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"The Bear!"

After much of the summer was over, I posted my thoughts on what the NASDAQ looked like after it was all said and done. Now, having never traded through a serious bear market, I don't think I knew what I was looking at. The severity of what would be to come would've been astonishing had I known about it then, and I wouldn't have believed it. [ Paris Metro card ] Had I known that the NASDAQ could indeed fall another 1000 points, I might've gleaned some information from the charts that said things were going to get ugly. I was confused by the action, watching Bloomberg Europe while in Paris as the NASDAQ went down daily. I pegged the market to bottom at 3250 then. Oy, a little wrong about that! It showed. A month later, I wrote bullish things about the market, on the basis of seasonality. Seasonality failed for the first time in a while.

So I've traded the tail end of a wildly bullish market where everything including the worst stocks gets inflated to crazy prices. And I've watched it top out and collapse. What now?

Having never seen this (the irony of course is that you don't begin to see the same patterns until MANY years and perhaps a few economic cycles later) I don't know what'll happen next. So for my own rumination, I need to go through what things I see working for both sides.

The NASDAQ has lost half of the cream off the top when it was at 5200ish. It is right around where it was before the great run of 1999-2000 began, before the Fed pumped a lot of money into the economy to be cautious about Y2K problems. While there have certainly been a lot of people who got trashed by the downturn, overall what this all means is that the market only destroyed the funny money created last year.

Maybe that's why sentiment is still wildly bullish. It isn't really impacting people yet. It was weird when the NASDAQ hit 2500's and Investor Intelligence still said bullishness was as high as August. Investors as a whole are not capitulating.

Right now there is the much publicizing growing graveyard of dotcom companies who burned through their venture capital with wanton spending on frivolous things and poor financial planning, high-paid employees and ridiculous company perks. There are still plenty of companies running themselves this way without solid product, and little experience to guide them. I've said this for a while now. I'd say that if I were to look at this historically, this would be a huge warning sign of an overheated economy, when employees are treated like royalty so freely.

[ NASDAQ Marketsite ticket ] You need look no further than the NASDAQ Marketsite in NYC, all gaudied up in the biggest screen in the world, a huge flashing attention-getting wall of stock figures, a tour which is basically a marketing device, fit with a stock market game with bells and whistles, and a "laser light tunnel" and a promotional video about how NASDAQ will water your garden and change your babies' diapers. It really did feel like Vegas. (of course, I haven't been there, but...)

Stories of layoffs at these companies are fairly common and we're seeing the once mighty stocks fall, and famous ones die. (Priceline.com, EToys.com, 3Dfx, etc.)

So in looking at the NASDAQ, you see the most badly affected sectors are Internets (with the dotcrap component) and PCs (almost every PC-related company has warned it will miss estimates, Gateway, Intel, Compaq, etc.).

Internets didn't have much of a solid business plan to begin with for the most part, while PCs seem to be pricing in flat to negative growth now that PCs have reached the point where people don't feel as though they need to upgrade as often, and as parts become easier and cheaper to make. Prices for all PC components have plummeted recently, and anyone with any sense would be buying parts like mad now.

Compaq, Gateway, Apple, and Dell have done terribly on the stock market, their complaint being sales are down. Going one step further, Best Buy and Circuit City stocks are in the shitter. So at the retail level, there's a huge problem finding buyers. The huge growth in the past, in the number of facilities and stores built, is now catching up with companies as they fill out their earnings.

So I feel as though consumer demand in technology could be just the first step in what may happen to the economy as a whole. I looked at retail stocks and got a mixed bag, so perhaps it hasn't extended so far as to hit durable goods/clothing. I mean, you look at JC Penney's and they're doing terrible, WalMart is looking like it is bearish, Kenneth Cole and Neiman Marcus have done okay, The Gap tried to find a bottom but is struggling. Perhaps consumers still have enough disposable income that they will still buy clothes and regular stuff, but tech is not affordable/needed?

And then you take that, and wonder what would happen if this was a serious bear market, and go the next step: what hits consumers eventually hits companies. What if companies stop buying hardware and investing in growing their business so aggressively? You would think that they would. We just came off a huge period of companies buying companies. Massive dilution of stock value. On the corporate level, you could see the deterioration the consumer level felt, and then higher tier stocks that have enjoyed continued growth would slow down, and you'd finally see Broadcom and PMC Sierra and SDL Inc. (soon to be swallowed by JDS Uniphase) get hit badly.

All the books I've read talk about the tops of cycles and how bulls end, and it usually ends in a massive buying hysteria where anything goes. If I were to look at what happened, this would be textbook. Is this really textbook? Time would tell, but I won't be surprised if this is the case. I would have seen it happen with my own eyes.

Now you look at the poverty effect from destruction of aggressive growth portfolios and consumer confidence finally begins to show serious signs of slowing and it affects more traditional stocks, the broader economy.

So in looking at the Dow Jones 30, it's been in the 9500-11500 area for two years now. Some argue this is a head and shoulders technical pattern, others say it's just consolidating for the next move up. As I look at it, I am as sure as anyone else, but my guess is that it looks like a distributive pattern, something that comes at the top of a cycle. Looking back at recent history I haven't seen the Dow sit at the same level for so long. I fear a big bear market could be taking place. The end of the longest bull run in history.

But could that really be the case? Are stocks really that overvalued? They don't feel like it in most cases. Traditional stocks I mean. But could the NASDAQ buyer drought extend to the S&P and Dow? Maybe in terms of growth we've seen the best of what's to come for a while? Maybe we've become spoiled? Surely certain tipoffs have occurred in the last two years. A bubbly NASDAQ, bloated workplaces, large gas-guzzling SUVs, record levels in a lot of economic data (CPI, unemployment, etc.), and so on.

It's disconcerting. What it would mean if this is the beginning of a long bear market is that I as a recent daytrader of one and a half years would be the product of a blowoff top. It would mean I am here because the hysteria over stocks reached such levels that I would begin being a daytrader. The same theory that says that Joe Schmoe only gets involved in a stock at the very top, when it runs up so high that he thinks it's easy money. What it all means is that if I want to do this for a living (which I do) that I better learn how to trade in less volatile conditions and to find rare gems. It will not be easy. But I am only drawn towards challenges.

Perhaps I'm wrong, perhaps long-time bears are wrong. Perhaps we're just working off the fat of last year, and the Dow and S&P have held up very well under the weight, and we will trend higher from here as technology and the economy continue to improve our lives. But I want to get down my thoughts, expecting periods of rallyage where people predict it was bottom but are really just bear market rallies, so that I can see if what I was thinking deep down (that is, that the market is historically in need of a bear market) is really the case.

But what of the economics of the country? Everyone's been predicting a credit crunch for ages, but what if it actually happens? The economy has a great deal of vapor money in it if you ask me, and it goes all the way from you and your friends leveraged on credit card debt all the way to the top, where the government borrows money from other countries, all on good faith. What if the US dollar finally begins to weaken?

It's just when I see things like all the PC stocks warning (which have as part of the SOX index led the NASDAQ higher for a long time) at once, combined with Microsoft warning for the first time in many many years, and California having rolling blackouts because too many people are using power there (while the electric companies lose money hand over fist from consumer protection laws, all in the face of admittedly recently falling oil prices that spiked up not too long ago and almost frightened everyone), I get a little antsy, particularly because we have not even fallen to levels yet where people will begin to feel hurt by this seriously.

It all makes me wonder. Cisco is lending out money from some unknown source to help out failing Internet providers and Cisco must eventually fall like the rest. People are hoping Greenspan cuts rates to save a market that looks to them like it's in trouble. Greenspan will probably give them what they want, but is it enough? Is it only a temporary solution?

I'm not sure. My instincts say bear in the next year or two, but as a trader I expect some bigass rallies and selling to occur along the way, and that's really all I need. Or supposed to need. If it affects the larger economy, I don't have much in the way of assets yet, plus I'm fairly frugal, so I feel I am less exposed than others might be. I take comfort in that.

I'm not a bear by nature, but I do believe in what they say, that successful people not only plan for bad situations, but the worst possible ones, and my natural cynicism catches warning signs that may cause me to be like this. It's not so bad to be completely wrong about the market if it goes up. It would be dumb to not participate after being proven wrong though.

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