"The End of the One-Way Market"
By Aaron L. Task
Senior Writer
04/03/2003 07:18 AM EST
"Recent market action has been highly emotional and volatile, raising the question: Where is the middle ground? (And I'm not talking about the road between Karbala and Baghdad.)
Just this year, the equity market has swung from euphoria at the beginning ("stocks can't fall for four straight years") to increasing consternation about the seemingly endless buildup to war ("let's get it on, already!") to euphoria when it became clear war was imminent and there was early progress (March 12-March 24). More recent, emotions again reverted to despair about stiffer-than-expected Iraqi resistance (last week), and back to euphoria again (Wednesday).
The good news is that the most recent swings have gotten a wee bit smaller -- after soaring 8.4% the week ended March 21, the Dow Jones Industrial Average fell "just" 4.4% last week. On Wednesday, the Dow rose a little over 200 points after a handful of 300-point moves (or thereabouts) in March. If the swings continue to diminish in frequency and scope -- especially on a weekly basis -- that could be a sign the market is focused less on the war and more on the fundamentals. (Of course, fear and greed will always be major components of trading, to varying degrees.)
But we're not there yet, not by a long shot. And although the swings might get smaller, it's time to learn to love volatility -- because it is here to stay.
Dead End for a One-Way Market
Recent volatility is war-related, of course, but it also reflects the increased dominance of short-term oriented traders vs. purportedly long-term oriented retail investors, who were far more influential in the late 1990s. Some observers believe that's not necessarily a bad thing. Regardless, it represents the environment that's likely to be with us for the foreseeable future. Investors waiting for a return of the "one-way" market of the 1990s, or those who've given up entirely as the bear market has persisted, need to adapt to this new reality. Otherwise, they risk missing out on the next round of opportunities.
"We've had a pretty spectacular ride, but the net is we're really unchanged" since mid-October, said John Bollinger, founder of BollingerBands.com. On Oct. 17, the Dow closed at 8275 vs. 8285 after Wednesday's session.
Ten Dow points in almost six months is about as "flat" as flat gets. But consider this: After Oct. 17, the Dow rallied to as high as 9050 intraday on Dec. 2, then fell to as low as 8242 on Dec. 31, rallied back to 8869 on Jan. 13, before swooning to as low as 7417 intraday on March 12. Since then, it's rallied to 8522 on March 21, back to 7929 on March 31 and then to Wednesday's close of 8285. (Other major averages have posted similar moves.)
In sum, the Dow has moved over 5700 points since Oct. 17, with an infinitesimally small bias toward the upside, hence the 10-point overall gain for the index.
I'm unaware of any legal way to have captured all 2850 points of gains that have occurred since mid-October, much less the entirety of the move by alternatively shorting and going long Dow Diamonds. But if you were able to capture 25% of the up move, that would have netted you over 700 Dow points.
"The buy-and-hold investor earned nothing, whereas even an inefficient market timer still made [nearly] 10% in six months," said Bollinger. "Ten percent in six months seems a pretty good goal in this environment. Buy and hold is not going to return much of anything."
'Giant Sideways' for the Long Term
Bollinger suggested the "microcosm" of the past six months is exactly what's happening and likely to prevail going forward in the market's macrocosm. "I don't think the stock market per se is going anywhere for years to come, but that we will go nowhere in a manner once described as 'giant sideways.' "
"Giant sideways" means the Dow essentially being flat for 16 years, as it was from 1966 to 1982, during which time there were several major moves up and down. The Dow first flirted with 1,000 in 1966, but didn't close above that mark until November 1972. Thereafter, it took until Dec. 1982 -- more than 10 years -- for the index to finally put 1,000 in its rearview mirror. Some observers believe 10,000, which the Dow first crossed in March 1999, may prove to be a similar sticking point. (I've cited these comparisons before, but they bear repeating as some people still can't grasp the concept.)
Meanwhile, Japan's Nikkei 225 remains nearly 80% below its peak on Dec. 31, 1989, having only recently come up from new 20-year lows.
"If history is a guide, the birth of the next bull market may be a decade away," the veteran technician suggested.
Given that, investors can either:
Stick with the long-term, buy-and-hold "strategy" of owning index funds and risk underperforming even paltry money market returns;
Get out of stocks altogether, a prudent strategy if you believe the bear market is far from over;
Become expert stock pickers, or;
Accept the new reality of a volatile market where timing is everything.
One problem with the final choice is that investors were inundated with the message that "you can't time the market." That's 100% true if "timing the market" means pinpointing absolute tops and bottoms. But in the real world, successful market timing means trying to capture the bulk of rallies and avoiding (or shorting) big declines.
"There's nothing else you can do" but try to time the market, said Harry Schiller, editor of The Short-Term Consensus Hotline and a RealMoney.com contributor. "You've got to buy weakness and sell rallies. If you're not, you're getting killed."
Technical support and resistance levels can provide guidelines, Schiller said, citing Microsoft and Pfizer as two big-cap names trading in well-defined channels where investors can buy and then "dump it" if it rallies three or four points.
Furthermore, he noted that on Monday morning, S&P 500 futures reversed after hitting a near-exact 50% retracement of their advance from the March 12 lows to the March 21 highs. (The Dow posted a similar move, although less exact, and Schiller dubbed S&P futures as "the market.")
If forced to use only one timing indicator, Schiller recommended an overbought/oversold oscillator, preferring Tom McClellan's, although there are others. (RealMoney.com contributor Helene Meisler provides a daily update of hers.)
"It's been a great trading environment for the past eight to 10 months," Schiller said. "Extreme oversold conditions can be bought and overbought conditions can be sold. To me, that's the way a market is supposed to act."
Meanwhile, maybe folks unnerved by all the market volatility have got it backward.
"Don't you want [the market] to be volatile?" mused Bollinger. "Don't you want opportunities to buy [shares] on the cheap and to sell them at rich prices, especially if you think net-net over the years it's going to be hard to make upside capital appreciation? Without volatility there is no opportunity."
Something to think about in these highly emotional times. "
(in
www.realmoney.com)
Enviado: 5/4/2003 20:19