November 29th, 2008

"Date that Broadcast"

Turn it off, I can’t take anymore!

“what a difference a rally and a three-day weekend can make. Now, traders left here this afternoon in a much better mood than they had been in earlier in the week. And, after all, the Dow posted a triple-digit gain on volume of better than 1 billion shares, and advancers swamped decliners. Now all that had traders leaving the NYSE on a high note……

Market watchers say at this point many of the big-cap tech stocks are positioned for a run early in the New Year……coupled with the traditional inflow of mutual fund money in January has many believing the next few weeks [into the First Quarter] could be better than the last few…..

we were up from depressed levels. A lot of bargain hunting going on today. One other factor: short covering; with many traders taking next week off, many of the short-sellers didn’t want to have their positions open, so they closed those positions today. One thing that characterized the trading today, as we’ve seen all month, was huge volume.”

The above excerpts are from the transcript of a business TV show; can you guess when it aired? Give up? It was CNN’s Moneyline of Friday, December 22, 2000. On the day of the broadcast, the S&P 500 closed at 1305.95, up 2.44% after having declined 14.5% from an intra-day all-time high of 1532.50 none months earlier on March 23, 2000. Similarly, the NASDAQ saw an all-time intra-day high of 5132.52 on March 10, 2000; it had fallen to 2469.17, a 50.14% decline by the day of the broadcast!

It was reasonable, at least, for everyone including the talking heads to hope that the market was close to a bottom. It’s understandable for the experts to think that “software infrastructure remains a very important sector. Any company that is addressing the needs of business, the move to ecommerce, software development and testing of ecommerce systems, any of these systems that result in higher profitability for the mainstream companies, the Fortune 2000 around the world. [sounds similar to what we are again starting to hear about basic materials, steel, soft commodities and oil stocks]”

But the markets aren’t that accommodating or well-behaved. As most of us who were in the market back then painfully remember, the talking heads were dead wrong and the indexes continued falling after that broadcast for nearly two more years before making a bottom. The NASDAQ lost another 55.7% of its value after the evening of the broadcast before hitting a low on October 9, 2002. The S&P 500 fell even further after the broadcast than it had before – another 40.5% on October 9, 2002.

Like putting salt on a painful open wound, it took a full six years, to October 4, 2006, for the S&P 500 to regain the level of that close on December 22, 2000; the NASDAQ recovered to only 50% of historic all-time high.

I’m sure we’ll again be hearing broadcasts similar to that MoneyLine show many times between this Thanksgiving and the last day of trading before the Christmas break, 2008. Be careful! Don’t fall for the siren call of the Talking Heads telling you that the market has hit bottom, is going up and, if you’re a long term value investor, there are hundreds of stocks at bargain basement prices that you should be buying “now”.

If there’s anything we’ve learned over the past year is that we need confirmation from the markets themselves in the form of solid moves above long-term moving averages before committing our capital.

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