It's not too late to sell!!

It's by no means too late to sell. It is far too early even to think about buying any stocks except shares in energy companies and oil service companies.

All the major stock indexes have now put in a weekly close below the uptrend line from the October 1998 low, although the Dow 30 just barely. This is what happens when a real bear market is just starting.

As we have been saying for some time, the current weakness in stocks looks extremely serious to us. If you trade futures, you know well that bear markets follow bull markets as surly as night follows day. Many stock traders have no inkling of what a bear market looks like and still less have they ever lived through one.

We are emphatically not saying that the end of the world is coming or that it's [permanently Game Over for stocks. We merely say that the probabilities have turned extremely ugly for owning stocks as far as the eye can see ahead and, contrariwise, the prospects are favorable for selling many stocks short.

Recently we have seen a succession of sharply lower lows and ever more feeble rallies. The rallies may have seemed fierce and they will have given many investors encouragement to believe that this was a good time to buy stocks at a goo price. In the early stages of a bear market, there are always many eager buyers and indeed the rallies can go farther than you ever think likely. Only when the bear market becomes more deeply entrenched do rallies become feeble to the point of being imperceptible. It's worth repeating that our sense is that plunges have gone farther down and that rallies have lacked staying power over the past few weeks.

Looking at individual stock charts, we see a grand total of 18 among the NASDAQ 100 for which there is still a case to hold the stocks. Among the Dow 30, we see just 6 which maintain a reasonable technical case. Trouble is though that one after another stocks once strong have been faking out. Last week, for example, American Express and Citigroup looked as if it was time to cash in case their toppy market action was a harbinger of a more serious decline.

There was an anecdotal report this week that one of the officers of MCI Worldcom had to sell millions of shares in his company in order to meet a margin call. You can imagine how many more margin calls would have to go out in the event of the current decline going much farther. Those that are well financed simply have more money to lose in a bear market.

Then there are mutual fund redemptions. You can guarantee that many investors accustomed to buy the dips successfully will start to get faint-hearted when upturns don't come as they used to. Not only will many regular buyers stop buying but many of them will also start selling. With mutual fund cash near record low levels, fund managers will have to sell in order to meet redemptions. They simply won't have the cash with whoosh to prop up the market.

In sum, a downward zigzag once entrenched starts feeding on itself. That's what a bear market is.

Once a bear market becomes entrenched, almost all stocks roll over and start going down. Unless you identify some truly exceptional circumstances such as we believe obtain in the energy market, the probability in favor of finding a stock likely to go up declines to about 10 percent. That is, if 90 percent of all stocks are going down, what is the chance of you succeeding in finding stocks among the remaining 10 percent without at least having an equal or higher number of losers among them?

As we write, it looks very much as if the petroleum market may have finished correcting. In our view it looks more likely that crude oil will go to $40 this winter than it will go to $25. Even at $25, however, the oil companies are coining money. Note too that petroleum stocks are severely underowned by the institutions. In our view this is one of the few safer havens, and possibly the only one apart from Treasury Bills and money market.

Our best guess is that stocks will test the 2000 lows some time in the next couple of weeks. Then most likely there will be some kind of a rally into year-end, possibly quite a strong one. Then we expect stocks to turn down again in 2001. Having broken the uptrend line from the October 1998 low, we envision the possibility that that same low could become the target for the major indexes. That level, of course, is a very long way down from here. Even if current earnings levels are maintained, which is by no means a certainty if the economy slows, stocks would still not be exceptionably cheap by historical standards.

It is worth pointing out that after as much of a decline as we have recently seen, it would take a lot of basing action before one could justify even considering buying stocks. At this point we have not seen any vestige of an initial bottom, let alone the double bottom with a higher low that suggests the potential; for a trend reversal.

Stockscom