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The Third Deadly Sin: Certitude

November 30, 1998

Although fear and greed usually drive the stock market, they took a back seat to investors' third deadly sin in mid-October, when brash certitude reared its ugly head among the bears.

If you were watching CNBC or reading the nation's business pages you would have missed it, since only a relative handful of sound-bite celebrities got to extemporize on the jeremiad they had been rehearsing for, oh, fifteen years.

The real action was on the Internet, where doom-and-gloomsters took to the chat groups like soccer hooligans at the end of a 4-and-16 season.

I was in the thick of it, of course, aggressively siding with those who argued that the Dow, which had plummeted nearly 2,000 points since July, had much further to go.

My speculation concerning a collapse to Dow 3500 or worse fell about midway between the discussion group's bearish extremes.

Aside from two or three hard-headed bulls who argued, seemingly implausibly, that new highs lay shortly ahead -- and who were pounded like anvils during the argument -- most of the participants seemed all but certain that the stock market's upward progress from the October lows was mere prelude to a swan dive even more spectacular than last summer's.

This particular discussion group attracted some top guns, including a dozen regulars who either manage money or actively trade their own, or who make a living writing about the stock market and predicting its next big move.

By late October, however, the bear's most eloquent defenders were clearly winded, and souring on the idea of doubling their bets against a rally that by then had recouped almost two-thirds of its losses.

Here was a telling snippet:

Doug: My guess is the "last chance" to get short may extend into January 1999. I expect the market to move lower between February 1999 and September 1999.

Atticus: You're probably right. This makes more sense than all the predictions I'm reading that say we will probably go up for the next two days then decline to 1929 lows in a few days.

A bit exaggerated, but it nonetheless captured the feverish thread of the discussion that had preceded it. It also defined the moment of truth for two bears who evidently were done crying in their beer.

For me, though, it is still too soon to capitulate. Of course, the Industrial Average could eke out the 700 or so points it needs to reach 10,000, but I think it could just as easily relapse to 6,000.

Regardless, Wall Street's cheerleaders seem not to have noticed that the current rally is unsupported by fundamental improvement in the global economy, or by any optimistic turn in the earnings outlook for U.S. companies.

From a purely technical standpoint, my runes suggest that some of the most widely watched indices, including the Dow Industrials, the S&P 500 and the Nasdaq 100, will continue to climb into early spring, achieving gains of 10-15% over their previous highs.

But small-cap stocks will continue to languish well below their peaks, and so will the Dow Transports. According to Dow Theory, that would be an ominous "non-confirmation" of the Industrial Average's move last week into record territory.

Meanwhile, as every student of the market knows, the purposeful bear attacks both bullish and bearish flanks. By rallying to new highs, this bear has already savaged those who had come to believe as recently as six weeks ago that there was easy money in betting on the market's continued slide into oblivion.

The bear's other tactical prong is to bring the crescendo of bullish hubris to levels exceeding July's. We're getting there, I'd say, but share indices will probably need to ascend a bit higher, and to frolic for a while in record territory, before the trap is properly set.

If I had to guess how long it will take to complete the process, I'd estimate about three to five more months. That's a long time for nothing to happen. But it feels about right to me, given the fact that bullish swagger has only just begun to re-merge, and that the punishment for being short has decimated only the dumbest and weakest of the ursine breed.

As to those readers who have come to view "Market Directions" as a contrary indicator, and who have been planning to sell every share in their portfolios the day I turn bullish, hold onto that stock for now.

For my part, I'll try to eschew certitude about the next Great Crash by focusing on the image of a floor trader named John McKechney, who once came to work at the Pacific Stock Exchange dressed in a pink-and-white tutu.

McKechney, whose untimely death seven years ago sealed his legend forever, had bet his dignity that a particular security would not trade that day at a certain price; but he was wrong.

Back in October I might have done the same thing, so certain was I that the bull market top of our lifetime was behind us. It would have been your five hundred bucks versus my having to goose-step down Montgomery Street wearing nothing but a cod piece and a propeller beanie.

These days I'd need much better odds. For, if the stock market demons occasionally let greed and stupidity go unchastised, it is only so they can spend the full measure of their fury on certitude.

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