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Commentary

(January 16, 2002)

Woosh! This is how we will describe today’s market action. For all intents and purposes, the Dow and the Nasdaq both closed on their lows. The tally: Dow down 211 and Nasdaq down 56.

For the last six weeks, both Rex and I have been trying to anticipate when another secular top will come. The news was certainly bearish. Valuation remains at all-time highs. By early December, the market was no longer oversold. What worried us, however, were the bearishness of the general public implicit in the high put/call ratios and the speculation of the Rydex bear funds. No more.

The current state of the market now says the top most likely came for the Dow on January 7 (at 10,345), and for the Nasdaq on January 9 (at 2,098). Both indices have now broken down. The major speculative stocks have broken down. Look at IBM, DELL, INTC, EMC, SUNW, CSCO, QCOM, AMAT, JNPR, and YHOO (in no particular order). The latest darling of the Nasdaq 100, Nvidia (NVDA), made a lower low a couple of days ago.  This stock is now off by more than 10% from its all-time high.

GNSS and EMLX are in the same category. These two stocks represented the strongest and the best price movements in the latest bear market rally, and now both of them have broken down as well. As the legendary Jesse Livermore would say, the tape tells you the whole story. Clearly, the tape is now saying the bear market rally is on its last legs.

To put this all into perspective, we will take a look at one of the most famous bear markets in history:

Dow Jones Industrials (June 1929 to May 1933)

We firmly believe the current rally is only a bear market rally. It is not a new bull market by any chance. For example, from the initial crash bottom in November 1929 to an intermediate high in April 1930, the Dow appreciated by approximately 50%. For people that did not get sucked into this bear market rally, they had another chance to lose their money when the Dow made another intermediate high in September of the same year. And so forth, and so forth. As the above chart indicates, trying to time a bottom in the market or an economic recovery in this environment is a futile exercise. For now, we would go with the line of least resistance, and that line says we are going down. Of course, there will be bear market rallies along the way. Very powerful bear market rallies. We will keep a very watchful eye on them.

The only remaining stocks (and that matters) that has not broken down and is still in an uptrend is Microsoft (MSFT), Home Depot (HD), and Wal-Mart (WMT). I anticipate they will do so soon. Keep in mind Microsoft reports its latest quarterly earnings at the close tomorrow. I for one believe this report will contribute to the current bearishness of the market.

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