Understanding the Post-Bubble Economy

That's why I use macroeconomics to frame my longer term perspective, and then mate that with trend analysis and technical analysis. This allows me to see both long- and short-term actionable possibilities, and even hold contradictory perspectives (in different time frames).

That's how I can get long when I'm bearish or short when I am bullish. It depends upon the market conditions. It's also why I frequently mention Ned Davis' book, Being Right or Making Money.

How We Got Here

We are at a peculiar point in the business cycle where prior assessments are increasingly coming under scrutiny, expectations are getting dashed and estimates are being revised. Yet at the same time, corporate profits are strong, balance sheets are in terrific shape and future earnings estimates remain robust.

All the while, Mr. Market is suffering from a malaise.

How did we arrive at this juncture at which economists are not only late in recognizing shifts but have been quite frequently wrong (and often wildly so)?

To figure out where you are going, it helps to know where you have been, and this is definitely one of those times.

The last bull market began in 1982 and ran almost uninterrupted for 18 years. During the last three of those years, an enormous bubble inflated. While it was concentrated in the dot-com/tech/telecom arena, the zest for stocks spilled over into other names. We saw more than enough enthusiasm to go around.

Alas, like all manias, this one had to unwind. That began in March 2000, as the preannouncement season revealed a quarter to forget. It has long been my suspicion that Y2K played a significant role -- the massive upgrade cycle prior to the calendar flipping sated buyers of tech. No one really needed much more of anything tech-related in the first quarter of 2000. The first quarter was a disaster waiting to happen. With stocks at such lofty levels, the preannouncement season was the straw that broke the camel's back. The bubble popped in ugly fashion.

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Barry Ritholtz is chief market strategist for Maxim Group, where his research and market analysis are used by the firm's portfolio managers and clients in the U.S., Europe and Japan. He also publishes The Big Picture, his macro perspectives on the economy and geopolitics, entertainment and technology industries, and is a member of the board of directors of Burst.com, a streaming media software company. At the time of publication, Ritholtz had no position in any securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Ritholtz appreciates your feedback and invites you to send it to [e-mail].