Six Weeks That Shook the Markets: Where Do We Stand Now?

Still complacent?

Markets like nothing more than humiliating the greatest number of people. And they certainly have in the past six weeks or so.

Let's review the damage:

• The Russell 2000 topped out on March 9 and closed Thursday down 21%.
• The Nasdaq Composite Index peaked at 5048.6 a day later and is now down 28% from the high.
• Microsoft (MSFT) collapsed April 3 after Judge Jackson issued his ruling of law in the federal antitrust suit. The next stop: the "remedies" phase. The stock has yet to recover.
• April 4, the Comp rollercoastered down and up -- over and over -- for a total of 2650 points of stomach-churning movement, or roughly 2/3 of the index's then-value. It ended the day at 4148.8 -- off just 74.8 from the prior close.
• And who can forget the bloody week of April 10 to 14? It was a horror show climaxing on Friday the 14th as all the major market indices suffered their largest one-day point declines in history on news of a scary inflation report.
• As you'll see in the sector reports to follow, many market leaders of the past two years (the vaunted technology, media and telecom) lie wounded. Some of the highest flyers have fallen 40% to 60% off their highs, and they may never see those heights again. TMT turned into TNT.

So now what? Despite all the turmoil, credible market analysts are still making the bull case for stocks. Goldman Sachs strategist Abby Joseph Cohen articulated it only last Monday: Company earnings will remain robust. Inflation does not inflate. The Fed will not surprise us with sharp short-term interest rate increases. Mutual fund investors keep pouring money into stocks. There are still cheap stocks if you look beyond the well-known tech and blue-chip names. Bottom line, Abby predicts, is a 15% gain in the S&P this year.

Abby is not alone. The majority of money managers remain bullish. Value investors have been making money as folks flee tech stocks for food, booze, cigarettes and bombs. (Yes, there is life after Julian Robertson.) Plenty of small-cap stocks sell below 15 times earnings. The flight to bonds has for the moment abated and interest rates seem to have stabilized, albeit with a slightly inverted yield curve. It's an election year, which has historically treated investors well in the second half.

So why do the months ahead seem particularly unpredictable for stocks? One reason may be that Mr. Market's mood has shifted in ways as yet difficult to quantify. Yes, some tech stocks are still up significantly for the year, but that is cold comfort to investors who have given back much of their gains since mid-March. Some of the names that investors recently fell in love with, in rising sectors such as B2B Internet services, may never recover. And many of the techs that have been around a while remain mired in April's muck despite good first-quarter earnings announcements.

Conclusion: It is legit to wonder if all the good news is priced in for some time to come. There has been some rotation out of more speculative issues into defensive companies with real earnings and sales. But do people truly believe that a bull market will be led by Goodyear (GT) and Phillip Morris (MO)? In such an environment, the market may tread water.

The week before the holiday ended inconclusively. Monday and Tuesday were huge rallies, but the next two days were a fade. Thursday was quiet. No one expects that to last.

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