I'm not sure if this is whom I should be writing to, but I have to ask. I'm a new subscriber and I started getting into the markets just after it peaked. What has caused this bear market of such dramatic proportions? What are the signs that it is rebounding? Should I be waiting for the tax cut that is still being promised? How should I set up my investment strategy? If these are things I should be asking a broker, let me know, but you guys seem to be the brightest of the bunch out there. Thank you. (April 28, 2001)

  Thank you for the compliment. The cause of the bear market was a perceived weakening in earnings due to future slowdown in the economy. The stock market is driven by expectations of growing earnings, usually looking at least 6 months into the future. When earnings are not expected to grow, stock prices come down as investors take out those future earnings increases from the stock prices. They are not as valuable without those expectations of future earnings. The Fed raised rates for over a year. On top of that it pumped billions into the money supply ahead of Y2K. That went into the stock market because banks found no one wanted it. Big, big market run. In March 2000, the Fed called the loan. At the same time it had almost finished its rate hikes. Double whammy. The market started to tank. After a summer rally, energy prices spike. Triple whammy. New plunge down. The Fed made some serious monetary blunders that pumped up the markets too fast (Nasdaq 50% above its 200 day MVA? Unheard of.) and then yanked it all away at once on top of tightening the remainder of money supply to a trickle to tilt at imaginary inflation. The economy was choked and the market knew it. It started down and is just now trying to get back up.

Signs of rebounding are the follow through we discussed in March, and now we are seeing leading stocks breaking out of strong bases. Those are solid signs of improvement. The tax cut is already being factored in. It is considered a done deal by most of the market. Investment strategy: we believe in following leading stocks and strategies that give us an edge: solid patterns, stock splits, pre-splits, and solid earnings and revenues. That is a sound strategy.


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