As Of: April 3, 2001
There finally seems to be a consensus that we are in a bear market. Closing out its worst quarter ever, the NASDAQ opened its first day of trading in April with more new lows as the tech bubble continues to melt. Meanwhile, 10,000 seems to be a barrier for the Dow Jones Index as it fell away from another attempt to cross that number. The stock market is ripe with opportunity and fraught with danger. The markets are at the same time oversold (and subject to a bounce aided by a short squeeze) while being exposed to the liability of further downside.
Clearly it is a traders market, offering many opportunities for the strong of heart and fleet of foot. If you are not a trader, you have two options: 1) Dollar cost average through the bottom with a long term investment horizon, or 2) Wait until a clear base has been established and then try to get in early when the markets move up.
It is the opinion of the author that, aside from a lot of intermediate volatility, a full recession cycle has to be completed before the market can look forward to dependable earnings growth again. It takes a long time before job cut announcements turn into actual job cuts. And then even longer while those out of a job use up their savings and start to restrict their spending, while others worry that they might be next. Unemployment has to go up and then plateau, and we need to go through a period of debt liquidation before the economy can start to rebuild itself. In short, we have at least six months of additional worry ahead of us, and perhaps much more.
It is a time to be both bold and confident, and selective and cautious. It is a time to distinguish shorter term market moves from long term trends. And, above all, it is a time to distinguish the survivors from those companies that will not be with us two years or five years from now.
Not all stocks will bottom at the same time. There is still plenty of opportunity to short some categories of stocks for short-term gains, while establishing long positions in others for a multi-year payoff. Selling covered call options in stocks you are willing to hold is another viable strategy. In short, this should be hedge fund heaven.
Best guess (but only a guess) is that we have a spring or summer rally followed by another painful sell-off. You either have to think like a short swing trader or a long term investor, but do not confuse the two. Those who do not have a well defined strategy are liable to be sliced, diced, and chopped every which way by this market.