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The Bull Market is Dead!
Long Live the Bull Market!

M.A. Nystrom, M.B.A.
Man on the street in (the Republic of) China
January 28, 2005

1. The bull market is over

In the event that you weren't aware of it, missed it, didn't see it, don't remember it or are consciously ignoring it, the bull market in U.S. common stocks is dead. Over. Kaput.

Five years after the turn of the millennium, Y2K still stands in the annals of history as the point that all three major U.S. indices - Dow, SPX and Nasdaq - hit their highs and then turned tail, marking the official beginning of the end of the Bull. Quickly came a dark and ugly period of crumbling and decay, with day after day of miserable market declines, right on through 9/11. It was not until almost a year later, in Fall of 2002 before the markets finally found support.

In just two short years, the entire world was turned upside down. Like being awakened from a pleasant slumber by a crack on the jaw, a bullish world of peace, prosperity and optimism was suddenly transformed into a bearish world of fear, uncertainty and war. The damage to retirement funds and stock portfolios was so bad that people were afraid to open their statements, afraid to be faced with the reality that their dreams of summer villas, new cars and most of all early retirements had evaporated with the mirage of prosperity.

Since those shocking lows in October 2002, the world seems to have returned to a certain sense of normalcy for most people, albeit a different, numb kind of normal. Once again we have to work for a living. No more day trading, CNBC, or retiring on stock options. And if the stock market has failed to register the 20% + annual gains of the last few years of the twentieth century, it has also managed to avert more of the surprising declines that characterized the opening of the twenty first. War is a reality. Thankfully, there have been no more terrorist attacks at home, and we've all gotten used to ignoring the false terror alarms put out by the new Ministry of Homeland Security. Likewise, we've gotten used to being searched, prodded and poked when we travel by air, though we grumble under our breaths at the inconvenience of it all (but only under our breaths - this is a different America). Even the market managed to score some decent gains again. The start of the war in Iraq in spring of 2003 marked the end of the declines, at least temporarily. The Dow regained most of its former glory (91% of it), and is still hanging in above 10,000. And if the SPX and NASDAQ did not do quite as well in absolute terms, they did manage spectacular rallies from their all time lows that would make any bull proud (see Table).

Table - Post Bubble Market Performance
  All Time High Low to Date Decline Rally
 Index Date Level Date Level Points % Fall Level Points Gained % Rise from Low % Retracement of All Time High
DOW 1/14/00 11,908 10/10/02 7,177 (4,731) (39%) 10,892 3,715 52% 91%
SPX 3/24/00 1,553 10/10/02 768 (785) (50%) 1,217 449 58% 78%
NASDAQ 3/10/00 5,132 10/10/02 1,108 (4,024) (78%) 2,191 1083 98% 42%

All of this is enough to lull the average investor back into a sense of complacency and lazy slumber, to begin once again dreaming of early retirement financed by stock market riches and housing equity gains. But those investors with a little knowledge of history, Elliott Wave theory and the signature patterns of market manias are less sanguine. The wise readers among you realize that the gains from the panic lows are nothing more than an impressive, multi-year, dead-cat bounce.

Indeed, we can say this with authority, for in spite of the impressive gains of late, not one of the three indices has managed to crack a new high and are in fact now turning back down with a certain urgency not seen in the markets for several years. It was bound to happen. The recent, multiyear rallies in the markets have taken place against the backdrop of a deteriorating fundamental environment. More jobs have been lost, interest rates are on the rise, and personal, business and government debt loads are all soaring. The housing bubble hasn't skipped a beat, picking up right where the stock bubble left off. The dead-cat bounce was purely a technical rebound, a phenomenon common in all sharp market drops. If you've still got money in this market, now would be a good time to quietly head for the exit. . .before anyone else notices.

After nearly 3 years of market gains, 2005 will mark the turning point, with stocks likely resuming on the uncompleted downward spiral that began in Y2K. If you've made some profits, or have managed to recoup some losses in the last few years, it is time to take the money and run. Mark my words: The bull market is over!

2. Long live the bull market!

While the truth is plain enough to see with an objective set of eyes, very few investors with money at risk are blessed with such objective vision. Their sight remains clouded by the hopes and dreams that the bull market represents. The latest Investors Intelligence survey shows bullish sentiment among investment advisors at an ALL TIME HIGH, above even the heights reached at the Y2K peaks. The bull market is an emotional phenomenon that represents more than just rising stock prices - it is the embodiment of hope and optimism itself. As long as the bull market remains alive in the mind of the investor, there remains the possibility of that new sports car, the house with the ocean view, of early retirement, and telling the boss to take the job and shove it! If the bull market has died in the price of shares, it will continue to live on in the minds of guileless investors who continue to buy and hold, down the slippery slope-of-hope, to the end of the line where shares are worthless and dreams are demolished.

But it doesn't have to be this way. There is alwyas a bull market is something, somewhere. Opportunity abounds for the ambitious, the flexible, the nimble and the just plain smart, and it most certainly doesn't have to be in the US stock market. It is common knowledge that more millionaires were made during the Great Depression than during all of the roaring 20's in the United States, and the same will be true during the great period of transition we are living through today. But part of this transition means that the center of wealth is shifting inexorably away from the U.S. After all, the tallest building in the world was made in Taiwan! And take a look at Pudong (ever heard of Pudong?), a gleaming new metropolis and industrial park in Shanghai that sprang up in just under 10 years, like a field of mushrooms after a spring rain, fertilized by the hundreds of billions of dollars that US consumers send to China each year.

3. Turn and face the strange changes

A friend and colleague of mine who is a professor of Venture Capital and Entrepreneurship at National Chiao Tung University here in Taiwan emphasizes over and over to his graduate students that big changes create big opportunities. From his perspective, the dot.com boom and bust was necessary, and served its purpose; 10 years after the debut of Windows 95, the world is a different place thanks to new information communications technologies (ICT) that have emerged. They were invented during the boom; now their full potential is finally being put to use around the world. While only a small number of the bubble-era companies survived the bust, the outlines of the colossal changes that they are creating can already be seen taking shape.

As Americans, we tend to think that we are at the center of the universe and always will be, and the insular, corporate controlled media does nothing to dissuade this idea. But the world is a big place, and big changes are in the air. Just take one whiff of the howling winds, and I dare say that you can smell the changes, rolling in like a storm. You may be able to ignore them for a little while longer, but nothing can stop them. While the Corporate press keeps the American public entertained with politics and war, it smugly pooh-poohs China's growth as a bubble. But the optimism that hangs in the Asian air is as palpable as the pollution that clouds its skies. Shanghai is a city on the move and people in the daily course of their lives walk so fast down the streets of the city that they are running! America may still be the best place for ideas, but Asia has emerged as the best place to finance, produce and realize them.

As an American living in China for the past year (to be specific, the Republic of China on Taiwan), the world is starting to look a little different to me. There is no doubt that America is an empire and it still exercises its economic and cultural might (more on this in the future). But in China, a baby giant has been born, and he is hungry and he is growing. There is a new game in town, and it is played by international rules. Open your eyes - the bull market is dead! Come learn the new game or risk being left behind. Change creates opportunity. Long live the bull market!

Turn off the TV and think!

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