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Why the Slide Could Accelerate

September 24, 2001

Having overestimated the psychological impact of President Bush's speech, I am obliged to focus even more resolutely on purely empirical indicators. Unfortunately, my most reliable tool -- the "hidden" pivot -- still paints a menacing picture. Indeed, many of the pivot targets that I've flagged, or tracked off-the-record, lie well below current levels. In some cases, they lie miles below, suggesting either that a truly devastating onslaught of selling looms, or that -- perhaps -- one of the many bear rallies that we will experience between here and the bottom of the abyss is imminent. Unfortunately, given the ease with which the averages have been decimating key supports, I lean toward the first scenario. This implies that, even with some indicators saying sellers are be close to exhaustion, the stock market's descent might soon accelerate rather than abate.

Many chartists may question how this could happen with shares already so egregiously oversold. But there are two simple reasons. The first is that the dollar has yet to fall. When it finally does -- and there is no if about it, as far as I'm concerned -- dollar-denominated deals around the world will start to de-leverage and unravel, removing what fragile support remains for stocks. The second reason investors may not have seen the worst is psychological: to wit, there is neither a shred of evidence nor the faintest glimmer of hope that the economy is about to turn around in the foreseeable future. In fact, evidence that things could get much worse before they get better is mounting each day. It comes to us, not by way of statistics we read in the newspaper, but through the anecdotes we hear from friends and neighbors: about businesses teetering on the edge; about co-workers getting laid off; about they, themselves, getting laid off. From where I'm sitting, there is almost no new business getting done -- or even considered. With only a few exceptions, the most successful and aggressive businessmen I know are simply hunkering down these days, waiting for the storm to blow over.

With respect to the stock market, ultimately even so-called "technical" rallies must attach themselves to plausibly bullish ideas. In recent years it was Alan Greenspan who salted the investment landscape with such ideas. But the Fed wizard has since been uncloaked, and it is not inconceivable that, someday, he will be reviled as the Pied Piper of Wall Street. In the meantime, if Greenspan cannot rally the troops, who will? President Bush gave it his best shot on Thursday night, but it was not enough. Perhaps Americans are still not convinced that we can defeat the enemy? It must be noted that while the President's words were truly inspiring, they are not corroborated by his recent actions. Indeed, it is difficult to reconcile Mr. Bush's avowed war on terrorism with his willingness to court alliances with the likes of Syria and Iran -- even as he demands that Israel sit down with Arafat to talk "peace." This is not the path to peace, as the Israelis well know. Will Mr. Bush and Colin Powell come around? Whatever the case, time spent pursuing bad options is apt to have huge costs.

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