-->What IS The"Larger Picture"? Can It Tell Me What To Do NOW?
11/27/2002 5:01:29 PM


By Anna Troupe, For Robert Folsom

Nearly everyone seems to be bullish the stock market right now. The latest economic news seems positive, plus the indexes are up more than 20%. Is the reality about the market different than the perception?



It's true that bullishness is rampant. Investors look at the latest rally -- 22% in the Dow Industrials, 33% in the NASDAQ, and 21% in the S&P 500 -- and think it's so large that it must be the start of a new bull market.



Let's consider the big picture. There have been five major rallies since the March 2000 peak -- and psychology reached bullish extremes at the top of every one of them. Nothing gives perspective the way history can, so here's a comparison from the past. During the most severe down leg in the 1930s bear market, the Dow saw seven large rallies from April 1930 to July 1932: Four of those carried the index up 20% to 40%.



In spite of talk about a"powerful resurgence", rallies during this year have been weak by comparison.



Then how can so many analysts be so optimistic?



As Bob Prechter says in his just-published Elliott Wave Theorist,"Social mood is driving these analysts' rationalizations -- it's that simple." A basic but all-important point about social mood: at real market tops, investors are incredibly bullish; at bottoms it's the opposite.



For example, when the market bottomed in 1982, the maximum bearishness by some measures didn't hit until September 1985, three years after the bottom. So the market was climbing what Bob calls"a Wall of Worry" because the majority saw each new gain as a developing top that would precede new losses.



Today we have the opposite scenario, what Bob calls"sliding down a Slope of Hope": the majority is very optimistic on a puny rally, even though the average stock index is still down 50% from the peak.



Because they think prices can't possibly fall further, right?



Yes, or because the market"has to go up sometime," or because they think stocks are"undervalued." There are many reasons why investors feel the way they do, but all you really need to know is that it's patterned. Once you know what those patterns look like on a chart, your perspective will be oriented to the larger picture, not limited to the present and recent past. And today's bullish extremes fit right in with what's happening in the larger picture.

Quelle

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<ul> ~ Market Sentiment</ul>