Following April’s sharp rebound, the markets held their ground in May. The mid-month rally following the Fed’s fifth rate cut quickly faded. The markets have slipped back to just about where they were before the latest Fed-induced buying spree. 

The April low was uncomfortable for the bulls, but it lacked the critical mass of a major market bottom. 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, all classic signs of bear market rally mentality. Despite the strong 41% rally, the Nasdaq is still off 58% from its all-time high last March.

Bullish sentiment, a contrary indicator, has surged with the thermometer this spring. The pundits and anal-ysts parading across CNBC and CNN are near-universally bullish. A Barron's magazine poll of investor attitude for the next six-months found 45% bullish vs. 11% bearish. The American Association of Individual Investors reports 64% of its members expect higher stock prices in the near-term vs. 23% bearish.

The Nasdaq has now rebounded 41% from the April 4^th low at 1,620. To put this into perspective, the DJIA rallied 50% from its 1929 crash low before resuming a decline that carried the index down to the ultimate bottom in 1932. Will the Nasdaq follow suit this time?

The Nasdaq ended a six-day winning streak on May 23^rd. The Nasdaq last mounted six consecutive advances (actually seven) back on January 28, 2000 to February 8, 2000. The bubble burst a month later, on March 10th. Will the Nasdaq follow suit again this time?

The Elliott Wave outlook puts the Nasdaq potentially at the beginning of Wave 5, which should bring it well below the prior low at 1,620. The short-term patterns are inconclusive but suggestive of an immediate drop to the 1,900 area.  A convincing break through this area should confirm that Wave 5 down is under way. Following this drop, the Nasdaq may need to extend one more small leg up to complete the Wave 4 counter-trend bounce. A bounce back above 2,300 should confirm this scenario. We’ll just have to stay on our toes as the patterns play out. Keep an eye on our daily updates as the month progresses.

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

Regardless of whether the Nasdaq is able to extend this rally a bit from here or not, we firmly maintain our stance that the recent rally is an admittedly large counter-trend bounce within the framework of the ongoing Great Bear Market of 2000 – 200[?]. 

Our investment outlook stands at:

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.

For short-term aggressive investors, look to establish or re-establish positions in your Great Bear Funds. 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.

Please read our disclaimer

The Economic Watch
The question we posed last month was: 

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.

Sir Alan and Co did indeed deliver that fifth rate cut. As we’ve discussed over the past few months, we believe the economic situation is much worse than the official US government statistics would lead you to believe. 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. 

We believe a far better and more accurate source for economic data is directly from the private sector itself. Few if any fudge factors, no biased surveys, no filters, no bureaucratic interference, just cold hard data.

We’ve complied a bevy of bearish economic tidbits this month, mostly from the private sector. Our favorite source is The Daily Reckoning, a daily dose of witty and enlightening economic analysis. Click here for your free signup to The Daily Reckoning.

Gauging from Moody's latest data, corporate debt defaults totaled a record $31.8 billion in the first quarter, equal to 65% of last year's total new issuance volume of $49.1 billion. 

"The median corporate bond rating stands at BBB, or weak investment grade," reports Jim Grant in Forbes, "the lowest since 1981, the first year for which statistics are available. Also, just 28% of the junk-bond universe holds the top junk rating, according to Moody's Investors Service. That's the lowest proportion in at least 80 years, a span that includes the Depression."

Despite the Fed’s five interest rate cuts in five months (the most aggressive rate cutting ever), mortgage rates are higher today than they were at the end of last year.

Hotel occupancy rates in New York fell to 73.3%, from 84.2% one year ago. San Francisco Bay fell sharply from 85.2% to 70.8% this year. Disneyworld occupancy rates fell to 77.8% from 84.5% 

Bankruptcy filings rose 17.5% in the first quarter of 2001. 

According to Gartner Dataquest, U.S. PC unit sales fell 3.5% in Q1, the first quarterly sales decline since they started keeping records.

Moody's observes: "April's record 40.9% monthly decline in semiconductor equipment bookings broke the previous record drop of 25.3% set just two months earlier. Semiconductor equipment bookings have dropped 45% year-over-year thus far in 2001."

The latest Manpower Inc. employment survey reveals the US companies are in no hurry to hire additional workers. In fact, "Companies have become as cautious about hiring employees as they were in 1990 and 1991, when the US had its last major recession," the Wall Street Journal reports.

The German IFO business sentiment index fell to its lowest level in two years. "The news will heighten concern that the German economy is being affected by the US slowdown," the Financial Times surmised.

Half of all U.S. households have less than $17,500 in financial assets. Middle income households have only enough financial reserves to sustain spending for 2.2 months. The bottom 40% of households have NO RESERVES whatsoever.

The ISI Group points out that US consumer installment debt now totals a record 21.7% of disposable personal income. US private debt now equals a record 147% of the GDP. ISI concludes, "To be sure, consumers and corporations are the most highly leveraged they have ever been going into a slump."

Corporate profits have dropped two quarters in a row. First-quarter 2001 after-tax profits fell over 3% in the first quarter. They fell 4.3% in the fourth quarter. 

Business investment fell 2.6% in the first quarter. It fell 3.3% annually in the fourth quarter. Those are the first back-to-back quarterly declines since the recession 1990-1991. 

The simplest measure of the banking industry's liquidity (the loan-to-deposit ratio) has deteriorated to its worst level since data started being kept in 1934."

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.

$3.00 a gallon gasoline is just around the corner. $150 to fill the RV kinda takes the edge off that vacation trip.

“You can’t always get what you want, but if you try some times you’ll find, you can get what you need.” -- The Rolling Stones