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Michael Santoli Presents: Reluctance to Embrace This Rally


If the Dow's at a high, why does the average person feel so lousy about the economy?

Good to see the MIM slate coming together nicely.

So, as I read some of the commentary about sorry market breadth and the illusory high in the Dow, with only one component clicking to a 52-week high, I have on my lap a heavy bound volume of Barron's issues March and April of 1999 - heavy because those were heady times for those of us dependent on financial print ads, and because we hadn't yet migrated a lot of stats to the Web.

Let me share a couple of items from those pages. I looked at the weeks ended March 26 and April 2 of '99, because they encompassed the weeks when the Dow first traded above 10,000 intra-day, and then its first close above 10,000, as all along the media held an urgent vigil for the five-digit mark to be taken out.

The week of the first intraday high above 10k, a grand total of 2 Dow components made a 52-week high (during that whole week, that is, not just the day the Dow got above 10k). Those were Proctor & Gamble (PG) and - remember? - Allied Capital Corporation (ALD).

The following week, the first time the Dow closed above 10k, only six Dow components touched a new 52-week high at any point in that week. For trivia buffs, those were ALD, the old CHV, Johnson & Johnson (JNJ), PG and - another jog to the memory - UK.

A quick look at the Market Lab section further shows that in both weeks, and on both the NYSE and Nasdaq, new lows outnumbered new highs by a factor of about 2 or 3.

So, what does this mean?

Yes, we were in a very different type of market, with the greatest bull of all time completing a massive run. We know, in retrospect, that the Dow was in the early stages of a huge, elongated topping process that would culminate a year later.

But what did the Dow do from that moment forward, with its narrow leadership and punk breadth and too much cheerleading and my company passing out Dow 10,000 hats to everyone on the floor of the exchange? It proceeded to rip higher by 10% in a month.

And then, essentially, that was it for the "real" market, not counting the never-to-be-repeated-for-generations blowoff in tech. (How about this, from the April 4, 1999 issue of Barron's, in a Q&A with a then-famous growth fund manager: His picks look like they could've been designed as a "Brewster's Millions" portfolio, intended to go toward zero the fastest: @Home,, iVillage.) So, there were clues that the bull was aging, that things were getting out of hand, but if you shorted the first 10,000 tick, you ate a 10% (unlevered) loss in four weeks.

To shift gears a bit, toward your tidbit yesterday that the VXO at 11 isn't compatible with there being a wall of worry: Well, the VXO (then just VIX) spent the first quarter of 1994 bouncing between 11 and 12. But there damn well was a wall of worry out there, with Investors Intelligence bears exceeding bulls for months on end, with the Street watching GDP slip toward 1% (below 1% for the 2Q '99) in full recession watch, in the days when Goldilocks was mentioned mostly at story time for pre-schoolers. Yet look at a chart of the S&P in the first half of that year, as it levitated up 20% by late June. If it wasn't climbing a worry wall, I'd like to know what it was climbing.

You know I'm not hunting for reasons to be bullish, and that I will adamantly argue against the idea that we're in anything closely akin to the '95 scenario. But I wanted to just test some of the suppositions being used to render this rally "invalid."

From where I sit, I still think there's been a noteworthy reluctance to embrace this rally as something worth chasing/participating in. If you wanted to get truly large on the short side (if?), wouldn't you have hoped that Succo's fine piece on short interest not have gotten such traction with MV readers and Doug Kass' bridge partners?

The process of hooking the skeptics is definitely underway, mind you, and may not have far to run. But the emotional posture of the people moving money around seems still hesitant, distrustful of the ramp. I respect what Woody Dorsey has to say, that sentiment levels don't always form that pretty, synchronous extreme along with the top tick. And, for the record, I don't really think this rally will continue long enough (either in time or amplitude) to generate a mass public "buy-in," literally and figuratively. I mean, I did Good Morning America this morning, for Chrissake, and the angle they took was "If the Dow's at a high, why does the average person feel so lousy about the economy (very much the societal rhythms that Professors Depew and Reamer discuss). It's just that, tactically speaking and until further notice, it seems the indexes aren't listening to the reasons it should quit going up.

Maybe one day we'll refer to this as the '06 Mets rally, the one that managed to somehow win a "pennant" that it "shouldn't" have been able to win because it had the narrow leadership of only three healthy starting pitchers and was suffering the negative divergences of a losing September even as it clinched the division. But we all know the divergences would catch up to them in the Series, right? That's why they play the games on the field instead of on paper. Not a prediction, mind you. And not betting advice.

No positions in stocks mentioned.
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