Sand Spring Advisors LLC
Tale of Two Markets
April 24, 2002
by, Barclay T. Leib
The next time someone asks you: "When will this bear market ever end?" show them the chart above of the Value Line A Index (that just last week touched new all-time highs) and ask them in all seriousness, "But has it even begun?"
To date, this has clearly been a tale of two markets. In simplistic terms, everything that CNBC suckered people to buy in 1998-1999 has now gone puff, and yet since 1998, simple old value stocks have acted like the "little-engine that could."
We have previously espoused some short-term support on the DJIA near 9,950. And yet, when we look at the Value Line chart above, when we look at the DJTA chart pattern, and when we look at financial stocks such as Morgan Stanley, Bear Stearns, Americredit, AIG, and Bank of America -- overall, we see significant downswings just beginning.
Particularly ominous is the large negative divergence of the Value Line's 5x35 momentum oscillator (shown above) as the Value Line recently poked to new highs.
Elsewhere, the best performing sectors within hedge fund investing have recently been emerging market funds, mortgage-backed funds, and distressed investing -- in that order. Much of this performance has been attributable to asset flows out of long-only traditional investing and into these smaller niche markets where capacity to handle such large investments is finite. Pension funds and endowments are clamoring into these strategies like there is no tomorrow.
But can it be that easy? Can the first market downdraft after so many years of excess end so peacefully in a shallow recession? Where is all the pain that typically should mark the bottom? Surely it should eventually extend beyond just the hallways of Lucent, Worldcom, Williams Communications, and other telecom washouts.
Our guess is that much of the pain is still hidden behind overly generous pension fund performance accruals, soon-to-end severance pay checks, non-marked-to-market private equity investments, and still liberal credit standards.
Unfortunately, time rolls by, and eventually time reveals all.
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