by John M. Curtis
(310) 204-8700

Copyright December 2, 2003
All Rights Reserved.

inding a new set of legs, U.S. equity markets are poised for impressive gains in 2003, finally getting traction after the worst meltdown since the great depression. With the Dow Jones Industrials up 20% and the tech-rich Nasdaq climbing over 40%, investors are getting the jitters, fearing another market slide, should profit-takers cash out before year's end. Year-end rallies typically keep investors in the market through the holidays, fueling sizable gains before sell-offs in the New Year. Yet, with the economy posting the best numbers since 1984, hopes remain high that the current bull-run can keep going into 2004. When third-quarter growth was revised to 8.2%, buyers rushed in believing that the current bull market could keep going. But with so many investors getting burned in the last bull market, savvy traders defensively take profits, driving averages southward.

      Prevailing wisdom—or spin, depending on how you look at it—attributes market vacillations to rational factors, including positive or negative economic trends, Fed policy, unexpected shocks like terrorism or other events that affect the economy. Creating myths is a favorite pastime of Wall Street, including blaming market gyrations on a host of rational causes, like corporate earnings. “Last week everyone was kind of waiting for a catalyst,” said Tasi Izushima, head of U.S. stock trading at brokerage firm Daiwa Securities, citing upbeat economic data, especially the upswing in manufacturing as reason for optimism. Wall Street spends far too much time debating bulls vs. bears, when insiders know that fund managers—not small investors—snatch up bargains or lock-in profits when the time is right. With the DOW and Nasdaq already posting impressive gains, it's only logical that institutional investors would take profits and drive share prices down.

      Profit taking alone itself isn't responsible for market meltdowns, through it contributes to sideways activity, namely, major averages climb to certain levels, then quickly retreat. In good economic times, bull markets take into account periodic sell-offs, yet market averages continue to break new ground. Technical analysts talk about “moving averages” to characterize aggregate trends in share prices, helping investors keep their heads on straight when daily gains lose sight of the bigger picture. “I can't recall since maybe 1982 the gap between economic opinions and economic reality being so wide,” said Alan Skrainka, chief market strategist at brokerage Edward Jones in St. Louis, cautioning investors to contain euphoria during the latest up-tick. Two years of declining equity values dampened Skrainka's “irrational exuberance,” a phrase Fed Chairman Alan Greenspan used to sober up the bull market in 1998.

      Small investors were largely flushed out of the market during the last downturn that saw long-term investors lose $7 trillion in corporate and private wealth. Only clever market-timers survived the three-year meltdown, while long-term investors watched their life-savings—and retirements—crash and burn. “You sound like you're naïve—like you haven't learned anything,” Skrainka said, reminding small investors that Wall Street is a tough business. Leading economic indicators point toward a robust recovery in 2004, but don't necessarily translate into a booming market. Investors hoping to recover losses sustained over the past three-years might be sadly disappointed to find out current valuations remain disproportionately high, at least by historic standards. With price-to-earnings ratios already inflated, many institutional value investors look to lighten inventories.

      Regardless of expected economic growth, the current run-up in stock prices may be difficult to sustain, especially 40%-plus gains in the tech-heavy Nasdaq. Bulls and bears agree that if you buy at inflated prices you're going to get burned. “Were finding plenty of good, solid stocks with good, solid fundamentals selling at reasonable price-to- earnings ratios,” said Bill D'Allonzo, a veteran fund manager and chief investment officer at Friess Associates Inc., a Delaware investment house that manages Brandywine mutual funds, calling current trends in the market a “rubbish rally,” where stocks with anemic earnings and bloated price-to-earnings ratios have fueled the current bull market. While it's true that small investors have difficulty timing the market, it's also true that institutional players control the market by taking profits and then snatching up bargains when prices drop.

      Small investors must beware that institutions frequently time the market, bargain-hunt and liquidate holdings when it's time to take profits. Positive economic trends don't necessarily translate into bullish stock markets, especially when valuations become inflated. With the devastating downturn in the last few years, investors must rethink old-fashioned buy-and-hold strategies, leaving small investors unable to recoup losses. Recent scandals in the mutual fund industry haven't helped confidence with long-term investing. No matter what the good news, institutions hedge their bets by ceaseless bargain hunting and profit-taking. While a robust economy, Fed policy and, yes, corporate earnings play a part, markets are still at the behest of fund traders dumping inflated shares and snatching up bargains. Buying the same old myths leaves the little-guy holding the bag.

About the Author

John M. Curtis writes politically neutral commentary analyzing spin in national and global news. He's editor of OnlineColumnist.com and author of Dodging The Bullet and Operation Charisma.

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