W a l k e r   M a r k e t   L e t t e r

            October 19th, 2000

          <http://www.lowrisk.com>

The beat goes on, and the market grinds lower in what is developing
into a very ugly year for the stock market. Take a look at these
year to date returns:

SP500 =8.7%
Dow =-13.2%
Nasdaq =22.1%


The drop from the all time highs earlier this year are even more
dramatic:

SP500 =12.1%
Dow =-14.9%
Nasdaq =37.2%


Remember early this year when many prognosticators were speculating
on just when the price of the Nasdaq Composite would surpass the
price of the Dow? Those voices have been awfully silent lately. The
Nasdaq is clearly entrenched in a bear market. It is now hovering at
levels last seen in early November 1999...which means that it has
erased all of the gains from one of the most spectacular bull
markets we have ever seen.

The losses in the SP500 and Dow are considerably more modest.
Nevertheless, with two and a half months to go this year, this could
shape up to be the worst year the market has had in a very long
time. The last losing year for the SP500 was in 1994, when it lost
1.5% for the year. The last time the SP500 lost more than the 8.7%
that it is currently down was way back in 1981, when it gave back
9.7%. (By the way, the last time the Nasdaq had a yearly loss
greater than the -22.1% it is currently down was way back in the
huge bear market of 1974, when the Nasdaq lost 35.1%.)

Of course, the market still has plenty of time to pare those losses
before the end of the year...and an October low followed by a strong
year end rally has seemingly become a tradition on Wall Street
lately. The big question right now is"will it happen again?" Well,
let's take a closer look...

Since the market peak in the first week of early September, this
selloff has been unrelenting. This is one of the real differences
between the current selloff and other selloffs we have seen in
recent years. All corrections and bear markets feature sharp
countertrend rallies. For example, in the selloff this past March
and April, we saw several strong rallies that lasted from three to
ten days. Those were very typical bear market rallies. By contrast,
in this current selloff we have had a few rallies, but they have
been VERY short lived...typically lasting a day or a day and a half.

Another unusual characteristic of this selloff is the lack of
emotional selling. The market has just kept grinding lower without
any panic from the sellers. We just haven't seen any"let me out at
any price" type of selling. In a decline of this magnitude, it is
very unlikely that we will see a bottom until we get some
capitulation from the bulls. In fact, the few times we have seen any
real panic was in those brief countertrend bounces, when all of a
sudden we saw the bulls tripping over themselves to buy...afraid
that they missed another October bottom. That has been one of the
most troubling aspects of this entire selloff.

Now I can almost hear you yelling"what about Wednesday morning?
Surely there was some panic there!". And that may be, after all the
Dow was down more than 430 points just a few minutes after the open.
However, the selling dried up almost as fast as it started, and the
market started rallying 20 minutes into the day. Not a really
impressive case of bullish capitulation.

OK, now that I have beat the Wall Street psychology into the ground,
how about the charts and the indicators? Well, the charts don't look
so good. They are all in solid downtrends, and the Dow and SP500
have broken below the lows set last spring. The Nasdaq is hovering
right at those lows from April, so it still has a chance of putting
in a double bottom on the charts, which would be bullish. The
operative word in that sentence is"would"...so far the market has
sliced through EVERY support level very easily. We will see how the
support from those April Nasdaq lows holds up. Meanwhile, the
internal indicators are all confirming the lows that the market is
currently setting, and from the looks of the indicators, the market
has more downside ahead.

OK, that was an awful lot of doom and gloom, maybe a bit too much.
As I mentioned above, even in bear markets the bulls get their day
in the sun. And sooner or later we will get a solid countertrend
rally, once that lasts between three and ten days. Since this
selloff started in early September, the market has been in a
downdraft for 28 trading days, which makes it somewhat long in the
tooth. The initial selloff that started in March lasted 25 trading
days, and the nasty one that started in July 1998 lasted 30 days.
Many other recent downdrafts have lasted 10 to 15 days. It looks
like the market is about due a strong bounce.

So, we need to be on the lookout for a good sized bounce, and one
that lasts more than six to eight trading hours. Who knows, perhaps
it started on Wednesday morning. But don't look for a"V" bottom in
this market. In other words, don't expect the market to just turn
around on a dime and head higher for good. There are just too many
traders and investors out there looking for that October
bottom...they are not going to all be correct. At least not without
going through some pain first. Look for that bear market rally to
fail, and for the market to make another run for the lows. And THAT
is when we will be looking for bullish divergences and a good
bottom.

With the speed that the market moves these days, this might all
happen very quickly. In fact, it COULD happen by the end of the
month and give us another October low. But it looks more likely that
it will carry into November. Hmmm, November...isn't there an
election in November? The market has been known to make big moves
around election time. In any case, don't expect the market to make
it easy for all the traders and investors who are salivating over
another bottom to buy into here. Expect volatility and lots of false
moves.


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