Take Advantage of a Market Reversal

Drach went on to repeat two themes he has successfully articulated for 30 years: That successful investors buy wholesale (when stocks are cheap) and sell retail (when they're back to full price), and that the media stampede otherwise intelligent people into making loss-inducing emotional decisions based on "after-the-fact" price change.

Is he crazy? Maybe not. The Nasdaq Composite is down 9% from New Year's Day, which sounds pretty bad. By no means is this sort of slough uncommon, however. Even in a raging bull market, stocks can tumble dramatically for multimonth periods.

In 1995, the Nasdaq Composite was up 39% overall. Yet there was an 8% decline from September through October -- 1,069 to 982.

In 1996, the Nasdaq Composite was up 22.6% overall. Yet there was a 19% decline from May to July -- 1,251 to 1,017.

In 1997, the Nasdaq was up 21.6% overall. Yet there was a 13% decline from January to April -- 1,381 to 1,206.

In 1998, the Nasdaq was up 38% overall. Yet there was a 34% decline from July to October -- 2,028 to 1,343.

In 1999, the Nasdaq was up 86% overall. Yet there was a 14% decline from July through August -- 2,840 to 2,442.

In 1993, the last time that the University of North Carolina won the NCAA basketball championship, the Nasdaq 100 was off 9% through the third week of April as investors reacted to the World Trade Center car-bomb attack and the clumsy start of the first Clinton administration. But the index, a proxy for the shares of big tech companies, went on to rally 16% through the end of the year, even as investors were later forced to absorb the country's tragic loss of pride and military personnel in Somalia.

Watch for Dark Clouds to Lift

Rather than blindly extrapolating the first quarter into the future, therefore, it might be best to stay flexible and prepare mentally for the possibility that the dark mood might lift, at least temporarily. Let's catalog what we think we know for sure: