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March 2000 vs. March 2002



Scott pinged me a bit ago and asked a great question with respect to the sector bell curves. He wanted to know what the bell curve picture looked like in March of 2000 and in March of 2002. Both were important points in the market, though different in some important aspects.

First, March 2000. In March of 2000 the NYSE Bullish Percent was at 44%. The Nasdaq Bullish Percent, however, was at 58%, a relatively high risk level for that indicator. (The Nasdaq Bullish Percent typically tops out around 60%.) It reversed down to defense on March 13, 2000.

The bell curve picture below from March 2000 may surprise you. The average level of the sector bell curve in March 2000 was a paltry 42.04%. From a technical standpoint, however, pay close attention to which sectors were skewed to the far right (tech, not surprisingly) and which were skewed to the far left (financials, "old economy" sectors). On a side note in March of 2000 we saw a dramatic relative strength reversal from technology-related sectors to financial and traditional S&P-based sectors. While March of 2000 was an important top for the market, the participation was very narrow and heading into that top the average (non-tech) stock had been in a bear market since 1997-1998 even as the major indices (controlled by large cap tech stocks at the time) continued moving to new highs. [Note: Incidentally, the last time the NYSE Bullish Percent was as high as it is today was in 1997.]

Below is the sector bell curve from March 2002. The NYSE Bullish Percent was at 66%. The Nasdaq Bullish Percent was at 54%. The average level of the sector bell curve was 65.52%.

The average risk level across the board was much higher in 2002 than 2000, but most investors remember the spring and summer of 2000 much more vividly simply because most investors were overweight in tech stocks in 2000, which were the very stocks that suffered the brunt of the bubble deflation.

The real structural change in the markets, in my opinion, did not occur until October 2000. By October 2000 the very sectors that were at the far left of the March 2000 bell curve had shifted to the right, while the sectors that were skewed to the right in March of that year, had shifted back to the left.

Today we have a situation where high-risk levels are appearing within the context of a primary long-term downtrend for equities in general. My take on that, for what it is worth, is that this situation (high-risk, primary downtrend) raises even further the potential risks of owning U.S. stocks. Our studies of the history of the NYSE Bullish Percent between 1965-1981 and 1982-2000 showed that regardless of whether the overall conditions of the market were structurally bullish (1982- 2000) or structurally bearish (1965-1981) there was virtually no difference in the length of time this important indicator spent on offense and defense. Rather, the difference was in the magnitude of the declines when this indictor turned negative. During the bear market period the declines when the indictors turned negative were disastrous and losses were not recovered during subsequent rallies. During the bull market period, subsequent rallies more than made up for declines. In other words, during the structural bull market period the primary uptrend rewarded those with the staying power to ride through the declines. Unfortunately, that primary uptrend line is not intact today.

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