As Of: May 1, 2001

Dangerous Optimism

Now is not the time to chase the markets up.

      It would appear that the highly advertised recession which never happened, has now been canceled. Don't believe it! The economy is not as bad as the NASDAQ would have had you believe in March, but neither is it as good as the Dow Jones Industrial Index (and other indexes) would have you believe based on their recent performance. Many analysts are suddenly upgrading stocks that they told you to sell a few weeks ago at the bottom of the market. Now (after most investors missed a 20% to 30% bounce up) they are telling investors to jump in before they miss the move back up.

      Nobody wants to miss the big move up, but don't confuse the long run with a short term rally in a bear market. The markets are receiving a push up because of the unexpected cut in interest rates and the approval of a tax cut. However, the negative factors that have been pushing the economy down have not disappeared. Excess inventory, consumer debt, job layoffs, earnings uncertainty, etc. are still with us and will be for quite a while. I would worry less about missing any further market move up than I would about buying into a market that could (and in my opinion will) drop again.

      Everybody likes an optimist, but this is a time when too much optimism can hurt. At the risk of missing some short term profits, I would caution investors not to get sucked into momentum investing just because the media and Wall Street houses are being optimistic. Consider just one example: When people were selling Dell Computer between $20 and $16, it surprised the majority by going up over $30. Now when people think it is safe to buy again, Dell has dropped back to $25. It was a great trade, but many people traded it the wrong way! Dell is not ready for the real ride up that you want to be on for the next 3 to 5 years. Nobody should have listened to the analysts when they said to sell in the teens, and you shouldn't listen now when they say buy in the high twenties. Be cautious. Be patient. Get ahead of the curve; don't try to chase the market.