Dear Prudence
Despite more
damage in most headline techs, a sprinkling of glamours located the
winner’s circle.
This fact, however trivial in the
grand scheme of things, along with the heaviest Naz volume than we’ve seen in
weeks, were the two pluses of the day.
For those keeping score, the May 24
intraday low was 3042.66.
Among the names, PMC-Sierra
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continued its follow-through from a head-and-shoulders top.
Meanwhile, Verisign
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in with one of its own.
In the bells, EMC
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the four-day shelf it had perched itself on, losing as much as 8% on major
volume before stanching the blood and closing up a half.
EMC has been the best-acting bell, and
for some time.
This leads me to caution against
subscribing to the often-heard belief that an end is near when the must-owns
finally come undone.
Yes, this did happen in the ’98 bear
market, when Cisco
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final eight days of the market decline, collapsing 40% and 41%, respectively,
during that time frame.
But the market is not so pat, as I
mentioned here just days ago.
One only has to have experienced the
action of the ’98-’00 period to agree.
History repeats, but rarely in exactly
the same manner.
Perhaps the best example of this lies
in the market of the ’20s.
In ’21, the economy entered a
recession, the culprit being vast commodity inflation.
Fast forward to ’29. Investors were
complacent about stocks because commodity prices were tame.
Beneath the surface of the ’29 market,
however, lay another kind of inflation…inflation in the amount of money that
brokers loaned to investors; i.e., margin debt.
Once the ’29 market weakened, the
mounting number of margin calls amounted to throwing fuel on a fire,
exacerbating an already-pronounced decline.
Fast forward to ’37, the height of
another bull move. Investors were again worry-free, this time confident because
margin debt was less versus that of ’29.
Sure enough, in ’37 yet another kind
of inflation struck which ignited a recession and a bear market.
It was an inflation in inventories.
This amid a backdrop of softening consumer demand.
The moral here is that it is tempting
to rely on one’s most recent experience in the market as something with which to
base the next episode.
Tempting, but not prudent.