December. Holiday parties, eggnog and the universal pass on an extra 10 pounds. Yes, 'tis the season. It's also a time of reflection, so I dusted off my keyboard to share some thoughts as we enter the home stretch of a rather long year. It hasn't been the best 12 months for many of us, and some people I know are counting the days until 2001 is behind us. Who can blame them? The market has been erratic, and we've been reminded in a most tragic way of the fragility of life. The easiest thing would be to sweep away the pain, hoping it never returns.
For my part, I've made a conscious effort
to forget. I prefer to remember the hardships we've faced and the fortitude and determination needed to pull us through those dark times. I'll remember watching humanity pull together, and I'll walk each step knowing how fortunate I am. I'll remember the colleagues we've needlessly lost, and I'll honor their memories with dignity and devotion. And I will remember holding Ruby's hand as he passed, as I try to make him proud each day.
This past year taught us to prioritize, to focus on what really matters, while not losing sight of what we need to do. The market's fluctuations seemed trivial at times, but we all know that life goes on and we have a responsibility to focus on financial performance. I wish I could tell you the tape will offer a respite, but unfortunately, I don't see that in the cards. While the landscape has weeded out some speculative excess, caveats remain. We'll need to be disciplined, patient and balanced as we trade ahead.
It's important to remember that most trading moves are characterized by three phases: denial, migration and panic. The first leg of the recent rally was the alleviation of the oversold condition. Clearly, people were in denial during the vicious move off the lows, and traders aggressively shorted into the price appreciation. When structural forces took hold, pension funds and money managers shifted assets from the low-yielding bond market and allocated a larger percentage to equities (read: migration). As the tape continued to lift, performance anxiety set in, and a panic to buy stocks ensued.
It hasn't been easy to understand the price action, and with the macro crosscurrents unfolding daily, there has never been a time when so many balls were in the air.
Rather than look at everything at once, let's break the tape down into our three trading metrics and take stock of where we are:
: The bulls will tell you we've turned the corner and the business cycle has troughed. As perception is reality on Wall Street, it's noteworthy that analyst estimates were continually lowered to levels that would eventually be met. The degradation in the fundamental arena was due to abate sooner or later, but end demand is still very much a wild card. Visibility remains guesswork, and analysts on the Street have narrowed their focus to a month-by-month, if not week-by-week, assessment. It's hard to believe a new bull cycle can begin at these historically lofty valuations, particularly in the technology sector.
: This past week was notable in that both the
and the Philadelphia Stock Exchange Semiconductor index, or SOX, reversed down and violated their 200-day moving averages. Meanwhile, the
200-day moving average and simultaneously violated the uptrend line. For the financials, watch the Philadelphia Stock Exchange/KBW Bank index, or BKX, at 810, as a tick there would violate a triple bottom and bode poorly for the tape. Overall, the technical picture warrants caution, but because it's simply a guide, I prefer to respect these developments rather than defer to them.
: The key to "getting in front" of a trading move is gauging the mindset of the masses and anticipating a psychological shift. During the early stages of this past rally, the fundamentals had yet to uptick and pure technical analysis begged making sales, not buys. Reading the body language of the mind is a critical metric for effective trading. The fear of missing the rally is now seemingly offset by the number of trapped longs. The abundance of exposure added because the tape was "acting well" will likely come for sale if the market keeps slipping. Remember, it's always a new paradigm ... until it isn't.
OK, what now? The tape is exhibiting its usual minxy characteristics by offering a little something for everyone. Overhanging the market are the continued uncertainty in the Middle East, the eventual bin Laden capture (sell that rally), the potential for year-end hedgers, the prospect of funds defending (marking) their positions and the wild card that is fundamentals. We could see a further "shaking of the tree" to unnerve the weak holders, possibly to the 1080-1100 area for the S&P, followed by an attempted lift into year-end.
of better times could buoy investor psychology and hence the stock market. I firmly believe bubbles don't end with a "V," and that we've been in a bullish phase of a larger bear cycle, but a strong showing to begin next year wouldn't shock me. If that happens, it will set up for a rather meaty trade to the downside and perhaps an eventual retest of the lows. Remember, markets rarely fall when everybody is bearish. The newfound bullish sentiment triggers a red flag, as many seem to be drawn to the promises of tulips and better days
In the past few months, the market seems to have shifted back toward the momentum environment that dominated 1999. While I appreciate the need to continually augment our style, I will continue to look at the big picture as a series of little pictures. Remember, as traders, we're not concerned with the market's ultimate destination; we just need to find profitability along the journey. I'll adjust my risk profile as a function of support/resistance levels and overbought/oversold conditions and continually scan the sector bases for rotations.
My friends, 2001 has been a learning experience, and we'll move forward together with our lessons in tow. Rewards don't come without risk, whether it's in the market or in life. Choose wisely and remember to focus on the important stuff while digesting the minutiae. Live well, laugh often and build on your strengths while addressing your weaknesses ... and always keep your right hand up. With Hoofy, Boo, Snapper, Sammy and Daisy standing beside me, I wish you all a most joyous and safe holiday season and a prosperous and peaceful new year.
Todd Harrison is president and head trader at Cramer Berkowitz, a New York-based hedge fund. At the time of publication, the fund held no positions in any of the stocks mentioned. Harrison's fund often buys and sells securities that are the subject of his columns, both before and after the columns are published, and the positions that his fund takes may change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Harrison's writings provide insights into the dynamics of money management and are not a solicitation for transactions. While he cannot provide investment advice or recommendations, Harrison invites you to send comments on his column to