On the Level: A Look at April 2000 Hinted at the Looming Treachery

One year ago, the Dow Jones Industrial Average closed at 11,164.84, down 0.5% for the day, and the Nasdaq Composite Index finished the day at 4148.89, off 1.8%. Those rather polite declines masked, however, the high-volume drama of the day.

The Comp at one point that day had fallen to 3649.11, an intraday collapse of nearly 575 points, or 13.6%; at that moment, the index was 27.7% below the all-time peak of 5048.62 reached on March 10 of last year. The markets commentaries that day were loaded with quotes from traders and strategists talking about a "bottom."

Why bother to bring up ancient history? That was the day I joined TheStreet.com. I haven't looked back in a year, but now seems as good a time as any. It's a kind of reality check for you and for me. What was I writing back then?

In review, one thing is clear -- I was already worried about the market. Here is how my first take ended:

One word of caution. Today, there was enormous selling pressure. The market came back. Thank God. And that selling pressure -- the "puke factor" -- may signal a bottom to be followed by a rally. But it could be a bear trap. The Dow and the Nasdaq are well off their highs, but there could be another leg down.

It has happened before. The lows of the Great Crash did not occur in 1929. Yes, stocks fell 48% in two months in '29, but the Dow then rallied into early 1930. The slaughter came only in October 1932. That was when the Dow bottomed out, 86% below its high-water mark.

No one knows the future, and if things go sour, no one will bail you out.

The next day, April 5, as my colleague Aaron Task wrote in his market round-up, "Investors returned to doing what has come most naturally in recent years: buying technology stocks while shunning blue-chips." The Dow closed down 130.92, or 1.2%, and ended the day at 11,033.92. The Comp rallied 20.45, or 0.5%, to close at 4169.34.

I wrote a column that day saying:

In short, the fate of the market today depended on that most evanescent of substances -- investor psychology.

What does the close suggest about investors' mood at day's end?

People are more bullish now than they were last week. At least, that's the interpretation of Merrill Lynch quantitative strategist Richard Bernstein.

"Our research shows that people were extremely bullish going into Tuesday," he said. "In fact, they are more bullish than they have been at any time since 1987. If anything, they may be more bullish after today. It may have reinforced their belief that stocks are invincible."

Does such optimism gladden Bernstein's heart? It does not.

My point all year has been that there is a lot more risk in the market than investors think," he said. "The fact that technology stocks were crushed and then recovered Tuesday and then recovered more today will only give people an even more false sense of security than they already had."

Bernstein was dead right.

April 7, 2000 was much the same -- more dip-buying as we headed into earnings season. Thomson Financial/First Call's Chuck Hill said that analysts might still be underestimating first-quarter earnings. My view? Yes, but all the good news was already in the stock prices of many stocks. The column was titled, "Strong Earnings Coming, but Big Rallies May Not Follow."

I capped my first week here with a column titled, "Risk, That 800-Pound Gorilla, Shoves Onto Market's Elevator." That was the first -- but not the last -- time I took aim at Cisco Systems(CSCO Quote - Cramer on CSCO - Stock Picks).

I asked a typical investor's question: "What has to go right for my highfliers to make me the money I want?":

The arithmetic is pretty simple. Take Cisco, the ultimate tech bellwether of the moment, for example.

Cisco has a market value of about $500 billion, excluding stock options. This year after-tax earnings are expected to be about $3.5 billion. The stock trades at about 140 times earnings. Let's say you the investor want to make a 20% average annual compound rate of return over the next 10 years. What has to happen? Cisco's net income must grow at slightly more than 24% a year, and in year 10, Cisco must sport a P/E ratio of 100. That is just to make the 20% return you want.

If you are 100% confident that Cisco will grow earnings at 24% a year and end up with a P/E of 100, you will make 20% a year on your money. If you are sure Cisco can do that, then keep on with it. If not, then you should re-evaluate holding Cisco. (If Cisco can leap such high hurdles, its market cap in year 10 will be $3.1 trillion. That equals roughly 20% of today's total U.S. public equity value.)

You can perform the same simple calculation on any stock or stock index in your portfolio. In this risk-laden market, perhaps you should. At the moment, the Comp is slipping again."

You can imagine the nasty mail that column elicited. The stock closed at $70 a share that day. I get less rude mail now that Cisco trades for $15.

I stayed bearish on tech and stocks in general. I just never could get comfortable with high valuations, especially as it became clear by the third quarter of last year that the economy was slowing dramatically.

What about today? After all, all the market averages are way down.

I remain worried about stocks and will talk more tomorrow on the problems I fear will dog stocks over the next 12 months.