To highlight a couple of remarks from last month:

"[With] bearmarketcentral.com’s selection as U.S. News' "Best of the Web" Site of the Week, …you can’t help but think that the bulk of this leg of the Great Bear is just about over and a significant but temporary low is nearby. By the time the mass media recognizes a financial trend, it is usually almost over."

"After the DJIA's 16 percent short-term plunge from 10,858 on March 8th to March 22nd's spike low of 9,107, and really the entire year-long 64 percent crash in the Nasdaq, the Great Bear seems close to finally having its fill, at least for this meal."

"This is an albeit very large counter-trend rally within the framework of the Nasdaq Great Bear Market of 2000-200[?]. The rally will likely have a ways more to go in terms of both price and time, so be prepared for the return of wild bullishness and equally wild claims that the next Bull Market is underway. We say Bull!" 

The markets have delivered the counter-trend rally, with a vengeance. The rally in the Nasdaq from the spike low at 1,620 on April 4th has been very painful for us Bears. The bounce in the DJIA from the spike low at 9,107 in late March has taken an eternity. With apologies to Thomas Paine, "these are the times that try Bears’ souls."

Yet in Elliott Wave terms, the Nasdaq rally is playing out pretty much on target. As we said last month:

"The Nasdaq is nearing completion of its third major leg down of the Great Bear. Wave 5 of this decline has more to go, probably to around 1,800, before a multi-week wave 4 rally ensues. Be prepared, as we know that bear market rallies are often sharp and swift."

Reprinted from March 2001

As you can see from the updated chart below, the Nasdaq’s wave 4 bounce is underway. The bulk of the rally is behind us, though there may be a bit more to go on the upside to complete the pattern.

For much more detailed information on Elliott Wave technical analysis, please see Putting Elliott Wave to Work in the Markets.

For the first time in nearly 2 1/2 years, last month we lifted our FULL CRASH ALERT warning, as the counter-trend rally was about to begin. We said:

For speculators, a tradable counter-trend rally is imminent. Protect the gains on your profitable short positions and prepare to go long.

For shorter-term aggressive investors, look to take profits on your Great Bear Fund positions. Longer-term aggressive investors may want to just ride out the counter-trend rally. Please see our Great Bear Funds Page for more information.

For conservative investors, five percent in a money market fund is hard to beat, plus you get to sleep nights.

This month, we’ll update the outlook to:

For speculators, stand aside as the counter-trend rebound may have a bit more to go on the upside. Protect the gains on your profitable long positions and prepare to go short.

[No change] For shorter-term aggressive investors, look to take profits on your Great Bear Fund positions. Longer-term aggressive investors may want to just ride out the counter-trend rally. Please see our Great Bear Funds Page for more information.

[No change] For conservative investors, five percent in a money market fund is hard to beat, plus you get to sleep nights.

Please read our disclaimer

The April low in Nasdaq was uncomfortable for the bulls, but it lacked the critical mass of a major market bottom. Though the faith of many may have been shaken, there are still plenty of "buy-the-dippers" out there. The mantra "the bottom is in, the bottom is in…" and the chorus "this is the buying opportunity of a lifetime" echo down The Street daily.

Solid and permanent market bottoms are usually marked by three major elements:

Pessimism: "Just get me out of that stinkin’ stock!"

Panic: "Sell everything, now!"

Capitulation: "I’ll never own another stock as long as I live."

We’ve seen the pessimism, and a perhaps a bit of the panic, but certainly not the capitulation.

The investment media has been drowning its readers with "how to profit from the market recovery" strategies. Here’s one example: "Top 10 reasons the bear market is over."

In May of 2001, The Street is certainly convinced that the bottom is in, there will be no recession, or only a brief, mild one, and that now is a once-in-a-lifetime bargain hunting opportunity. These are all current signs of classic bear market rally mentality.

The Economic Watch
As discussed last month, we believe the economic situation is much worse than the official US government statistics would lead you to believe. The overall economy is now governed by very tight and efficient supply chain management practices. The bulk of the U.S. economy is now much better able to "stop on a dime and put on the brakes" than it ever has. We believe the 25-50 year old econometric methodologies still used by most government bureaucrats are painting a picture that is lagging way behind the true state of the economy.

So, has the Fed panicked, with its two full percentage point drop in short-term interest rates so far this year? (Another 50 basis point rate cut is wildly anticipated at next week’s Fed meeting.) The only conclusion we can draw from the Fed's actions is they are very worried about the health of the economy. They must believe that the economy is much weaker than they had previously thought.

Yet in the face of the Fed’s cuts in short-term interest rates, long-term bond yields have actually moved a bit higher this year. On March 1st, 10-year Treasury notes yielded 4.87%. The yield is now over 5.3%. The string the Fed is pushing with is a very short one.

Yet it is these longer-term rates that matter much more to corporations as they contemplate their long-term capital spending plans.

The CNBC pundits will have you believe that good news is good news and bad news is good news. If the economy is recovering, then it’s a good time to buy stocks. If the economy is still in sliding, then Sir Alan of Greenspan and Co will continue to lower interest rates.

Here are this month’s economic highlights, or lowlights, depending on your perspective:

The "official" unemployment rate rose to 4.5% in April, the highest level in 2 ½ years. Last week the "first time claims for jobless benefits" totaled 408,000 - the highest level since '92.

Cold, hard, and indisputable corporate layoffs have soared to the highest rate since the recession year of 1991, and the layoffs are still accelerating. About 600,000 layoffs have been announced so far this year, nearly 3½ times last year’s level.

The "official" U.S. gross domestic product grew by two percent in the first quarter. [In a highly unusual move The White House, not the Commerce Department announced that the number would likely be revised downward.]

Home mortgage delinquencies have reached the highest level since '92.

Consumer debt is going up at a 10.5% annual rate. Household debt payments are at 14% of income, the second highest level ever.

The National Association of Purchasing Management index fell to 47.1 in April, down from 50.3 in March - its first decline since being created in 1997.

Silicon Valley real estate busted with 2000’s tech bubble. Vacancy rates were near zero a year ago. Now, vacancies are for example at 16% in Mountain View and 12% in San Mateo. Rental rates have fallen by 25% since the beginning of the year.

Ditto the real estate troubles in tech-heavy Denver. The inventory of unsold homes in April rose 43% from one year ago.

The Conference Board’s Index of Consumer Confidence fell to 109.2 in April, a new four-year low. This was the sixth decline in the last seven months.

We’ve seen but the tip of the iceberg of the energy crisis in California. The peak summer air conditioning season is dead ahead, and Hollywood doesn’t like to sweat. California comprises 1/8^th of the nation's entire economy, and an economic recovery here cannot be sustained without a resolution to the energy crisis.

Gasoline prices are soaring across the country, dampening summer vacation plans and consumer spending alike.

Here's some closing food for thought from our friends at The Daily Reckoning, who recently offered this bit of wisdom, from Barron's:

"The public preference for stock is not only as marked as ever, but also the will to speculate is still a speculative factor not to be overlooked. The prompt return of huge speculation and the liberal manner in which earnings are again being discounted indicate that it will be difficult to quench the fires of stock market enthusiasm for long."

What’s interesting and significant is this quote is from March 24, 1930, "in response to the dramatic rally that ensued shortly after the 1929 crash. But that classic "sucker's rally" ended just weeks after this quote appeared in Barron's. And it was from that point that the long, devastating bear market in stocks actually began."