Grizzly's Growlings Current Report

Monday Morning Market Musings  11/06/2000

"Markets Survive October, but ....."

Editor’s Note: Bearmarketcentral.com is happy to be chosen as one of Money Magazine's "favorite cranky contrarian websites." Check it out online or see the article beginning on page 162 of the November issue. From the article:

“Bears offer a sense of history you don’t get from analysts spouting off about the New Economy.”

Happy to oblige. Let’s put 2000’s market action into some perspective. Cash or short has been the place to be. Back in January we talked about the January Effect: “As January goes, so goes the markets.” January 2000 didn’t go very well, at least in terms of the DJIA, which fell nearly 5% for the month. The DJIA hit its all-time intra-day high of 11,750 on January 10th. From there, the Bear has slowly wrestled control from the Bull. 

The DJIA and S&P 500 are down about 5% year to date. The NASDAQ Composite has been in a full Bear Market since early March when it peaked at 5,133. At Friday’s close of 3,451, it's down nearly 1,700 points, or 33 percent. The Russell 2000 also peaked in March and is down 17%.

Last month we said, “October will be a month to remember.” Well, maybe so for New York Yankee fans.

We were expecting much more action to the downside in October, including an historic crash day. There was that minor panic sell-off on October 18th following the terrorist attack on the USS Cole. The 430 point, 18 minute plunge in the DJIA was but a taste of what Bear Markets are made of.

But it was all too brief, too painless, too orderly and too bloodless. The panic turned to wild bullishness within minutes, producing the rally through late last week. This all appears to be a classic bear market rally. As we’ve said many times:

Rallies in bear markets are often quite sharp. But also, most bear market rallies are very short-lived. They serve their purpose to work off the deep oversold technical conditions in the market and to then set up the next down move.

The October sell-off was widely attributed to mutual fund tax-loss selling prior to the fiscal year-end, which concluded October 31st. [There were a helluva lot of losses earlier in the year to get off the books!]

The Street consensus is that the worst is over and that this October will match other Octobers of late and mark a significant and lasting low. The consensus is the traditional year-end rally will begin soon, regardless of the outcome of Tuesday’s elections.

The last thing the Street is expecting is another large leg down in the Bear Market. 

Last month we said:

The Elliott Wave labels … paint a pretty clear picture: the DJIA is approaching the top of the a-b-c wave 2 counter-trend rally. There may be a few more days or even weeks of squiggles higher to complete the details of wave C of 2, so we'll just have to ride out any short-term rallies.

Once the wave 2 pattern is complete, the DJIA should begin the relentless wave 3 we've been anticipating. This move should include an historic crash day, probably in mid-October.

Despite, or perhaps because of, October’s wild swings, there is really no change to the essence of this outlook.

US STOCKS REMAIN ON FULL CRASH ALERT!

We repeat our investment outlook: 

For aggressive speculators, any short-term strength in the markets hold excellent low-risk entry points to the short side.

For longer-term investors, you may want to have a look at one or more of the mutual funds well-positioned for the down side. Please see our Great Bear Funds Page.

Please also read our disclaimer.

How rampant and ridiculous are the current long-term Bull Market projections? Here are some stratospheric suggestions, as assembled by Robert Prechter of Elliott Wave International

All of these forecasts are WAY out into the future, and certainly anything is possible. But the manic bullishness manifested in the forecasts is symptomatic not of a market springboard bottom but an historic market top, the kind that marked the top of the infamous Tulip Mania of 1637 in Holland.

As we first offered back in April, according to Charles Mackay's classic and must-read Extraordinary Popular Delusions and the Madness of Crowds, a single "Viceroy" tulip bulb was exchanged for:

four tons of wheat
eight tons of rye
four fat oxen
eight fat swine
twelve fat sheep
two hogsheads of wine
four kegs of beer
two tubs of butter
1000 pounds of cheese
one complete bed
one slightly used men's suit
and one tarnished silver drinking cup

Quite a bargain, eh? But Tulipomania was just about flowers, right? The late 1990's InterneTulip mania was about money, and making more of it through technology, e-Commerce, and the Internet.

When future historians write their equivalent to Mackay's brilliant Extraordinary Popular Delusions, they'll cite examples such as:

At the turn of the Millennium, a single share of hundreds of different Internet stocks traded for as much as $150 in Federal Reserve Notes. Famous stocks of the day such as Priceline.com TheGlobe.Com, iVillage, and eToys bloomed in the mania, only to wilt into the scrap heap of history in a matter of months. 

Tomorrow of course is Election Day. Each day we all cast our votes on Wall Street with our dollars. The markets have been echoing the sentiment of the polls, that the presidential election is too close to call. Whatever your political bent, whichever candidates you support at the state and local level, please take the time to exercise your democratic duties and cast your vote. “Democracy is not a spectator sport!“

“When your brother-in-law’s portfolio is down, it’s a correction. When YOUR portfolio is down, it’s a bear market.”     -- Grizzly

grizzly@bearmarketcentral.com

Please read the disclaimer.

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