Revisiting Old Times

MarketWatch featured a piece with the subtitle “Are we revisiting 1998? Or 2001?” That is certainly a valid question given how the markets have been meandering from bullish to bearish territory, at least according to my Trend Tracking Indexes (TTIs). Here are some highlights:

There’s a sense of déjà vu in the market these days. The question we need to answer is whether it’s 1998 or 2001 we’re revisiting.

We’ve been pondering this topic since last summer when the Federal Reserve and global central banks began their furious offensive. We offered at the time that if the wheels fell off the financial wagon, we would be well warned.

We must now discern whether those actions were a sign of troubling times or the building blocks of a wall of worry.

At the heart of the matter is the structural integrity of the U.S financial system. In a finance-based economy, that has profound implications for livelihoods around the world.

We often say that to appreciate where we are, we must understand how we got here. There is a distinct difference between taking our medicine and being injected with fiscal and monetary drugs. The former is a function of time and price. The latter is a quick fix.

In 1998, the Federal Reserve slashed rates and ushered in the massive technology boom at the turn of the century. That period redefined market perception as housewives flocked to stocks and the promises they held.

When that bubble burst — and remember, most folks vehemently denied that we were in a bubble at the time — the Fed stood at the ready.

In January 2001, they began their series of rate cuts. The S&P;, saddled with capacity and littered with false hope, swiftly lost 40% of its value.

In my view, and to be a little bit more specific, we may be closer to October 2000 than to 2001. I remember distinctly the events leading up to October 13, 2000, a date which will forever remain with me. It marked the day that our domestic Trend Tracking Index (TTI) effectively signaled an all-out sell and we moved to 100% cash on the sidelines thereby avoiding the brunt of the subsequent bear market.

The days and weeks leading up to that Sell signal were not unlike what we are experiencing nowadays. The bubble had a different name, but it was a bubble nevertheless. Wild swings in the market, a few whipsaws here and there, and eventually a slow deterioration of stock prices lead to the crossing of the trend line into bear market territory.

It’s difficult to recognize a major change in market direction as it is happening. Just as on October 13, 2000, I had no idea that this was the beginning of a major bear market. Right now, we have crossed into that same territory again and only time will tell if this move to the downside will be sustained. While many fundamental indicators support this direction, we need to be patient before taking any positions that take advantage of this new trend.

About Ulli Niemann

Ulli Niemann is the publisher of "The ETF Bully" and is a Registered Investment Advisor. Learn more
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