Keep a Steady Hand and a Sober Plan

Well, good old Alan Greenspan was at it again while I was touring America's Heartland. He just can't seem to help himself when it comes to meddling with the market, as he struck another blow to the bears when least expected. With stocks already humming, another 50-basis-point rate cut on the heels of the first increase in industrial production since September took bulls and bears alike by surprise. So, the 5 billion-share day that I've been expecting (although I thought we'd see it on the downside) finally occurred last Wednesday -- just the ticket to get technically oriented analysts in a tizzy. Yet many befuddled fundamental analysts and gurus, already burned by having called bottoms prematurely, remained skeptical.

Panic, Then a Pullback

With record-high short interest on the New York Stock Exchange, falling margin debt, the largest monthly equity fund outflow ever in March, increased bearish sentiment and earnings and economic growth punk, the Nasdaq Composite posted back-to-back double-digit weekly gains for the first time that I can recall. It was panic-buying, as shorts scrambled to cover and portfolio managers rushed in lest they fall further behind their benchmarks only three weeks into the quarter.

As Dick Arms pointed out Monday morning, the market was clearly overbought and ripe for a pullback. And, on the heels of Merrill's Intel and communications-chip downgrades, the market, led by tech stocks, hit the skids. As we've noted, the market has a tendency to fall on the Monday after very strong weeks and then continue to climb. It's notable that Monday's pullback was done on only modest volume and, as Arms also pointed out, the major market measures had run up to resistance levels last week. It looks as if the proverbial wall of worry remains intact, as index put action remained high, which should allow for a breach of 2200 on the Nasdaq Composite and 1250 on the S&P 500 in the very near term.

After the close, Compaq and Novellus reported a penny under and a penny better than expectations, respectively. However, both guided analysts lower, as did Costco, which warned that it will miss. Given already-lowered expectations virtually across the board, it's not surprising that only 14% of companies that have reported have failed to meet expectations. And it's also no surprise that many will keep analysts' expectations low for the current quarter, as there's no reason to encourage them to raise the bar. Companies seem to be using the cloak of economic weakness to clear the deck of miscellaneous write-downs and to recognize losses in order to make numbers easier to reach later in the year.

Good News From Abroad

News that consumer spending in France was much better than expected, and that Japan's new prime minister, Junichiro Koizumi, promises to bring real reform to the world's second-largest economy has helped to lift markets overseas. The Nikkei managed to edge higher even after DoCoMo officially announced the delay of its third-generation rollout until October. The dire forecasts for a global recession appear to be receding, which has also been reflected in energy prices and the yield curve.

I expect that Greenspan's moves will unleash greater inflationary pressures on the domestic economy, but that's unlikely to be a major concern until sometime next year. In any case, he's unlikely to repeat the same mistakes again, so the chance of another bubble forming under his watch is slim. Simply put, the outsized gains that investors have come to expect since the mid-1990s are apt to be only fond memories in the new millennium.

With the Fed very accommodative and tax cuts on the horizon, I remain convinced that 2002 earnings growth will support higher prices. However, I might be forced to revisit my near-term targets (1300 on the SPX and 2350 on the Comp), as the strength of this move has exceeded my expectations. I see little reason to believe that the market will sail through the summer unscathed, and I expect that, as we reach the latter part of this quarter and sentiment becomes more bullish, we're likely to see a significant pullback.

Nonetheless, I believe we'll see the year's highs in the fourth quarter, as it becomes clear that the economy was never as bad as many had come to believe. A steady hand and a sober plan will be required to make the year a very successful one.