One can easily get caught in the trap of thinking that things can’t get much worse, and presuming that an upswing is due after the market or any particular stock takes a beating. It is this “logic” that makes investors sometimes choose to sit it out for the long term in a stock that is having a difficult time making progress. Unfortunately, sitting it out can often end up requiring a lot more patience than first anticipated, during which time there is a lot being left to chance. Throughout a lengthy waiting period, if the company falters or has difficulty putting up good earnings, there are chances it might never make it back.

Famous quotes in Wall Street circles include, “don’t fight the tape” and “the trend is your friend.” These sayings sum up the age-old wisdom that traders have come to embrace as the best advice whenever the market action seems to defy all other logic. Arguing that things shouldn’t be the way they are is fruitless in the stock market. You are better off realizing that the market values stocks based upon supply and demand, and that doesn’t mean that fairness, logic, or common sense have always got much to do with it.

Not long ago I heard a statistic quoted that there are 174 internet companies which once saw their shares trading above $50.00 and are now trading below $2.00 per share. One by one, many of these companies are likely to go out of business and their shares will become worthless. Only the truly exceptional ones will survive, and quick fixes are highly unlikely.

What is very important to realize is that the laws of supply and demand are what drive the market prices of stocks, so one could say that the market doesn’t ever make any mistakes. If a stock is priced up at all time highs, one can conclude that the demand for those shares is more intense than ever. Such was the case in the internet sector, where demand was once extremely intense. More dollars were chasing after too few shares as people desperately wanted to own internet stocks. Now, however, that intense demand is not there, and apparently there is too much supply. Imagining a scenario where intense buying demand will suddenly return to the sector is difficult, as investors have come to realize once again that it takes actual earnings fuel and not just the fumes to make this engine run.

There is usually a direct correlation between a company’s earnings growth and the demand for its shares. The outlook for strong earnings growth is known to excite buyers, and so does the outlook for weaker earnings provoke sellers. When a stock is being priced up at all time highs, the market is anticipating strong earnings ahead. Likewise, when a stock treads into new low territory, the market is anticipating further disappointment. Don’t argue with the market, or fight the tape! Realize what the trend is telling you, and wait until the market shows you proof that a change in direction is at hand. Otherwise, picking bottoms is simply guesswork.

The Nasdaq Composite recently broke below its May low of 3042, where many analysts had expected it to find support and bounce back again. Instead, amid the election uncertainty, the market has only deteriorated further in a broad based decline. It is obviously difficult to make much headway when the majority of stocks are declining, and as Nasdaq has declined 50% from its March 10th high of 5132, there are many stocks that have suffered even greater percentage declines.

Since trading first began on the computer based Nasdaq exchange in 1971, the only greater percentage drop occurred during the 1973-1974 bear market. Nasdaq was still in its infancy at that time, and it declined 60%. So, if it is any consolation to you and your own portfolio, you can say that this has been the worst bear market in nearly 30 years. As far as we can tell, this one is not over yet, but we certainly don’t want to set any new records!

Apparently traders don’t like the continued legal rhetoric that is surrounding the election. The economy is certainly slowing, and deciding on our new president will still not change that fact.  Earnings warnings have been numerous, and for months the market has been strong almost exclusively in defensive areas.  These defensive areas have included drug, food, tobacco, insurance, bank, energy and oil stocks. We have been left with a lack of leadership in the market’s true growth areas as money has gravitated towards these safe havens.

The FOMC (Federal Open Market Committee) does not meet again to discuss interest rates until December 19, but moving to a neutral bias could potentially provide a positive catalyst for the ailing stock market. It is widely believed that during the first quarter of ‘01 rates will need to be lowered to prevent a recession. While this move is being anticipated by many analysts, concerns over wage pressures and high energy costs have remained a factor in the Fed’s decisions thus far to maintain its tightening bias.

The market has done little to encourage us to believe that things will improve, while many are still hoping for a year-end and post-election rally. What is of great concern is the deterioration of the financial group’s leadership, which has only recently put pressure on the market.  An increase in earnings warnings in general has threatened investor confidence, but warnings from within the financial sector have recently shown us more bad signs.

There has been growing talk of loan defaults and bad credit risks weighing heavily on the important financial sector.  If the fourth quarter proves to be a disappointing one for the financials, the market could sustain even greater damage. As these financials wrap up the latest quarter, the worry is that some banks have been left high and dry amid the great number of dot-com failures that have recently surfaced. 

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