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The Bear dies when the last Bull quits:
Six signs of a coming bounce
by Christian DeHaemer
If you listen closely, you can just make out the faint whine of former dot-comers as they plead to get out of that lease contract they signed for a new Porsche. Or perhaps it’s the loud taps resounding from the keyboards at fuckedcompany.com, the website where newly fired geeks vent their frustrations.
Don’t get me wrong, there is a slim wedge of compassion buried somewhere in my conscience for these non-working rich. But it is quickly eclipsed by baser feelings of pleasure when they finally get their comeuppance.
As I write this, the NASDAQ is down 27 percent since January 1, and 64 percent over the last 52 weeks.
At Taipan, we’ve made some nice returns by shorting the Medicine Company (MDCO:NASDAQ) for a 35 percent gain and Capstone (CPST:NASDAQ) for a 71 percent gain. And we took 28 percent profits on Indosat (TLK:NASDAQ), which tends to bounce from one Indonesian crisis to the next.
We make money in every market
I mention this because I’m vain, but also to prove that you can make money in any market. "The trend is your friend" is a good rule to hang onto.
That said, sooner or later the market will bounce and the shorts will have to cover. A few months ago, when the NASDAQ was trading at 2,500, I told you that we were heading for a "screaming 1000 point drop." That is now within 400 points of coming true.
NASDAQ at 1,500 could trigger a bounce. Taking that theory to heart, let’s look at a six reasons to be bullish.
401(k) on automatic
Record money continues to go into 401(k) plans–equity fund inflows ran US$1.8 billion in the first week of March, according to AMG Data Services. That week, 59% of the new cash went into small-cap and aggressive growth funds.
For the whole month of February, negative cash flows were US$3.5 billion, but you must take into consideration that equity fund assets total US$4 trillion. About US$1.6 billion was pulled out of technology-sector funds, but even more was taken from international funds, which experienced US$2.6 billion in net outflows.
Despite rising outflows in January, cash flow was positive for the month. It ran at a rate 40% lower than in January 2000. The good news is, they were still in the black–and a lot of this money is building cash positions.
The fund managers are not putting in play a large portion of the cash going into mutual funds. That cash continues to build on the sidelines. If the market turns around, it may do so very quickly.
Record down years are often followed by record up years.
In 1998, during the Asian Devaluation crises, the South Korea Kospi index fell more than 60%. The next year it was up 266%!
I remember the summer of 1998 very well. At the time, the pundits were preaching that Long Term Capital Management was going to sell the world markets down the proverbial drain in a flush of over-leveraged derivatives. Thailand and South Korea were going to take ten years to come back. Look at Japan, they said.
It’s true that Japan has been in a tailspin for ten years. But over those ten years, it has bounced more than 60 % on three occasions. A little over a year ago, Fidelity Small Cap Japan was up more than 300%.
The market looks six months ahead
The market likes to look ahead six to nine months. The fourth quarter of 2000 was so heavily loaded with warnings that the year over year numbers will look great. There is a good chance that the market will start to rally in June.
Over the past few years, it has taken roughly six months for Fed cuts to kick in. The Fed started cutting aggressively in January. Again, that puts us at June. There is also the possibility for a summer rally. Last year, the NASDAQ jumped from about 25% over the summer.
Speed of the market
Information now moves so fast that the business cycle is reduced. I still believe this argument. The speed of the recovery will shock many people, just as the speed of the decline shocked many people.
The contrarian
There are many reasons to lean towards bullishness at this stage of the game. The contrarian would say that the media stories of dead dot-coms and a bankrupt Japan are a bullish sign. Buy cheap, sell dear. I don’t believe we are quite there yet. I don’t like the fact that the put/call ratio is still below one (0.92). More puts than calls would signal pervasive bearishness–and ironically be a bullish indicator.
Sacrificial veteran
I won’t switch over from bearishness until I see a trigger. The new bull market requires a sacrifice. In the Asian crises of two years ago, it was Long Term Capital Management that signaled the bottom.
We need to see panic. Some analyst needs to jump out a window with shares stuffed in his pocket. Some company in the national spotlight must go under. When Amazon closes its shipping department, or Gabrielli gets fired. That’s when I’m bullish.
This could happen at any moment. I expect it to happen sometime in the next few months. And when it does, I want to be in position to benefit. Until then, we’ll hold on to our profitable short positions, build cash, and whistle merrily while the market bleeds.
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