This week we wax a bit more philosophical. The market, still trapped primarily in back & forth neither-here-nor-there action for months, isn't offering much to inspire our usual fare of stimulating prose and keen (ok, comical) insights.

While last week's gains might have been impressive, let's get some perspective. The S&P 500 hasn't seen a new high since early March. The Nasdaq Composite: not since late January. The major indices remain in intermediate-term downtrends, in well-defined patterns of lower highs and lower lows. From a technical perspective, so far we haven't seen any action indicating that new highs are forthcoming.

My expectation that we're in the midst of a major topping formation remains unchallenged, at least by the market. In fact, the "action behind the headline action" continues to point toward a major distributive pattern that typifies major market tops.

According to the Vickers Weekly Insider Report, corporate insider have been selling stock at a furious pace throughout 2004. Fourteen billion dollars worth in the first four quarters. David Coleman states that insider sales have NEVER been higher, since the company started tracking the data in 1971.

Ask yourselves this, folks: why are the people most intimately familiar with their own company's prospects unloading stock at an unprecedented pace? If you believed in the future of your stock would YOU be selling it?

Why sell today when you can sell tomorrow? One reason: you expect a better price today and a worse price tomorrow.

Small investors on the other hand, have returned to the dizzying heights of silliness first witnessed in the big bull of the 90s, shortly before they and their capital were swiftly parted. Bullish sentiment stood at ridiculous highs earlier in the year, just before the mini-bull market posted its still-unchallenged high. Margin debt has doubled in the past year at brokerages like Ameritrade. Small investors are once again engaged in speculative frenzy, apparently not having learned the lesson that easy money is the hardest to come by.

That's why methinks the bear ain't over by a long shot. Nobody has learned much of anything. Bear market bottoms typically form amid a mood of frustration, "capitulation" as it's commonly referred to. Investors swear off stocks, having been burned to a finally intolerable degree. The small investor "learns" that he's not quite the financial genius he thought he was on the way up.

When did this market ever see capitulation? Why do the ignoramuses at CNBC still have jobs? The majority still believes in "buy and hold" and that "stocks always go up." For all practical purposes, it's still the 90s, only the handles have changed.

(The "handle", in futures floor-trader lingo, is the main, non-fractional digit of current price. For example, bond traders may be trading "two and threes", with an understood handle of "96" on bond futures bid at 96-2/32nds and offered at 96-3/32nds.

And there you have it, this month's one morsel of useful information, just in the nick of time!)

But the market isn't quite that easy; stocks don't always go up and typical investor "strategies" don't always bear fruit. Have you noticed that stock brokerages NEVER engage in competitive advertising suggesting that their clients do better than the other firms' clients? Have you ever seen an ad that states "At Uncles Merrill and Lynch, 80% of our clients make money in the markets. We do better for you than the other shmoes."

You would think that'd be a great selling point, wouldn't you? Good track records sell! Do you know why we NEVER see ads like that? Because the nasty truth of Wall Street is that MOST INVESTORS LOSE MONEY OVER THE LONG HAUL. There is nothing positive to advertise. And the truth is not exactly of the variety that inspires confidence and sends investors tripping over themselves to open new accounts. "Come on over to Waterhouse where we charge you less to lose your money. On EVERY transaction!"

So when the public remains rampantly bullish can we really be confident that the next bull market wave higher lurks just around the corner? If the public, whose track record is so bloody poor that its reality is NEVER discussed nor advertised in neither polite nor not-so-polite company, if that public is bullish while the folks in the know are dumping stock by the bus load, should we not consider the possibility that this may indeed be a major top?

Of course, I could have written an almost identical commentary in 1998, before the market rose another 50%. Unfortunately, there is no accurate barometer for dingbatedness. In speculative frenzies the masses DO tend to be right for periods of time. There's no conflict there: As it's said in this business, "It's easy to make money. The hard part is keeping it."

But conditions are ripe for decline. We have the usual array of technical factors that I've discussed ad nauseum throughout this year. And now the market is facing potentially dramatic reversals in the fundamental factors it has relied upon to climb.

Fuel prices are near record highs. Raw materials have surged in price. I rushed to the local Safeway, giddy with excitement upon having perused the Memorial Day sale flyer promoting "50% off on beef!" Turns out the sale price was still 30% higher than the every day prices last year. Milk, butter, eggs: same story. And whatever I saved on beef was lost at the gas pump.

What does that matter to the stock market? WHEN THE COSTS OF BASICS SURGE, THERE'S LESS MONEY FOR EVERYTHING ELSE. When fuel and groceries drain an additional $500 a month, there isn't as much left over for flat screen TVs and SUVs. Stocks don't go up when folks aren't buying product.

And then there are interest rates, perhaps the most critical foundation of the market's unjustified gains. It's easy to inflate the asset markets with low interest rates. All that money's gotta go somewhere. But the odds don't favor still lower interest rates. This much is obvious. The next big move in rates will be higher, not lower. What will sustain the speculative frenzy then? Where will investors find capital to borrow now that the great refi bull has likely ended?

Make no mistake: the asset markets have been propped up through stimulus, not via investment. It wasn't smart money investing in the future of corporate America that drove the market up from its lows. It was been mere inflation driven by an abundance of cheap, easy capital that will always seek to find a home somewhere. The smart money enjoyed the ride is now bailing out with profits. The dumb money is trading on margin and holding out for "Dow 36,000".

Whose side you wanna be on?

Mark M. Rostenko
Editor
The Sovereign Strategist

June 2, 2004

Mark M. Rostenko, a veteran of Chicago's commodity exchanges and editor of The Sovereign Strategist, spends far too much of his time enthralled by the never-ending procession of inane prattle emanating from Wall Street. Nonetheless, it hasn't stood in the way of accurately forecasting the dollar's top, the beginning of the gold bull market, and nearly every significant turning point in the stock market since the bear market began. Please visit www.sovereignstrategist.com for a free sample issue and more commentary. And while you're there, feel free to join our international family of well-informed and successful investors.