Sand Spring Advisors LLC

Too Chi-Chi To Be Short

October 1, 2002

by, Barclay T. Leib

Subscribers should know that we are well on our way to our monthly letter. Hopefully some have already profited nicely from our negative discussion of Wal-Mart, Sears, GM, and P&G last month.

It is however becoming awfully chi-chi to be short. Perhaps it is just coincidence, but in the past two weeks I have met two hedge fund managers who were both mega-bullish in late 1999, and are now both mega-bearish. It makes my contrarian sensitivities bristle. The herd mentality is at work, and how these folks can look themselves in the mirror and live with their lack of personal creative thought -- both back then and once again now -- is hard for me to fathom.

Similarly, Market Vane has now been registering a Bullish Consensus number well above 90 for the 10-year T-Note for multiple days now (somewhere close to 94 at present). This also makes my contrarian nature sit up and pay attention.

Is the stock market really going to serve up a crash right now (as Robert Prechter appears to be espousing for those who may have read his latest newsletter)? Or does it make more sense for us to experience a surprise relief rally now, followed by a longer period of purgatory and "slow death by boredom" market that simply grinds lower (along the lines of Morgan Stanley's Barton Biggs' recent views)?

Back on September 3rd, I espoused that a B-wave down would develop into a September 20-30th time window that would likely scare the hell out of people. That's what B-waves do (and has certainly done in this instance). I suggested this decline had a high probability to probe all the way to 814 on the S&P 500. The market went through this level a bit Monday on an intraday basis, but closed above it. Further short-term probing back down could yet occur. Maybe the S&P will even make new lows -- vis a vis its late July lows -- as the Dow and Nasdaq have already done. It's certainly possible. I do not want any reader to try being a hero at this point in time and use leverage to go massively long.

But what is the probability of a real crash from here, right now, into our early November cycle date?

If there is further weakness, I believe that it is not going to be "the 7,600 to 3,000 'air pocket' slide on the Dow Jones" that Prechter puts forward. With the T-Note Bullish Consensus already at 94, moves like that just don't tend to occur. Too much fear has already built up -- at least on a short-term basis. Instead, from here, I'd only expect at worst marginal further weakness into November. And in my heart of hearts -- despite having no clue what fundamental event or news might cause it -- I still think enough time exists to cause November to become instead a reaction high.

As much as I still hate some of the big-cap consumer-oriented names where capital is mistakingly hiding, I'm a buyer of certain value stocks here (DLP, CSG, CBE, PDG among them). And in terms of the major indices, I continue to look for S&P 1002 as a better level to eventually get re-loaded up on the short-side.

Meanwhile, long-term readers may remember the chart below of the SOX Index that first appeared under a title St. Patrick's Day Wish - March 17, 2002. I was bearish in the region labeled "false breakout" with a downside price-target goal labeled "ultimate target." Well, that target has now been reached -- wish granted -- and I will now officially turn agnostic on the semiconductors -- inclusive of Intel at $13.90. While $12-$13 on Dell likely still beckons with time, Intel has fallen far enough to merit covering all shorts and just leaving it alone for a bit. Last weekend's bearish Barron's story on Intel was, as usual for the popular media, just a tad late.

Chart constructed using Advanced GET End-of-Day

Certain 1999 bulls may now be bears, but I've tried simply to be a rational investor throughout.

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