Wake Up and Face Facts -- the '90s Are Over - TheStreet

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How quick were you to believe a new bull market had begun precisely at 9:30 a.m. last Wednesday? The speed with which otherwise rational human beings were ready to forget two years of pain and jump onto the bull bandwagon was shocking. And it tells us why we're still months away from the event we thought happened in the middle of last week.

First of all, this isn't the mid-'90s when bull market corrections ended in furious reversals after a few days of retail selling. This is 2002, and we are right in the middle of the worst bear market since the Great Depression. Get that one little detail right, and market movement takes on a whole new dimension. Real bear markets end in ice, not in fire.

Consider where you looked for leadership last week. It wasn't just the deja vu of tech stocks, but the ultimate deja vu of

Cisco Systems

(CSCO) - Get Report

. New market cycles demand new leadership, not the same old names. And early cycle leaders rarely have P/Es that still scrape the stratosphere after they've been beaten back to mother Earth.

And what made you believe that the

Nasdaq

, "the stock market for the next 100 years," would carry us out of this vicious bear cycle? The Nazz is down over 60% since the bubble top, while the

S&P 500

has only lost half that. In reality, how often does an ugly duckling turn into a beautiful swan? That's why they call those stories fairy tales. Market leadership begins in strength, not in weakness.

Greater Fools

If you turned on the financial news last Wednesday, you saw a barrage of fallen managers come out of their caves to proclaim a new paradigm. Did it occur to you these folks were actually talking their positions, and letting hope interfere with reality? And how much did happy talk by newscasters who never trade affect your opinions that day?

Nassim Taleb offers an argument about why we lose money in his controversial book

Fooled By Randomness: The Hidden Role of Chance in the Markets and Life

. According to him, many traders believe they rule the roost simply because they were in the right place with the right strategy for that moment in history. Unfortunately, these so-called experts wash out as soon as times change because their foolproof strategies crash and burn.

Does Taleb's argument sound familiar to you? It zeroes in on all the bull market genius that's evaporated since the burst of the bubble. So why do you still chase stocks in the same way you did back then? The obvious answer is that you want to believe those days are returning, and you're willing to sacrifice hard-earned cash over and over again to make that happen.

It's Time to Smell the Coffee

So how do you avoid getting sucker-punched in this tough market? Start by recognizing the broad framework for the narrow price action you see at any point in time. If you did that last week, the ugly three-week selloff that preceded the rally would never have left your vision. Also, apply common sense. I'm no whiz kid when it comes to fundamentals, but there was nothing in the Cisco release to tell me the bears' days were numbered.

A recent poll asked traders how they were doing in the current market environment. The results noted about half the respondents admitting they were thinking about leaving the game because they were getting clobbered. The real surprise, though, was in the other half who responded to the poll. These folks said 2002 has been the most profitable year they've ever had. To which group do you belong right now?

I can answer that for you. If you're adapting to the market, seeing what's in front of your nose and not allowing old habits to interfere with reality, you're probably doing well at the moment. But if you're waiting for the '90s to return, or playing a bull market game in a bear market world, the odds are good you'll be looking for a new hobby very soon.

Alan Farley is a professional trader and author of

The Master Swing Trader

. Farley also runs a Web site called

HardRightEdge.com, an online resource for trading education, technical analysis and short-term investment strategies. At the time of publication, Farley did not have any positions in any of the stocks mentioned in this article, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Farley appreciates your feedback and invites you to send it to

Alan.Farley@TheStreet.com.

Also,

click here to sign up for Farley's premium subscription product The Daily Swing Trade brought to you exclusively by TheStreet.com.

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