Climbing the Stairway to Heaven

With this column, we introduce Tony Dwyer, the chief market strategist of Kirlin Holding and the managing director and chief market strategist of Kirlin Securities. As always, let us know what you think.

When you look at the market's recent move, all you can say is "Wow." This is truly a historic environment on the downside and the upside. This market will be referred to for some time, in the same way you see record high and low temperatures on daily weather forecasts.

What amazes me is how quickly one man can go from being godlike to being considered the devil incarnate -- only to come full circle to being godlike again. All I heard or read in the financial press during the past few days is how Fed Chairman Alan Greenspan wrecked the economy and lost touch with reality. Thursday, he was again being complimented for being so wise as to cut interest rates when no one expected it.

Surprise! A Stroke of Genius

Was the Fed trying to send a message that the economy is too weak and the stock market is down too much? It was amazing to read right after the Fed move that rates were cut "because [Fed members] just uncovered new information and were panicking."

In other words, they knew something we didn't and had to move quickly. The conspiracy theorists were having a field day with the unexpected move. The truth is that the unexpected cut was a stroke of genius. The Fed governors have watched many times what happens when countries intervene on behalf of their currencies. If the currency is tanking and everyone expects intervention, it puts a Band-Aid on a chainsaw wound -- it only works temporarily. When a central bank intervenes after the currency has already turned, it tends to have a much longer-lasting impact. That's what the Fed did. The market had already turned, and the Fed reinforced it.

Another thing that amazes me is the lack of moderation among analysts and investors. There's a tendency to be either wildly bullish or wildly bearish, especially after a day like Thursday. Usually, both sides make solid cases, and the result is somewhere in the middle. The bearish argument is that the prior rate cuts did nothing to stem the decline, so this one should act as another opportunity to get short.

I disagree. We're approaching the point at which the economy should respond to the first rate cut. Economists generally agree that it typically takes at least six months for any interest rate change to affect the economy. As a result, we should not have seen any improvement yet. Once that first rate cut begins to positively affect growth, economic and earnings results should begin to stabilize.

The reports by IBM, Apple and Microsoft may be early signs of stabilization. If that's the case, we now have three other rate cuts that should lead to a reaccelerating of the economy, which can only help improve the earnings outlook as we move closer to 2002. In other words, the worst (as evidenced by the rally off the lows) is behind us in terms of the economy and, therefore, corporate profits. Don't get me wrong; earnings are not going to be good. That is the current environment. The good news is that institutional investors are putting money to work based upon next year's earnings potential, and "visibility" should improve dramatically as the rate cuts begin to do their work.

Keep Focused on the Future

I remain steadfastly bullish toward stocks over the next couple of years, but I'd avoid the emotional rush to get back into the game after a 16% move in the S&P 500 and a 30% move in the Nasdaq Composite since the beginning of April. The Fed action should cause money to come in from the sideline on any pullback, and that is the most important change to the environment. Despite the volume during the past few days, there is still a great deal of cash out there that wants to enter the market, but not after such a big run. That means as the market pulls back -- as it normally does after a big run -- portfolio managers should be there with buy tickets. They don't like to chase stocks; everyone likes a bargain. The difference now is that they truly have reasons to buy the dip.

A key to successful investing is to manage expectations and judge buying or selling decisions based on where we are -- not where we were. In the last week of March, I examined the historical performance of the S&P 500 after it was 15% below its 40-week (200-day) moving average. As of the week ended March 22, the S&P was 23% below its longer-term moving average. That has only happened four times since the early 1960s, and the average three-month returns were 18.27%. It is a wonderful indicator for both the short and long term. It suggests that the near term has limited upside from current levels. As for the long term, there's a great deal of room left to run. The average one- and two-year returns from the lows are 37% and 60.46%, respectively.

Returns After Market Turn Investors should wait for a bout of profit-taking or a correction to put money to work
Week of Low	Low Price	40-Week MA	% Diff	3 Months	3-Month Return %	6 Months	6-Month Return %	1 yr	1-yr Return %	2-yr Return %
3/22/01	1081.1	21.89
12/4/87	221.2	293.97	24.75	268.7	21.47	267.4	20.89	274.3	24.01	59.04
10/4/74	60.9	86.52	29.61	71.6	17.57	84.6	38.92	86.3	41.71	76.68
5/29/70	68.5	89.66	23.60	82.4	20.29	86.2	25.84	101.2	47.74	62.63
10/7/66	72.7	86.52	15.97	82.7	13.76	90.7	24.76	97.8	34.53	43.47
Average			23.48%		18.27%		27.60%		36.99%	60.45%
Source: Kirlin Securities

How do you read this? Investors shouldn't sell here. Just wait for a bout of profit-taking or a correction of the gains to put more money to work. I firmly believe that we are going higher because the rate cuts should soon begin to work in turning the economy. It's not a question of whether you buy -- only where you buy. Stay patient, manage your expectations and don't get caught up in the media blitz. The market has probably turned the corner, but it isn't going to be an elevator taking us up. We'll have to take the stairs, and that's hard work.