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"Market Divergence"

[February 27, 2000]

Once again I write instead of doing homework... Oh well, it gets done eventually. I just have to forego sleep instead.

It's the weekend after the Dow has just cracked 10k for the first time since last April. I don't have cable TV but I'm sure CNBC and CNNfn are making a big deal of the whole thing. NASDAQ reaches new highs! No one seems to care! Actually, that's not true; people like this seem to really care.

And I'm sure everyone who's sensible cares about what's going on. This isn't really all that good that the Dow and S&P are leaking while the Naz is going nuts. At some point the divergence ends. Everyone knows this. The traders are thriving off it. Investors in the Naz might end up getting burned. Dow and S&P folks are already ticked.

My S&P fund has been getting smacked while my trading account has been doing well. (naturally I trade growth stocks) I'm not too worried about the fund though -- over time, the U.S. economy will grow and add new tech companies to it, thus making the S&P more valuable to me. One thing that troubles me though is that I've read stuff about the S&P becoming more weighted into a smaller number of stocks. Less diversification.

But anyway. What's going on? Value is certainly not the way to go right now. Growth is hot. Obviously this won't continue forever. Warren Buffett and his value crew are not popular people right now. They seem out of touch and unwilling to accept these new companies (many of which, contrary to the popular clichés, ARE making money and posting profits) as being worth investing in. Eventually those consistent, necessary companies will return to prices they deserve to be at.

Right now the selloff in the Dow has been so steep and orderly, that you have to think that money is just leaking out of it. It's like people are taking money out and putting it in the Naz. I mean people like old-school investors. Is that possible? Or is it just that these interest rate hikes are scaring the old school into selling until things look better? The Naz investors don't seem to care about interest rates at all.

You know, back when the Dow was at 10k in the fall, I was bearish as anything. Expecting a steep selloff and all. The markets bounced strong going into the winter and I changed my bearish stripes to bullish ones well after I should have. But I'm glad I at least had the sense to change. Anyway, volume came in and seasonality took over. Lots of trading activity and all. And now the Naz is trading close to 2 billion shares a day. When I started trading back in April '99, volume dropped off over the summer and the stocks I followed were selling off. So now that it's getting close to summer again, I'm kind of seeing how this liquidity and seasonality play out in the markets. As a newbie, I was sucked into caring about every little PPI and employment figure as if any of that mattered in the intermediate to long term. It's all bullshit. The only people who make money off it are the people who trade the big swings on the days that news is released. Interest rates are of course a big deal, but not those little numbers. The figures are adjusted and fiddled with and distorted so that they lose all meaning. Interest rates are more reliable.

As far as the Naz goes, since it's attracting all these top-callers and people who think it's full of crap stocks, I think this article puts things in another perspective. One thing it points out is that stocks on the Naz ARE being selectively bought. Unless you just buy the biggest companies out there like Cisco and Microsoft, you're not guaranteed money. The Naz is propelled by growth, and when companies cease to grow as fast, they get slammed. Just look at the e-tailers like beyond.com and buy.com. Also look at Gadzoox and E*Trade. Not healthy stock charts. When growth in the Naz starts to slow, prices will drop. Fast. I don't think that the author of that article is right. He says something on the order of a 9% decline is all we'll see. Given the sharp, vertical rise of the Naz, I think it will correct much more sharply than that. Of course I'm bullish, but corrections will be fast and furious. And I bet when summer comes and people take off for vacation, prices will go down like last summer. Stocks like @Home and AmeriTrade never recovered from that.

The funny thing about all this is that I'm certainly no expert. I've only been doing this for a year and I really have no say in speaking about the history of the markets or anything like that. I'm glad that I have all this information at my fingertips, but my experience pales in comparison to all these people who've been making money in value stocks for decades. I could be horribly wrong. But I have to start somewhere, and since I trade, not invest (yet), I can change as the market dictates.

But I'm certainly justified in coming up with my own theories about how the markets work, right? I can tweak them as I get older, root out the useless crap like CNBC and financial analysts and government figures. Once you get all the talk and bullshit out of the way, the market seems to make a lot more sense.

The people who cry out that this is a stock market bubble could very well be right...eventually. As someone in a daytrading channel said as the Dow collapsed last week, "They should drag out Bill Fleckenstein [ultra bear] for being right...five years later." Heh. The cardinal sin of the people who are betting against the market right now is that they are trading against the market. The market is never wrong. It can be screwed with intraday, but over the long haul, the market always knows what it's doing. To think YOU know how it SHOULD be is just stupid. Now, yes, the risk is very high right now on the Naz. (look at weekly chart of it -- the rise is fucking scary...but no top in sight yet.) Long-termers might not be foolish to go more cash right now until things feel better. But come on. Betting on a market crash? Thinking NASDAQ stocks don't even deserve to be above $20? That's just being closed-minded. Some Naz stocks really are wonderful. More wonderful than Citigroup or Coke.

As it stands for the rest of the year, I think the Dow and S&P will probably survive the summer fairly well. (a ton of damage is being done right now) I'm gonna be cautious going into the fall since I still have that crash mentality in me, but we'll see. Liquidity is the big concern for me. On the other hand, I still see plenty of room to grow. Any bearishness I have is more to do with corrections than extended bear markets. B2B seems to me to be something that will play a part in the way EVERY business goes about buying and selling. Sort of the same effect as the Internet, except the Internet also involved a huge cultural movement. Combine this with miniaturization, high speed wireless bandwidth, and expanded use of the Internet, good times should continue... (and don't give me shit about buzzwords -- all that stuff is so tired and speaks to me of people who don't really understand the implications of those buzzwords. [e.g. "Dude, what is 'e-everything' anyway?" Ugh...)

Shorting the Dow stocks would've paid off really well. They're so consistent in their declines that it's astonishing. Do people really want out of those stocks that bad? Day after day, more droppage. No bottom in sight. And meanwhile, the general market attitude is still pretty cheery. This is because the Naz is doing great. And most people I know or read are involved in the Naz, not the crusty Dow companies. If the Naz goes down a lot, then people start complaining. Amusing. Even more amusing that every time the Naz goes down, people say it's The End!

The market always knows what it's doing. If you can figure out what it most wants to do, you can screen out all the daily blips and bounces and falls because the larger picture will make itself clear in the end.

So where am I going with this? I just seem to be rambling on and on. :) I just wanted to get some thoughts out there on what I'd been seeing. I hope I'm right on this because a whole lot of things will have begun to make sense to me. If not, I'll have to rethink and see what else I can come up with. Try to figure out more about the behavior of the market and all.

I love this shit!

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