Bullish, Bearish or Sluggish?

Are we still in a bull market, or are we now in a bear market?  First of all, we believe the bull market that started in 1994, the last time the Federal Reserve raised interest rates, is definitely over!  The Nasdaq earlier this year dropped 37% from peak to trough.  Let’s call that nasty drop what it is-a bear market!  Are we in a bear market currently?  That is a tricky question to answer because it is difficult to identify bull and bear markets until they are over.

For several months, the market has allowed only the most nimble traders an opportunity to profit.  Sector rotation has been the theme with one sector having momentum for several days only to pass the momentum to an entirely different sector days later.  We have seen drug stocks gain while financial stocks drop.  Financial stocks go up while semiconductors go down.   Some days have given investors pleasure only to deliver pain several days later.   This sideways churning in the markets can be very frustrating but can also serve as a constructive base building process for gains down the road.  The Dow has moved back and forth between 10,000 and 11,000, while the Nasdaq has been stuck between 3,500 and 4,000.  In this market commentary, we have attempted to identify potential catalysts that could break the stalemate in the stock markets.

One or more of the following four items is needed to move the markets higher.

1. The economy slows just enough to allow the Federal Reserve to adopt a neutral stance on interest rates without slowing too much as to affect corporate earnings.  This is the proverbial “soft landing”.
2. Leadership must emerge in several key sectors of the market (perhaps financials, drugs, technology or telecom).
3. Higher trading volume or cash in-flows must return to the markets (trading is usually slow during the late summer months).
4. There must be a slowdown in companies “going public”.  This week was one of the busiest weeks ever for the IPO market.  This resulted in billions of dollars being siphoned out of existing companies and being invested into new issues.  This would not be a problem if the market had stronger cash in-flows.

Both the Dow and the Nasdaq are negative year to date by 5%.  Meanwhile, the erratic behavior of the major stock markets has produced nice year-to-date gains in several sectors that can be used for diversification such as: energy stocks +14%, energy service stocks +41%, R.E.I.T.s +22%, and bonds +4%. *

We believe the market is neither bullish nor bearish and is probably best described as sluggish.  We remain optimistic the fourth quarter of 2000 could prove to be the quarter that breaks the markets out of their trading ranges to the upside.