ContraryInvestor - Market Observations

NEW ERA UPDATE 4/15: PERSPECTIVES ON A MANIA

Our sincere thanks to our chief chartist Tim for bringing us a very timely NASDAQ '00 and DOW '29 comparison. Does anyone really know where the NASDAQ/S&P/DOW are heading Monday, all of next week, next month, next year? Of course not. Our personal bet is down over time, but in saw tooth fashion. Maybe we're simply dead wrong, but our bet is that the next six months (at least, and possibly longer) are nothing but countertrend action. Clearly it took 2 1/2 years for the 1929 "crash" to fully complete itself. U.S. in 1973 and Japan in 1990 were completed over one year or more. The initial drop in 1929 was close to 47% and then a 50% countertrend rally ensued. After that it was saw tooth all the way down.

Tim's following chart of the S&P shows a break of a channel bottom that has it's initial bottom channel origins in the mid-1990's (at the beginning of what was to become the mania stage of this great bull market - the blue lines):

Everyone Has An Opinion...For what it's worth (and possibly not much), here are our humble thoughts on where we stand:

1. On one side of the fulcrum stands the public investor. 401k's (now 201k's after last week), IRA accounts, personal "savings" money, etc. If the public initiates panic redemptions of their mutual funds en massé, we're in for the worst financial disaster in US history. Plain and simple. The above charts will be meaningless.

2. On the other side of the fulcrum stands the Fed, the Treasury, the Administration, global central bankers/officials, the brokerage community and the large mutual fund complex. Let's be realistic here, there will be some type of coordinated action ahead. There is not a whisper of a chance that this consortium of vested interests will stand by and watch the US markets implode from the sidelines. This group can effect change and action in the short term. The long term is a different story.

There you have it. Quite simplistically, we see these as the two big picture factors at play.

Other Random Thoughts:

1. We have to believe that the bulk of the "new era" speculation has come to an end. We're talking about the BB stocks, the B2C and B2B area, etc. Chances are that moon shot, parabolic stock moves are behind us.

2. The rallies ahead should be narrow. Probably only those issues that are considered top quality (and this includes the big cap techs, although still many are wildly overpriced).

3. The texture of venture capital money in this country should change. The large institutions responsible for funding this area (Calpers, university endowments, other plan sponsors) may have quite a different view of the world ahead as a good number of dot.com's file in the year ahead.

4. Possibly the days of "buy-and-hold" are behind us for a while. During 1929, trading was the only possible way to make money (unless you had the luxury of being able to stay short from start to finish through some hellacious rallies). At the bottom of the '29, '73 and Tokyo '90 bear markets, trading the ups and downs was the only way to make money for years. Buying and holding was a losing proposition. We believe we have entered/are entering that type of market environment right now. Be prepared to be flexible in your investment activities and adopt that philosophy.

5. Fear/disgust among the public should take time to develop. Hence the saw tooth. Hope. Dashed hopes. Hope once again, and so on.

As you would imagine, we'll be updating these charts and the related commentary in our Market Observations pieces as we move forward. Remain flexible. Virtually nothing ever happens on Wall Street in a completely linear fashion.

Best Regards,

The folks at ContraryInvestor

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