If investing were still likened to gambling, it would more likely be compared with putting down money on the craps tables when someone is on a hot streak. Every IPO has to double…150% gains in just two days…800% gains in three weeks. These are the types of returns that many had grown to view as commonplace. "No earnings? No problem! I don't wanna miss out. Let it all ride…."

A year later, the Dow, S&P 500, and NASDAQ are down over 10%, 20%, and 50%, respectively. The same financial news networks that were promoting mass interest in investing had begun to use words like "carnage" and "destruction" in stock news reports. Many of the internet stocks are down over 90%, and within the NASDAQ, the ten largest stocks alone have suffered a combined loss in market cap of over a trillion dollars.

It is impossible to fully comprehend the events of the last year-and-a-half without first examining the performance of the stock market (and the US economy) for the decade leading up to the bull market top in March of 2000. The buildup of pressure that exploded to the downside last March had occurred not over a period of 6-9 months or even 18, but over nearly 10 years. As such, we must acknowledge the likelihood that markets could indeed take as much as a third of that time, or 2-3 years, to turn around.

A full down cycle, from bull market top to bear market bottom, tends to involve a turnaround not only of stocks and the economy, but of public sentiment as well. At a bull market top, P/E's are typically at near-term highs (with P/E's on the S&P 500 in the low 20s), but the general public is buying more than they were when prices were lower. Consumer confidence is normally very high, and public sentiment is bullish to an extreme. In March of 2000, P/E's were at all time highs. Since that time, the S&P has fallen 20%, and the NASDAQ is down over 60%, with at least two temporary bottoms in the meantime that sent many advisors proclaiming "new bull market" and sent investors rushing in to buy more stock, only to have them ride it down for an additional 20-50% loss. This marching of prices, to lower highs and lower lows, is actually fairly typical for a bear market and was in large part to be expected. Stock prices have decreased and we have had a slowdown in economic production, as well as corporate sales and earnings growth.

The difficulty, however, is in the public sentiment. True bear market bottoms seldom occur without a complete reversal in investor sentiment. But we have been conditioned over the past decade to expect appreciation on our holdings of 20-30% a year, more than double the historical average. There's an entire generation of investors who grew up on consistent double-digit returns and can barely remember the crash of '87, people who buy under the assumption that all stocks eventually have to go up. This is the sentiment we are dealing with, and turning that sentiment from bullish to bearish, from euphoria to fear, may take a while.

At a bear market bottom, P/E's are typically very low, with P/E's on the DOW and S&P in the low to mid teens, but the general public refuses to buy stocks they paid nearly twice that price for 6-12 months earlier. Consumer confidence is usually very low at these points and public sentiment is extremely bearish. The picture at present, however, is very different. P/E ratios for the DOW and the S&P 500 are still in their 20s. An article in the New York Times in February of this year placed the P/E for the NASDAQ 100 (the 100 largest stocks in the NASDAQ) at over 800! This figure was at an all-time high of 165 in March of 2000 and, because earnings have come down so much in the last year, has risen five-fold in that time. And while consumer confidence has been declining somewhat, overall public sentiment is still relatively bullish.

A contrarian view would suggest that since the general public remains largely bullish, it would be wise to maintain a bear market mindset. While we do not fully ascribe to these tenets, we must agree that despite severe price declines in technology related sectors, the events of this past year do seem to fall somewhat short of a full reversal. As such, we do not expect to see anything close to last year's highs for quite some time.

          · Executive Summary              · 2000 - 2001:  Look Back               · The Market Moving Forward          

             · On Technical Analysis and Trading         · Market Calls Performance          · Acknowledgements