Grizzly's Growlings Current Report

Market Update Tuesday 06/06/2000 5:00 a.m.

The 38% Solution

Well, no doubt about it, the markets managed to survive the May crash window we have been discussing. We believed that the risk of an historic crash was extraordinarily high. Yet it failed to materialize.

So, are the markets out of the woods yet? We don't think so. Like the Vegas crapshooter who's managed to defy the odds and roll seven consecutive sevens, the risk remains extraordinarily high that the next roll will end it all.

The NASDAQ Comp fell over 2,000 points (38%) from its all-time high of 5,132 on March 10th to 3,042 on May 24th. The strong and sharp rebound since that low looks more impressive than it may be. The rebound has retraced about 700 points, only about 38% of the 2,000 point fall, a typical rebound and resistance level.

Isn't it interesting that the fall from 5,132 to 3,042 was almost 38%, and the rebound from that low has retraced almost 38%, yet the NASDAQ Comp is still some 1,300 points below the March 10th peak? Ah, the deceptive magic of numbers.

As we said in our May 11th update:

Don't be fooled by any short-term rallies. The rallies will be short in duration and potentially very sharp, but they will serve their purpose by relieving any short-term oversold conditions and clearing the way for the next leg down.

The rebound may have exhausted itself with Monday's (06/05/00) lackluster performance and the markets may start accelerating back to the downside starting today (06/07/00). Equally likely, there still may be another couple of hundred points left on the upside to complete the rebound in both the NASDAQ Comp and the DJIA. 

As Jim Stack of InvesTech Research points out in our latest Q&A, 

The A-D (Advance-Decline) Line is still in a downward or bearish trend, having peaked over 2 years ago (in April 1998). This is the biggest divergence in history without seeing a bear market in blue chip indexes. The fact that this divergence is continuing only heightens the risk going forward.

Indeed, the recovery rally has convinced the bulls that the bottom is in and the bull market is back. Two mainstream Wall Street firms, A.G. Edwards and Morgan Stanley, announced that they are taking all of the cash they have been holding on the sidelines lately and putting it into stocks (and bonds). Where were these guys two weeks ago when the NASDAQ Comp hit 3,100?

The dip-buyers are convinced that they're right once again. Virtually everyone is now convinced that the Fed's six consecutive interest rate hikes have finally slowed the economy, thus alleviating the fears of inflation and further rate hikes. (If inflation is dead, why has gold risen $13.00 in just the last two trading days?)

We repeat our assessment from our May 18th update:

The deck is stacked perfectly for a crash, beginning NOW. In Elliott Wave terms, we are likely in the early stages of the "third of a third" wave. This devastating move may take several weeks to fully play its hand and it will likely include an historic one-day crash.

Our exact timing for the start of the crash was premature, but nevertheless, the market risk remains extraordinarily high and we continue with our ongoing warning:

US STOCKS REMAIN ON FULL CRASH ALERT!

grizzly@bearmarketcentral.com

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