Bricks in the Wall: Part 1

What made the market so bearish? What went wrong in the last few weeks that made people think that the 30% recovery off the bottom had run its course?

As part of my attempt to get back in the swing of things after vacation, I spent a ton of time mulling over this very question. Before I left, it looked like Nasdaq 5000 might be in the bag. Now, it looks like a retest of the April lows seems like a distinct possibility, albeit one that I give less than a one-in-three chance of happening. What went awry? In this series I will give you a checklist of things that went wrong in July and my prognosis for improvement.

1. Great Expectations

Expectations during the critical earnings period got set too high by a series of terrific reports in the first week of the season. Yahoo! (YHOO Quote), for example, made you feel like all of the handwringing about the Net was just wrong. Things seemed as robust as ever.

Talk about a fakeout. Earnings were as robust as ever for Yahoo!, but just doggone awful for everybody else. In fact, Yahoo! may be taking the whole Web profit opportunity -- or at least the part that America Online (AOL Quote) doesn't have -- for itself. The Web is beginning to look like a two-portal market, where you pay Yahoo! and America Online to get read and everybody else just grinds along in Loserville.

Same thing happened with cellular. Motorola (MOT Quote), which everyone thought was going to stink up the joint, actually did an in-line number and didn't cut assumptions. That alone raised the bar for Ericsson (ERICY Quote) and Nokia (NOK Quote), something for which neither company was ready.

Altera (ALTR Quote) and Intel (INTC Quote) did the same thing for semiconductors, setting the bar way too high for everybody else. Which led to a tremendous selloff in semiconductors, and vindication for the hated Jon Joseph. Expectations have come down enough that good news for stocks will be met with rallies, but we have to have good news and it is getting tougher and tougher to find any.

2. Data Shift

The macro data -- after simmering, if not cooling, when the stock market cratered in April -- got better, as if it just followed the Nasdaq right out of the oblivion. Purchases that were contemplated got put on hold in April only to be realized in May and June when the market had its comeback. Of course that freaked out the Fed, which then put out the word in its own subtle way that it would prefer not to see such robust spending.

You can pretty much graph expectations of rate hikes right on top of the NDX. When the NDX climbs, the sentiment builds for a rate hike. When it falls, the sentiment retreats. The only problem with that scenario is that it is impossible to break out of the range. Either way. Which makes all but the quickest of buys and sells pretty frustrating.

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Editor's note: Be sure to check out Part 2 and Part 3 of this series!

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