The following is archived from The Contrarian - notes from the wall street underground; I published October 15, 1998.
This day was the first and heavy thrust from the bottom coming off the 1998 bear market low. The Nasdaq traded as low as 1,492.40 the previous week, and worked towards its ultimate top of 5048.62, one and a half years later.
The 1998 low culminated with the blow-up of Long Term Capital Management (LTCM).
Emotion was running high during this period, and while leadership stocks were considerably strong, especially in terms of relative strength, sentiment in the investing community was resolutely negative.The material is poorly archived, as it was published pre-Blogger and with a password-protected site. I'm typing-up these now because I am using the material on a related work.
The Contrarian is based on Dostoevsky's Notes from Underground.
Thursday October 15, 1998
Depressing Rally
It's uncanny, really. I can't remember a time the Dow rallied 300+ points and folks seemed so little pleased. Where are the happy campers? Where is the goofy celebration that normally caps such a momentous day? I'll tell you reader, I recognized pain - real inexorable pain out there by the end of the day. Skepticism for sure, but more significant was the pain this explosive rally seems to have created. These people are absolutely unhappy, in disbelief, or worse - they're bloody SHORT!
Okay, it's not the majority who are short here, but I'll tell you there is angst out there. This is the most disappointing huge day on Wall Street I've ever seen. Today was the 3rd biggest point rally ever in the Dow and yet there's a kind of despair out there. I'll tell you what it is. It's the sorry fact that investors, long-term investors no less, sold out of their portfolios in a panic last week and missed today's explosive, foolish rally.
It's terrible, really. To have held onto their portfolios through all that pain, right through to the end last week when it was finally clear there is some kind of problem in the world and stocks had to be sold. Only to have the market take-off again now without them, before they've had time to adjust their perceptions more positive. It's altogether unkind.
I know you think I'm being arrogant, but that's not really the case. So what if cautious folks sold out their stocks, I am the bigger fool. Yes, I may be the world's greatest fool. Perhaps you're down on your portfolio this year, and of course it would have been nice to be a buyer of quality last week instead of finally selling those loser stocks you held for so long. But look - you have a normal, respectable life compared to me. You'll bounce back. But me, reader, I am an insect. A foolish little bug. I live in a hole and I rarely (never really) go outside - I can't risk the good cheer. My biggest draw-downs, you see, my greatest portfolio disasters, have all followed periods of enjoyment and self satisfaction. I had to put a stop to that. For the sake of future gains, I had to make myself more miserable than even you!
Anyhow, we must address this incredible marketplace. This Sebastian of growth. This depressingly large rally and its significance. Yes, my dears, it is not insignificant that the Fed did cut rates today. And that so many now are skeptical following a session whereby up-volume topped down-volume by a nine to one ratio. Indeed, this is confirmation now that one, this market bottomed last week (Root Canal Bottom), and two, it is going much higher. The other day I mentioned I must be the biggest bull on Wall Street. After today's rally, and with all the cautious forward forecasts, and continual questions of liquidity crisis' and looming recessions, etc., I suspected I was the only bull on Wall Street. Not true, of course, but I would not put a top on this market yet, my friend. As fun as that will be, I must expect now that we will make new highs in the intermediate term, and that includes the Russell 2000! Yes, I am crazy, I have told you that. But you will hate me when the Russell makes new highs.
Tomorrow, or by Monday I should warn you, I'm going to be a net seller of stock. When I get this excited I must always lighten up - I've learned that. But I refuse to sell low tomorrow, and if the market is only down tomorrow I will go back into margin, buying more stock instead. In fact I hope they sell-off early tomorrow, at least. My suspicion is we will, if only to allow the frustrated chorus another song: "...the buying was overdone; the rally was largely short covering and option-related activity; one had to expect stocks to cool-off." Yes, I can almost guarantee that at some point tomorrow, or at least by Monday, stocks are going to rally much higher still. Then at the point sentiment shifts from prudence, skepticism and disbelief, to where people are actually seeing bullish, I will lighten things up - for the near term at least.
These include: KNDL, PPDI, GENZ, SEPR, ENMD, INTC, ORCL, MU, YHOO, AOL, CSCO, LIPO, NEM and PDG. I'm not selling any Japan though. It will be a while before anyone likes that trade enough for me to hand it over to them.
Bah!
The following is the original first-post of The Contrarian - notes from the wall street underground; I published September 28, 1998.
The date precedes an important bottom for the equity markets (especially for the Nasdaq, which would mark the low of 1,492.40, on it's way to the ultimate top of 5048.62, one and a half years later).
This 1998 bear market came on the heels of the Russian financial crises and culminated with the blow-up of Long Term Capital Management (LTCM).
Emotion was running high during this period, and while leadership stocks were considerably strong, especially in terms of relative strength, sentiment in the investing community was resolutely negative.The material is poorly archived, as it was published pre-Blogger and with a password-protected site. I'm typing-up these now because I am using the material on a related work. One note: you might notice I was not against making market calls publicly during this period. I no longer commit myself to a future-direction for the markets. One might be very good at predicting what lies ahead, but ultimately it's a fools game. I was a good trader, but perhaps more lucky-good, as this was the greatest set-up of my time (this 1998 Nasdaq low precedes a 255% move higher in just 18 months, which is followed by a 78% decline over a two and a half year period). One might have a sense that something big or important is coming, but what is the point of predicting specifics when you're holding a tiger by the tail? You're going to experience some scratches - better to shut-up and keep the tiger in front of you.
Finally, The Contrarian was based on Dostoevsky's Notes from Underground. This is entirely intentional. Enjoy (ha!)
Write this down - Gold, gold stocks especially, the Yen, Japanese stocks even, and oh yes, small-cap US growth stocks are all moving significantly higher in the next few months; perhaps even more.
This is madness? Yes, I am mad. I am sick as well. Sick and mad. I think I need another root canal, but I refuse to see a dentist. I've had no less than six of these rootings and they always seem to come in pairs; rotten dentists. And not two at a time, mind you, never. It is only during or soon after your root canal that it becomes apparent a second will be needed - oh yes, required. Yes, my roots are not good at all, certainly not. But you can be sure I refuse to see a dentist.
I have digressed. You want profit, I know, and I am but ranting about the dental community. But this, dear reader, is my first entry. My prelude. My graceless entrance. And who am I? Why, a sick fowl man in need of root canals and a proper bath. Yes, yes - but I am more like you than one might think. I'm not as much fun as you, perhaps, but you see I know something important. I know something about even you. Try as you like to ignore it, but we are in this together, my reader. This little delightful place. And while I can't show myself face to face (among all those perfect teeth!), I know enough to understand this. We are of this world together. This paradise is a reflection on us both. We are not much fun at all.
I am net-short this market and planning to get a lot more so as soon as this counter-rally quits, don't get me wrong. And I would be perfectly happy to announce to you we are now at the beginning of the end; that we are doomed; that as long-term investors we are about to test our will in the face of the most severe torture. That we are staring at the face of a 70%+ bear. Unfortunately I cannot. You see I am actually getting bullish.
Small-cap stocks. What a call that is? Who among us isn't savvy enough to know the ills and perils of investing in that class of stocks these days? Well, you can laugh at me now because I am such a fool. I am accumulating small, illiquid Biotech stocks for Christmas. The market's still ugly, I'm not denying it. But I'm buying Biotechs I've never heard of on the next wave down. Yesterday you see, and rather quietly, just about every Biotech traded to new highs on enormous volume. Sure, the market has been up for a couple of weeks now, but aside from the Internet group it's tough to find new highs in any stocks. Bet me these will not make higher-lows the next time down. Sell me your shares even. You don't have small-cap shares though, do you? How do I know that? How can I be certain, in fact? Yes, I'm certain. I can also surmise those Financial stocks have got to be pretty tempting to you here, right? They have fallen so far, so fast. The selling is clearly "overdone." It makes no sense these stocks could down this much. Well, it's even more incredible than that, my friend. This is the case, even though every expert on Wall Street knows the Bank and Brokerage stocks to be "oversold," "overdone," and definitely a good buy for long-term investors.
These are no dummy experts, either. These are the same regulars from CNBC and anywhere else that will give them TV-time who explain tried and true concepts such as "never stand in front of a freight train," "never catch a falling knife," or "leave it for stuntmen to play on falling pianos," etc. In spite of this, and even when their stocks have acted this badly, apparently they've yet to sell a single share. And if they aren't holding on for their dear long-term lives already, then they are stepping up to stand in front the freight train and buying even more Financials! God bless them and the horse they rode in on. Yeah, I'm short the market; just looking to buy the small-cap losers coming down from new highs. You'll hate me for it. You'll know me a fool. I am a fool too. Don't think for a minute I am bragging. I'm more miserable and foolish than any of you. But I'm nothing next to the bank stocks. There is misery for you. You can have the money to be made in the bank stocks.
Names, names, names. Give me names you insist. You must be insisting by now. You're still here, surprisingly enough, so I'll satisfy you. Watch this group: Genzyme, Medimmune, Centocor, Biogen, Entremed, Immucor, Immune Response, Liposome(or other), Serologicals, Pharmaceutical Product Development, Covance and Kendle. There's more on the list but I can't stand mentioning any more. I don't know which I'm going to buy. I'll be in with orders under the market for the ugly days to come. Days when Lehman and Bankers Trust are gasping for long-term air. And regardless of which are my favorite, I feel compelled to buy at least a bit of the last three names (PPDI, CVD and KNDL) - three dental Biotechs. I was lying to you when I said I hated dentists. I love dentists. And especially this new-found dental technology - whatever it is. I'm not going to see a dentist, that was the truth. I'm just going to buy these Biotechs. Covance, I read, is involved with integrating a more Chinese-style treatment into western mouths. I'm buying that one for sure. I'm looking to buy all three. I hadn't heard of any of them before yesterday, but I'm going to buy them and not just out of spite. These stocks could double from the lows they post in the next two weeks, before the end of January. I'm not going to convince you to buy them now, I know. By January though it will be OKAY to invest in them. In the meantime do watch.
