spieler würfelt - 1-3 runter/4-6 rauf, wobei er die gleiche
Chance hat, wie alle Analysten.

[investor_007]

Der Autor meint es etwas anders,

er sagt, daß man durch verkaufen eine 100% Chance hat, nicht
ärmer zu werden.

Bleibt man jedoch im Markt, so läuft man mit
50%iger Wahrscheinlichkeit in einen Bärenmarkt.

mfg
investor_007

[RH2]

Sehr einleuchtende Argumentation von Herrn Fromson, leider!
rh2

[investor_007]

Ich sollte noch die Quelle angeben:

http://www.realmoney.com

mfg
investor_007

[investor_007]

Is Today the Day?
10/18/00 8:05 AM ET

This day has that feeling, doesn`t it? Starts out benign. Looking like it could hold. And then, one by one, they chip at it until you begin to think that, yes, today is the day. Today is the day we plunge.



Downgrade Fever
10/18/00 7:14 AM ET

Analysts are really downgrading today. IBM (IBM:NYSE) is letting people down. Shorting some Nokia (NOK:NYSE) right now off a downgrade of Texas Instruments by Lehman.

Short Texas Instruments and Nokia.


Mystery Buyers
10/18/00 7:11 AM ET

Futures are taunting us again. And there are buyers around. Nokia (NOK:NYSE) should be down more after the RF Micro (RFMD:Nasdaq) disappointment, but someone doesn`t want it to go down. Is there a Finnish Buzz and Batch?

Short RF Micro.

[investor_007]

Observations of a Trader
By Todd Harrison

10/18/00 8:53 AM ET





Monitoring the tape from afar, I am unable to dissect the internals as if I were on the front lines.

However, as is my nature, the wheels never stop churning as I feel compelled to put some thoughts on paper in hopes of offering guidance to some of you. I am doing my best to get back to my turret and stand by your side, but some things are more important than the market. Believe me when I tell you I would prefer to be battling the war of the greens and the reds, and hope to rejoin you shortly. Having said that ...

The level that I would focus on is the double bottom that is in place in the NDX -- the first bottom being put in during the spring selloff and the second last Thursday. Intuitively, the bounce last week made sense from an extremely oversold condition, lending credence to the fact that traders don`t follow technicals because they work, but rather, they work because traders follow them.

The 2900-3000 level in the NDX now becomes huge. For the market to become constructive once more, we need to hold into that zone. If we do break those levels (read: tick at 2850), there is no discernable support until 2250.

Again, the vicious one-day snapback isn`t bullish for the big picture, and what we want to see is a basing among the sector bases and a deflation of the highflier complex. Remember, excess is an extension of greed, and we`ll say it again, greed doesn`t form bottoms, fear does.

While I`ve been cautious, I am not saying that I wouldn`t buy stocks. I would just continue to advocate discipline. The hallmark of successful trading is the ability to incorporate the various metrics in play, and assimilate them into your approach. There are very real dangers out there, including the further indiscriminate selling by both individuals and the fund community. Remember, if margin calls and redemptions are only beginning, the level of equity prices won`t matter when the red tickets hit the trading desks.

Scary? You bet. The savings rate (or lack thereof) is scary. The level of margined stocks is scary. The credit risk is scary. The leverage to the stock market on every level is scary. I`ll tell you, cookie, it`s downright spooky. Am I massively short? Heck, no -- I am massively cautious. Doesn`t mean that you can`t play longs, it only means that we could be at a historical inflection point and you should be conscious of the risks. Again, this is a trader`s view, but the lessons and implications are pertinent to anyone who has investments.

Jumping on the bear wagon you say? Anybody who has read me for the past three months knows I have become incrementally more constructive as we`ve slid down this slippery slope. I`ve never understood those who are bullish higher and bearish lower ... seems counterintuitive to me. There are most certainly companies that can be bought today that will rise appreciably going forward, the game is just getting tougher.

I would even argue that if we can hold into these levels, we may sidestep a potential abyss. My only goal is to keep you informed and allow you to play on a more even playing field. The decisions you make will affect only you and your family, so you most certainly will be held accountable. Choose wisely, as this isn`t a dress rehearsal ... and best of luck to you.



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Todd Harrison is a partner and head trader at Cramer Berkowitz, a New York-based hedge fund. At the time of publication, the fund held no positions in any of the stocks mentioned. Harrison`s fund often buys and sells securities that are the subject of his columns, both before and after the columns are published, and the positions that his fund takes may change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Harrison`s writings provide insights into the dynamics of money management and are not a solicitation for transactions. While he cannot provide investment advice or recommendations, Harrison invites you to send comments on his column to Todd Harrison .